Cottage and small-scale industries occupy an important place in Indian Economy. These industries are contributing half of the total industrial production in India and provide gainful economic activity to more than five times the number of people employed in the large and medium sized industries in the country. Their contribution to India’s export earnings has reached significant proportions during the past few years.

The development of cottage and small-scale industries holds solutions to many side problem of Indian economy. The economy reeling under excessive population pressure, on agriculture subject to the vagaries of nature, a people oppressed by massive unemployment and the consequent misery and a nation struggling to stand up and build its economy, has much to gain from the development of cottage and small-scale industries.

1. Increase in Employment Opportunities- The Employment Argument:

Unemployment, both in the rural and urban areas of the country, has assumed alarming proportion and it continues to mount up despite our efforts at creating more and more job opportunities under the plans for economic development. Establishment of cottage and small-scale industries on a very wide scale can contribute a great deal in removing much of this unemployment prevailing in the country at the present time.


With the limited amount of capital resources, the small-scale industrial sector holds promise of creating greater employment opportunities. This is so because the cottage and small-scale industries are more labour intensive i.e., they employ more labour per units of capital than the large scale industries.

This argument is not acceptable to many economists. Dhar and Lydall believe that employment should not be created only for the sake of employment. Technically speaking, we need more employment to create more output and therefore any employment which does not result in increased output cannot have an economic justification.

Thus, employment must be productive i.e., it makes sufficient addition to output. Interpreted in these terms, the employment argument is essentially an output argument which entails that scarce resources must be put to best possible uses so as to result in maximisation of output.

In other words, we must establish those enterprises which have a high output capital ratio i.e., which give more output per unit of capital employed or to say the same thing differently, use less capital per unit of output. From their studies, Dhar and Lydall found out that large scale industries produced a large amount of output per unit of capital than the smaller enterprises.


This is because the large industrial units, though capital intensive in nature, turn out much larger volume of output by working in two or three shifts each day with the same given amount of capital equipment, machinery and plant.

However, many other economists do not agree with the analysis of Dhar and Lydall. R. Venkataraman from his studies found out that employment generating capacity of the small industries was about eight times higher than the large scale industry sector.

Even the output capital ratio (i.e., output per unit of capital employed) was about four times higher in the small industries as compared to large industries. Thus, Venkataraman makes a strong case for small scale industries on the basis of employment argument because both employment and output, according to his findings, are higher per unit of capital employed in the small-scale sector.

2. Economy in the Use of Capital- The Capital Scarcity Argument:


India is not as lucky in the matters of capital resources as has been the ease of the industrially advanced nations. In fact, acute scarcity of capital has been one of the major causes of our economic and industrial backwardness over the past centuries.

Therefore, there is a greater need for judiciously utilising this scarce factor so as to achieve largest possible output and a quicker pace of economic development. Thus, we need to establish those industries which use a small amount of capital per unit of output, or to say, in other words, which generate larger output per unit of capital.

The ratio of output to capital (output-capital ratio) should be maximised or the ratio of capital to output (capital-output ratio) should be minimised. It has been generally observed that modern large-scale industry is highly capital intensive or that it uses more of capital per unit of output. On the other hand, the small-scale industry produces a much larger volume of output with a smaller amount of fixed capital equipment.

The argument that the small-scale industries require smaller amount of capital, and in view of the capital scarcity in less developed countries like India, they must be given a high priority in the programme of industrial development, is only a static argument i.e., it does not take into consideration the impact of such industries in the growth rate of capital formation and availability of capital for investment in future.

Dahr and Lydall argue that such industries will unfavourably affect the growth rate of capital formation and thus reduce future availability of capital.

This is because, those industries being labour intensive, wage bill or labour income will constitute a major share in the total value of output or sales revenue of these industries. Since labour has a very high marginal propensity to consume (MPC) all labour incomes will be used for consumption and so there will not be any significant flow of savings.

Capital has a lower income share in the output, and even with low MPC, would not be able to contribute much to the national savings. Thus, overall saving rate would be reduced thereby adversely affecting future rate of growth of investment, output and employment.

This argument would thus make a case for development of large scale rather than small scale industries. The implicit assumption here is that labour would consume all wages while the capitalist would automatically save a larger portion of their income.

If however, through proper policy measures, technological upgradation and modernisation programme labour productivity and income are raised in the small scale sector, their savings would also come out of labour incomes and add to the stream of capital formation. It is also not true that capitalists save most of their income and use it for reinvestment.


In the modern society, conspicuous luxury consumption is rampant and much of the profit income is used for this purpose. Therefore, a proper policy of encouraging small scale industries would serve the interest of present employment as well as future growth by encouraging saving, investment and capital formation.

3. A Means to Achieve More Equitable Distribution of National Income- The Equality Argument:

The development of cottage and small-scale industries ensures an equitable distribution of income and wealth. The ownership of small and cottage industries is much more diffused and is spread over millions of people, while the large-scale industries are owned by only a few big industrial houses.

Thus, while large-scale industries lead to concentration of income and wealth in a few hands, the small-scale industries help a wide dispersal of income and thus ensure a more equitable distribution. Further, since the smaller industries have a much bigger employment potential, they naturally distribute incomes among a much larger labour force, which further assures a better distribution of income in the society.


