The rationale behind small entrepreneurs in the Indian economy has been summarized in Industrial Policy Resolution 1956 as under:
“They provide immediate large scale employment. They offer a method of ensuring a more equitable distribution of the national income and they facilitate on effective mobilization of resources of capital and skill which might otherwise remain unutilized.
Some of the problems that unplanned urbanization tends to create will be avoided by the establishment of small centers of industrial production all over the country”.
Rationale of Small Entrepreneur
i. Employment Argument
ii. Equality Argument
iii. Decentralization Argument
iv. Latent resources Argument
v. Allocation efficiency Argument
The relational of small-entrepreneurs can broadly be classified into five arguments. These are as follows:
(1) Employments argument:
The most important argument advanced in favor of the Small Entrepreneur is that they have a potential to create immediate large-scale employment opportunities.
This argument is based on the assumption that small scale industries are labor intensive and can create more employment.
It is said that employment generating capacity of small scale entrepreneur is eight times that of the large scale sector. Information provided by the Annual Survey of Industries indicates that household and small industrial units accounted for about 60 percent of the total employment generated in manufacturing.
Small entrepreneurs are highly suited to take the unemployment problem in view of India’s scarce capital resources and abundant labor.
(2) Equality argument.
Small entrepreneurs ensure a more inequitable distribution of national income and wealth. It is accomplished in two ways:
(i) The ownership pattern in small entrepreneur is more widespread as compared to ownership of large scale units
(ii) Their more labor intensive nature and their decentralization and dispersal to rural and backward areas provide more employment opportunities to the unemployed.
This all results in more equitable distribution of the produce of he small entrepreneur. As most of the small enterprises are either proprietary or partnership concerns, the relations between the workers and the employers are more harmonious in small entrepreneur than in large enterprises.
(3) Decentralization argument:
Decentralization argument suggests the necessity of regional dispersal of industries to promote balanced regional development in the country.
Large scale industries have the tendency to concentrate in urban areas hence semi urban and rural areas remain deprived of the advantages of industrialization.
But, small-scale industries can be located in rural and semi urban areas to reduce the regional disparities and to use local resources to cater the local demands.
Decentralization of industrial enterprises will help to use local resources such as raw materials, idle savings, and local talents and ultimately improve the standard of living even in erstwhile backward areas.
(4) Latent resources argument:
According to this argument, small entrepreneurs are capable of tapping latent resources like entrepreneurial skills and hoarded wealth especially in rural and semi-urban areas.
Small enterprises encourage the growth of a class of small entrepreneurs required for the growth of the economy. The growth of entrepreneurial class requires a conducive environment.
Small enterprises provide that environment which encourages a growing network of feeder and complementary relations among plants and firms.
It is a given fact that the basic conditions such as supply of power and credit facilities the latent resources of entrepreneurship can be tapped by the growth of small enterprises only.
(5) Allocation efficiency argument:
It is argued that small enterprises use productive factors more efficiently. This is because small enterprise pays factor prices that are closer to existing scarcities i.e. they pay lower wages and incur high capital costs.
This would result in lower capital output ratios and higher labor capital ratios. In any case small scale units made use of local resources and cater largely to local needs.