The Industrial Policy Resolution puts forth following four main arguments in favour of small enterprises.
Arguments in Favour of Small Enterprises
1. Employment Argument:
The most important economic task before the country is the solution of unemployment problem. The scope for creation of “wage-employment” is limited as it depends on industrial growth.
But there is a large scope for the creation of “self-employment” and here the small- scale industries can play a significant role. Kerve Committee has rightly observed that the principle of self-employment is at least as important to a successful democracy as that of self-government. The argument is based on the presumption that small enterprises are labour intensive and thus create more employment per unit of capital employed.
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Thus let alone capital goods industries where capital intensive projects are a necessity, in other spheres of production, small enterprises which help to enlarge the volume of employment with scarce capital should be encouraged.
A more sophisticated form of this argument is that small industries should be developed because the capital output ratio for such enterprises is lower vis-a-vis large-scale enterprises.
2. Equality Argument:
The equality argument suggests that the income generated in a large number of small enterprises is dispersed more widely in the community than income generated in a few large enterprises. In other words, the income benefit of small enterprises is derived by a large population while large enterprises encourage more concentration of economic power.
In this way, small enterprises bring about greater equality of income distribution. However, it is a fact that there is a common tendency for the average wage to be lower in small factories than in large factories. Moreover, the virtual nonexistences of trade unions in small factories enable employers to exploit the workers to the maximum.
3. Latent Resources Argument:
Small-scale industries are widely dispersed all-round the country and have provided opportunities for young entrepreneurs to venture into a number of new fields.
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It is suggested that small industries, by tapping latent resources, encourage the habits of investment in rural areas. This argument is woven out of several strands of thought.
One such strand related to the existence of a large number of potential entrepreneurs who have no capacity for promoting or managing large concerns but have the necessary talents for the promotion and management of smaller units.
Another strand relates to the existence of large reserves of idle savings which could be channelised into productive uses if the hoarders had the opportunity of establishing business of their own. In a developing economy, rapid economic growth is hardly possible unless methods can be found for mobilising rural savings.
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This can be done in several ways. The democratic way of mobilising rural savings will be to spread investment opportunities all over the country in such a manner that reliance on forced mobilisation of rural savings is minimized and an environment is created in which peasants develop spontaneous habits of thrift and investment.
4. Decentralisation Argument:
The primary objective of developing small industries in rural areas is to extend work opportunities, raise incomes and standard of living and to bring about a more balanced and integrated rural economy.
In India, the method adopted for developing cottage and small-scale industry is the construction of industrial estates, usually in small towns.
These estates provide factory space and common facilities. At present there are 346 such industrial estates in India.
Large industries are mostly concentrated in metropolitan cities. The smaller towns and the countryside, in order to benefit from modern industrialisation, must encourage small enterprises. Industrialisation of the country can become complete only if it penetrates into the remote corners of the country. Small industries by carrying the job to the worker, overcome the difficulties of territorial immobility.
The weak “spread effects” radiating from the establishment of large scale industries in a country like India has been stressed. It is somewhat reasonable to assume that the ‘spread effects’ of small industries would be relatively more important.
Once a number of small industrial enterprises have sprung up in a locality, it is very likely that there will be a tendency to multiply. Workers’ skills and aptitudes would be more developed when they work with machines which have to be attended to in typical small establishments than with automatic machinery operating in big industrial units.
They will thus enlarge and improve the skill base of the economy. Smaller establishments may also grow into larger units. The development of large-scale enterprises as a result of the growth processes should be more welcome than that fostered by state direction.