17 Role and Importance of Small Scale Industries (Economy)

Small scale industries occupy an important place in the country’s economy. This faces many serious problems, most of which are associated with the smallness of their operations.

role and importance of small scale industries
role and importance of small scale industries

Role and Importance of Small Scale Industries

The Small-scale sector plays a vital role in the growth of the countries.

Following is the role and importance of small scale industries:

1. Employment Potential

Small-scale industries are labour intensive. A given amount of capital invested in small-scale industrial undertakings is likely to provide more employment.

At least in the short run, then the same amount of capital invested in large-scale undertakings.

The Encouragement of small-scale industries would serve to counteract the seasonal unemployment in agriculture and Thus to utilize labour which might otherwise go to waste.

These industries offer limitless opportunities for self-employment. It is these self-employed persons who are the backbone of the nation.

Every effort must be made to strengthen the position of these proud and self-reliant persons in the country’s economy.

Related: 12 Characteristics of Ideal or Optimal Capital Structure.

2. Less Capital Requirement

Small-scale industries are the capital-light example they need a relatively smaller amount of capital than that required by large-scale industries.

Thus, one of the great advantages of small-scale industries is that they make possible economies in the use of capital.

As capital is very scarce in under-developed countries.

It may be used to Greater advantage in the early stages of development if it is used to expand transport and other public utilities, irrigation, and other agricultural requirements and those forms of large-scale industry where the advantages outstandingly great.

Related: Top 12 Factors Affecting Business Finance (Complete List).

3. Latent Resources

Small-scale industries will fall into being capital that would not otherwise have come into existence.

The spreading of small-scale industries over the countryside would encourage the habits of thrift and investment in rural areas.

Moreover, the enterprising small manufacturer has to scrape together capital where the can find it.

He often manages to get it from relatives and friends.

This capital probably would never have come into existence is productive capital had it not been for the Small Enterprises.

4. Skill Light

Another attraction of small-scale industries lies in their being skill light a large scale industry calls for a great deal of Management and supervisory skill foremen, engineers, accountants, and so on. Like capital, these skills are also in very short supply in our country, and it is important to economies as much as possible in their use.

Small-scale industries provide a way of doing this and at the same time provide industrial experience and serve as a training ground for a large number of small-scale industries managers, at least some of whom develop the capacity for managing large-scale undertakings.

Related: 20 Importance of The Study of Business Environment.

5. Use of Local Resources

Small-scale industries are importing light like they used a relatively low proportion of imported equipment and materials as compared with the total amount of capital used in them.

Large-scale industries, on the other hand, require huge imports in the form of equipment and materials, upsetting the country’s Balance of payments thereby.

A low import intensity in the capital structure of the small-scale industries reduces the need for foreign capital or foreign exchange earnings.

Thus, obviates Balance of payment difficulties later and currently retains within the country a large part of whatever induced effects may materialize.

Related: 12 Main Characteristics of Decision Making (With Examples).

6. Quick Production

Small-scale industries are the “quick investment type” like, those in which the time required between the investment of capital and the start of the flow of goods produced is relatively short.

In a developing economy with strong inflationary pressure and the need for a rapid rise in the living standards, the importance of such quick investment type Industries can hardly be exaggerated.

The anti-inflationary requirements and the requirements of development are often in conflict but a compromise can be found in the small-scale industries which have a high fruition coefficient and also a short fruition lag.

7. Decentralization

The development of small-scale industries will being about the decentralization of industries and will thus, promote the object of Balanced regional development.

A major drawback in the industrial structure of our country is that the regional distribution of industries is exceedingly uneven.

On the other hand, there is a disappropriate net growth of large-scale industries in a few areas.

Related: 11 Advantages and Disadvantages of Decentralization (Explained).

8. Equitable Distribution

Small-scale industries and cottage industries have the additional advantage that small-scale industries they secure a more even distribution of income and wealth.

The development of large-scale industries tends to concentrate large income and wealth in a few hands, which is undesirable from the social point of view, in that they involve exploitation of Man by man.

