From Ambition To Action: Make Circular Economy Work For MSME Clusters

Imagine a small textile unit in India that has been exporting fabric to Europe for years. The owner has always focused on quality, price and timely delivery. One day, a buyer sends a new requirement — details of water use, energy efficiency, waste management and proof that the product is environmentally compliant. Suddenly, the business owner realises that good fabric alone is no longer enough. Sustainability has become a condition to stay in business.

This is not a distant future scenario; it is already happening.

Across the world, the textile industry is changing rapidly. Climate concerns, shortage of natural resources and strict environmental regulations are reshaping how textiles are made and sold. For micro, small and medium enterprises (MSMEs), this shift is no longer optional. Circular and resource-efficient practices are fast becoming essential for survival, especially in export markets.

Why regulations matter to Indian MSMEs

Consider a dyeing unit in Tirupur or Panipat supplying to a European brand. New regulations in the European Union, such as rules on eco-design, sustainability reporting, and producer responsibility now require buyers to track how a product is made, what resources it consumes, and how waste is handled. If suppliers cannot provide this information, buyers simply look elsewhere.

For Indian textile MSMEs, this means circularity is not just about being “green”. It is about market access. If units cannot demonstrate sustainable practices, they risk losing orders altogether.

Ambition exists but action is harder

Many MSME owners are aware that the market is changing and genuinely want to adopt better and more sustainable practices. However, ambition by itself does not keep businesses running. In most MSME clusters, margins are thin and cash flows are tight, making owners understandably cautious about new investments. They are willing to act only when it is clear that costs will reduce, productivity will improve, risks will remain low, and returns will be visible within a short period. This is where the circular economy becomes relevant, not as a moral or environmental argument, but as a sound business proposition. Global studies indicate that circular textiles could unlock nearly USD 1 trillion in business opportunities. With established clusters such as Panipat, Surat, Coimbatore, and Karur already practising recycling and reuse at scale, India is well positioned to benefit. The opportunity is real, but it must be translated into practical, low-risk, and bankable solutions for MSMEs.

Circularity already exists but informally

In fact, circular practices are not new to Indian clusters.

Imagine a small unit that reuses fabric waste to make cheaper products, or another that repairs old machinery instead of replacing it. Many units reuse water, minimise waste, and rely on manual processes to save energy. These are circular practices but they are informal, undocumented and unmeasured. Because they are not recorded, banks do not see them. Policymakers do not count them. Buyers do not reward them.

What cannot be measured cannot be financed. To make circularity investible, these everyday practices must be formalised, aggregated and documented so that they become visible to markets and financiers.

Why clusters matter more than individual firms

Expecting a single MSME to invest in new technology or compliance systems can sometimes be unrealistic. The risks are too high. Now imagine the same effort at a cluster level. Shared infrastructure, common standards, pooled investments, and collective learning suddenly make solutions affordable. Costs are distributed. Risks are reduced. Knowledge spreads faster.

Clusters are the missing middle ground, too big to be informal, too close to the ground to be abstract policy. They are where circular economy solutions actually work.

Technology and finance, the double challenge

Even when MSMEs want to adopt cleaner technologies, problems arise. Many technologies are designed for large factories, not small units. Local technicians may not be trained. After-sales support is weak. Any disruption to production can mean losses. On top of this comes finance. Banks are hesitant to lend for “new” or “green” technologies they do not fully understand.

This is why blended and patient finance matters, grants, guarantees, concessional loans, and outcome-linked incentives. Programmes like EU-supported initiatives help reduce early risks, demonstrate success, and slowly change how banks assess MSME investments.

Sequencing is key

Sequencing is key. Effective transition to a circular economy does not happen overnight, nor can it be forced through one-time interventions. It follows a clear and logical progression. The process begins with awareness, where enterprises understand why change is necessary and how it connects to markets and competitiveness. This is followed by diagnostics, which help units identify where resources are being wasted and where efficiencies are possible. Demonstration comes next, showing — through real examples on the ground — that circular practices can work without disrupting production. Once confidence is built, aggregation allows multiple enterprises to adopt solutions together, reducing costs and risks. Only then does finance become viable, as banks and investors can see proven, scalable models. Finally, policy alignment ensures that regulations, incentives, and public procurement reinforce these efforts rather than working at cross-purposes. Measures such as green public procurement, rational pricing of water as a resource, and targeted efficiency incentives can accelerate this transition but only when they are designed in line with what MSMEs can realistically adopt and sustain.

Social outcomes cannot be ignored

Circular economy initiatives succeed only when they improve lives. In MSME clusters, environmental gains must also mean safer workplaces, better skills, and more stable jobs, especially for women and informal workers. Without social benefits, sustainability lacks legitimacy.

What clusters must do next

Three actions are essential:

First, clusters need a shared vision. Mapping value chains, identifying strengths and gaps, and building a credible cluster identity helps attract buyers and investors. This vision must be led by committed, forward-looking enterprises.

Second, start with low-cost, quick-return actions. Simple efficiency measures build confidence and trust. Successful clusters like Tirupur show how early wins create momentum.

Third, long-term partnerships are critical. Brands, technology providers, financial institutions, policymakers, and local industry associations must work together. Strong local associations are the backbone of this transition. Neutral institutions can support but leadership must come from within the cluster.

Panipat, a real-world example

The Panipat textile cluster shows how circularity already works on the ground.

Many units reuse wastewater for dark dyeing, saving freshwater. Heat recovery systems reduce fuel use. Simple innovations like improved steam piping, insulation, capacitor banks, and variable frequency drives cut energy costs. These are not expensive, high-tech solutions they are practical, business-driven choices.

With a business volume of nearly Rs1,30,000 crore, a long recycling tradition, and strong export linkages, Panipat stands at a turning point. Interest from public programmes is growing. What is needed now is coordination, collective action, and confidence.

The bridge to the future

The circular economy is not a destination- it is a bridge. A bridge between ambition and action. Between environmental responsibility and commercial reality. Between global markets and local livelihoods.

If designed around real production systems, real cash flows, and real people, this bridge can carry Indian MSME clusters into a competitive, sustainable future.

(With inputs from Priyanka Rai)

Mukesh Gulati is executive director, Foundation for MSME Clusters.

Priyanka Rai is communication lead, Foundation for MSME Clusters.