This paper probes energy intensity and economic performance in small enterprises with reference to two energy-intensive small-scale industry (SSI) clusters in the state of Karnataka in India. Based on analysis of primary data collected from 38 bricks enterprises and 31 foundries, the paper brought out that there is a positive relationship not only between energy intensity and share of energy cost in total variable cost but also between energy intensity and value of output. But there is a negative relationship between energy intensity and factor productivities. Energy made a statistically significant contribution to economic performance in terms of returns to scale. Those small enterprises, which were less energy intensive, achieved higher returns to scale than those, which were more energy intensive. Therefore, it is imperative for Indian Policy Makers to include 'energy efficiency improvement' programmes as part of the strategy for enhancing SSI competitiveness. (c) 2004 Elsevier Ltd. All rights reserved.