Market-based incentives for additional greenhouse gas emission reductions for project activities offer new opportunities in developing countries. The revenue from Clean Development Mechanism (CDM) projects can ensure financial viability of energy conservation and cost reduction measures in many industries. Carbon credits generation activity is growing at 80% in India. Though India has the highest number of registered CDM projects in the world, CDM has yet to become popular among small and medium enterprises (SMEs). The number of Indian SMEs participating in CDM is small. It constitutes only around 5% of the total registered CDM projects in India. SMEs' contribution is more than 50% of industrial production in India. Going by its value added figures in the manufacturing sector, it makes for one-third of total exports and employs the largest manpower next to agriculture. With more than three million SMEs, this sector contributes 40% towards the GDP, provides employment to more than 22 million people and is growing at a rate of 20% annually. The wider role of SMEs in the Economy and their potential to reduce GHG emissions through energy efficiency and other measures at a marginal cost make them ideal for CDM activities. SMEs can immensely benefit from carbon cash flows. CDM can provide incentives to SMEs to adopt new and more efficient technologies, improve energy and environmental performance, and help them access finance at low costs. Benefits from potential carbon revenue streams could be significant in raising the equity component of financing their modernisation. Energy efficiency, which enables flow of carbon revenue in the segment, will not only enhance their environmental quality but will also make the working environment better. Increasing the SME participation in CDM is very critical to achieve desired modernisation and cost competitiveness in the segment. A strategic approach needs to be formulated to leverage carbon finance to strengthen SMEs and their future potential in contributing to the Indian Economy and making the economic growth more inclusive. Since the SME participation to date is not very encouraging, a little effort to create a CDM-enabling environment in this sector could lead to harnessing its latent potential. The units in food processing and agri-industries