They also create vested interest which puts obstacles in the way of the economy marching towards its goal of the socialistic pattern of society.

Related: Top 5 Types of Distribution Channels in Marketing (Explained).

9. Mobility of Labour

By carrying the job to the worker, small-scale industries can overcome the difficulties of terrestrial immobility.

Moreover, unlike large Industries small-scale industries do not create problems of slum housing, health, and sanitation, etc. and the attendant disease, misery, and squalor.

10. Support of Large-Scale Industries

Another highly useful role of small-scale industries in developed and underdeveloped countries is the great support that the development of large-scale industries can obtain from small-scale industries.

role and importance of small scale industries
role and importance of small scale industries

This is possible in the following ways:

  1. Small-scale industries may manufacturer small parts like cycle parts, which may letter be assembled by the large Industries.
  2. The large-scale industry may produce semi-finished goods which may lead to being made into several types of finished goods in small-scale industries setups, such as agricultural implements and cutlery from iron and steel, household utensils from sheet metals.

Related: Top 9 Advantages of Logistics or Physical Distribution (Explained).

11. Reduction of Dependence on Agriculture

The growth of Cottage and small-scale industries will divert surplus labour from our overburdened agriculture and thus bring about a more desirable occupational distribution.

12. Relieving Congestion in Urban Areas

By providing remunerative employment in the rural areas, these Industries will relieve congestion in overcrowded urban centers.

13. Sustaining Green Revolution

Small-scale industries can help sustain the green revolution in the countryside mainly through the development of agro-based industries and services, such as the production of farm implements and equipment for food processing industries and Agricultural Machinery repair and service workshops.

Besides, the expansion of rural income as a result of the green revolution is expected to boost the consumer demand for sophisticated items such as radios, TV sets, transistors, cycles, sewing machines and cosmetics, which the small-scale industries can conveniently meet.

Related: Top 5 Basics of Successful Entrepreneurship (Must Know).

14. Foreign Exchange Earnings

From the point of Balance of payments, small-scale industries are justified on two Grounds.

One, they do not require much foreign exchange resources for their establishment and to that extent place almost no extra burden on the balance of payment, position.

Two, small-scale industries can contribute to the foreign exchange Kitty of the country by adding to exports.

These industries are exporting traditional as well as non-traditional items.

15. Production of Consumer

Small-scale industries, predominantly producers of consumer goods, have a key place in the process of development.

The industrialization of the country, with emphasis on heavy industries, requires large capital investment, living little for large and consumer goods industries.

In the process of industrialization, when the income increases the demand for consumer goods also increases.

If the supply of consumer goods does not exist as it leads to price rise, which will thus not only lower the standard of living of the poor workers but will also jeopardize the very process of growth.

Related: 9 Advanced Strategies for Building Maximum Customer Satisfaction.

16. Political and Social Advantages

Small-scale industries can help in awakening the powerful dormant forces among masses for use in constructive activities.

The freedom of work, self-reliance, self-confidence, enthusiasm to achieve, and all such traits of a healthy Nation can be built around the material activities performed in these industries.

17. Preservation of Inherited Skill

Small-scale industries were helpful in the preservation of the inherited skill of our artisans which would otherwise languish and disappear.

A great many people in villages and small towns will be saved from the mechanical, monotonous and robot-like life associated with big industrial cities.

These non-economic factors cannot be concretized into cold statistics. In fact, these are the essence of life.


Thus, Small-scale industries have a crucial role to play in the economy:

  • Reducing the incidence of unemployment and underemployment.
  • Increasing National income.
  • In meeting the shortage of consumer goods.
  • In accelerating economic growth by making optimum use of natural and human resources.
  • In promoting balanced regional development.
  • In reducing inequalities in the distribution of income and wealth.
  • In relieving the present excessive pressure on land and overcrowding in urban areas, and in sustaining the Green Revolution.

Thus, now you know the role and importance of small scale industries in an economy.

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