Thus, the development of cottage and small-scale industries, on the one side, helps in reducing the concentration of income, wealth and economic power, on the other hand they ensure that largest number of working people obtain the gains of industrialisation and economic development.

The development and spread of small-scale and cottage industries helps in reducing income inequalities and securing a more just distribution of income in a number of ways. Firstly, the small-scale enterprises employ a large number of workers. Therefore, the wage bill or the share of labour in the output is much higher than that of capitalist incomes.

This reduces functional inequalities between the capitalist and the labour incomes. Secondly, the total wage bill is distributed among a very large number of workers. Thus, each worker has a comparatively equal share in the total labour income. This creates greater equality of income among the workers. Thirdly, each worker’s income is used for meeting this consumption and other needs of the dependents and family members.

Whereas the objective of income equality may be laudable, it is bound to create problems with regard to growth of income, output and employment in future. Setting up labour intensive small-scale industries would, no doubt, give a greater-share of income to labour; but it would also reduce future rate of investment thereby bringing down rate of growth of output and employment.


It will therefore result in smaller avenues of employment for workers in future, increase unemployment and social unrest. There would then be greater inequalities between those who get jobs and those who fail to do so. Thus, greater equality now may result in more inequality in future. More jobs today may mean lesser jobs in times to come.

4. Using Unutilised Capital and Skill- The Latent Resource Argument:

A strong argument in favour of the small small-scale industries is that their establishment would make use of the latent resources which are lying idle. Establishment of village and small scale industries would lead to utilisation of hoarded wealth, family labour, local skills of artisan and craftsman, etc.

It would also lead to development and use of native entrepreneurship. These resources and capabilities being spread over the entire country and its far flung areas cannot be made use of by the large-scale industries.

But the spread of village and small-scale industries can harness these resources, make them a vehicle of country’s socio-economic transformation. In fact, over the past few years the development of such industries have indeed contributed a lot in utilising the rural savings and the skills of craftsmen, artisans and the rural entrepreneurs.

5. Cottage Industries—A Source of Rural Prosperity- Rural Development Argument:


Cottage and village industries can contribute a lot towards rural prosperity and the economic well-being of the village people. Development of such industries can provide part-time occupation to the people engage in agriculture and a whole- time job to the village artisans and craftsmen.

It is a known fact that more than seventy-five per cent of India’s population lives in villages and nearly seventy per cent of country’s work force are directly engaged in agriculture. Now, agriculture being a seasonal occupation cannot provide full-time employment throughout the year. Besides, excessive pressure of population on agriculture has given rise to the perpetual problems of under-employment and disguised employment.

Spread of village industries offers a viable solution to all these problems of rural unemployment, poverty and economic oppression. By creating more job opportunities in non-agricultural activities within the villages, industries can contribute a great deal to relieve the excessive pressure of population on land, thereby paving the way for the mechanisation and modernisation of agriculture.

Thus, the development of cottage industries, not only provides additional job opportunities and income to the village people, but also assures improvement in agricultural productivity and enhances village prosperity.

6. Checks Large-Scale Migration of Population to the Urban Centres:

The development of cottage and small-scale industries in the countryside can effectively check the migration of rural population to the already overgrown and congested urban areas. The rural masses steeped in poverty and unemployment due to law productivity in agriculture, are attracted to the urban centres with a view to making better living.


However, because of the slow pace of growth, in the industrial and commercial activity in the urban areas, most of them who come here, fail to find out adequate job opportunities and thus only add to the urban unemployment and overcrowding in the cities. The establishment of cottage and small-scale industries in the rural areas will help in providing jobs to the rural unemployed and thus prevent the migration of rural population.

7. Export Potential:

The cottage and small-scale industries contain a huge export potential. As is evident from recent trends, contribution of such industries have increased manifold during the past years, they contribute nearly one-fourth to the total export earnings of the country. With the further development of these industries, this share is bound to go up rapidly in the near future. Hence, to reduce the tremendous strain on our balance of payments, development of cottage and small-scale industries need to be developed faster.

8. Industrial Decentralisation:

Cottage industries will help in achieving the much-needed decentralisation of industries in India. This is very essential from military, social and economic point of view. There is also the problem of industrially over-congested and depressed areas in the country. There is industrial concentration in a few big cities while the rural areas have so far remained practically shunned off from any industrial activity. Cottage industries can prove to be the most apt instrument for bringing about a balance regional development of the country.

Critics of cottage industries contend that the cost of production in respect of these industries is so high that they can never compete with the large-scale industries. It may, however, be observed in this connection that social cost in respect of cottage industries is comparatively low. Cottage industries do not give rise to evils of large-scale production like labour-capital disputes, over-crowding, immorality, etc.


Besides, it is wrong to assume that money costs in cottage industries are necessarily high. The experience of China and Japan bears testimony to the fact that with the use of power and small machinery the money costs can be considerably reduced even in cottage industries.

In view of the above consideration, we may safely assert that cottage industries from the very backbone of economic life in our country. They must, therefore, be given a vital place in any scheme of economic planning.