There are numerous arguments in favour of the small-scale industries which justify the rationale of small-scale industry development. The Industrial Policy Resolution 1956 has put forward four arguments in favour of small-scale industries which emphasise the very rationale of small-scale industry in the Indian economy. The arguments are:

  1. Employment argument
  2. Equality argument
  3. Decentralisation argument
  4. Latent Resource argument.

1. Employment Argument:

Small-scale industries have a great potential to create immediate large-scale employment opportunities which is essential for solving widespread unemployment problems of underdeveloped nations. Small-scale industries are labour intensive i.e. they use more of labour per unit of output than investment.

As India is a capital scarce and labour abundant country and the major problem of the economy refers to unemployment, it could have been addressed by small-scale units which sometimes even provide 15 to 20 times greater employment than corresponding large industries with any given investment. Because of this huge employment potential small industry are preferred over large ones.


2. Equality Argument:

Another argument supporting the rationale of small-scale units refers to equality argument for even distribution of income and wealth. Small-scale units, because of its ownership pattern which is widespread and labour intensive in character provide millions of employment to the unemployed more particularly the rural poor who are in search of employment to eke-out their livelihood.

3. Decentralisation Argument:

Decentralisation argument also supports the rational of small-scale units because it aims at regional dispersal of industries in the country. Decentralisation of industries help tap local resources like raw materials, idle savings local talents etc. and make provision for self-employment and capital formation. This helps in increase in income of the people which ultimately improves the standard of living of the people.


4. Latent Resource Argument:

The latent resource argument for tapping hoarded and unutilized wealth strongly supports the case for small industries. Small enterprises provide an environment in which the latent talents of entrepreneurs find self-expression.

Besides the above, small industries are also supporting large-scale industries overcoming territorial mobility, reducing pressure on land relieving congestion in urban areas, and sustaining green revolution by developing agrobased industries in the country.