Emphasizing the very rational of small-scale industry in the Indian economy, the Industrial Policy Resolution (IPR), 1956 stated:

“They provide immediate large scale employment, they offer a method of ensuring a more equitable distribution of the national income and they facilitate an effective mobilisation of resources of capital and skill which might otherwise remain unutilized. Some of the problems that unplanned urbanisation tends to create will be avoided by the establishment of small centers of industrial production all over the country.”

The rationale behind micro and small enterprise development in the country, for the convenience of our better understanding, can broadly be classified into four arguments, viz.,

(1) Employment argument,


(2) Equality argument,

(3) Decentralisation argument, and

(4) Latent resources argument.

Let us discuss these in more details one by one.

1. Employment Argument:

In view of India’s scarce capital resources and abundant labour, the most important’ argument advanced in favour of micro and small enterprises is that they have a potential to create immediate large-scale employment opportunities. The increasing emphasis on micro and small enterprises in developing countries like India stems largely from the widespread concern over unemployment hovering in the country.


There are many research findings available which, well establish that micro and small enterprises are more labour intensive than large- scale enterprises. In other words, small units use more of labour per unit of output than investment. According to a research study, while the output- employment ratio is the lowest in the micro and small-scale sector, employment- generating capacity of small sector is eight times that of the large scale sector.

P.C. Mahalnobis also supports the view that micro and small industries are fairly labour intensive. He mentions that with any given investment, employment possibilities in micro and small enterprises would be ten or fifteen or even twenty times greater in comparison with corresponding factory system.

There are some scholars also like Dhar and Lydall who oppose to this employment argument of micro and small enterprises. They hold the view that employment should not be created for the sake of employment. The important problem, according to them, is not how to absorb surplus resources, but how to make the best use of scarce resources. Then, the employment argument becomes an output argument.

2. Equality Argument:

One of the main arguments put forward in favour of the micro and small enterprises is that they ensure a more equitable distribution of national income and wealth. This is accomplished because of the two major considerations:


(i) Compared to the ownership of large-scale units, the ownership pattern in micro and small enterprises is more broad-based and widespread.

(ii) Their more labour-intensive nature, on the one hand, and their decentralization and dispersal to rural and backward areas, on the other, provide more employment -opportunities to the unemployed.

This results in more equitable distribution of the produce of the micro and small enterprises. It is also held that as most of the micro and small enterprises are proprietary or partnership concerns, the relations between the workers and the employers are more harmonious in micro and small enterprises than in the large-scale enterprises.


Here again, Dhar and Lydall (1961) have pointed out this equality argument as fallacious. Giving statistical evidence, they established the fact that wages paid to workers are much less in micro and small enterprises than the wages paid to the workers in large-scale industries. In India, wages in micro and small enterprise are about half the wages paid in large-scale industries.

The reason is not difficult to seek. Workers in micro and small enterprises, due to virtual non­existence of trade unions, are unorganized and, therefore, are easily exploited by the employers. There is no doubt that the argument of Dhar and Lydall does have some force. But in an under-developed country like India, the workers have choice not between a high paid job and a low paid job but between a low paid job and no job at all. Then, even if micro and small enterprises provide low paid jobs, they would be of virtual importance in an economy like ours where millions are already in search of employment to eke-out their livelihood.

3. Decentralisation Argument:

Decentralisation argument impresses the necessity of regional dispersal of industries to promote balanced regional development in the country. Big industries are concentrated everywhere in urban areas. But, micro and small enterprises can be located in rural and semi-urban areas to use local resources and to cater to the local demands.

Admittedly, it will not be possible to start micro and small enterprises in every village, but it is quite possible to start micro and small enterprises in a group of villages. The International Perspective Planning Team (IPPT 1963) also rightly stressed that the focus for industrial development under a dispersal policy should be neither the metropolis nor the village, but rather the large range of potentially attractive cities and towns between these two extremes.


Decentralisation of industrial enterprises will help tap local resources such as raw materials, idle savings, and local talents and ultimately improves the standard of living even in erstwhile backward areas. This, in turn, helps achieve ‘inclusive growth’ i.e. the cherished goal of the country. The most glaring example of this phenomenon is the economy of Punjab which has more micro and small enterprises than even the industrially developed state of Maharashtra.

4. Latent Resources Argument:

This argument suggests that micro and small enterprises are capable of mopping up latent and unutilized resources like hoarded wealth and ideal entrepreneurial ability, etc. However, Dhar and Lydall feel that the real force of latent resources argument lies in the existence of entrepreneurial skill.

They argue that there is no evidence of an overall shortage of small entrepreneurs in India. Hence, they doubt the force of this latent resources argument. Their assertion does not appear to be very sound simply because of the fact that if small entrepreneurs were present in abundance, then what obstructed the growth of small enterprises in the country?

The emergence of entrepreneurial class requires a conducive environment. The fact remains that micro and small enterprises provide such environment in which the latent talents of entrepreneurs find self-expression. Our economic history also bears this evidence.


The impressive growth in the number of micro and small enterprises in the post-Independence period highlights the same fact that providing the necessary conditions such as power and credit facilities, the latent resources of entrepreneurship can be tapped by the growth of micro and small enterprises only.