The differences between the small-scale and cottage industries are basically two:
(a) While small-scale industries are mainly located in urban centres as separate establishments, the cottage industries are generally associated with agriculture and provide subsidiary employment in rural areas and
(b) While small-scale industries produce goods with mechanised equipment employing outside labour, the cottage industries involve operations mostly by hand which are carried on primarily with the help of the members of the family.
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The Fiscal Commission (1949) also made a distinction between small-scale and cottage industries in this manner:
A cottage industry is one which is carried on wholly or primarily with the help of members of the family either, as a whole or part- time occupation.
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A small-scale industry, on the other hand, is one which is operated mainly with hired labour, usually employing 10 to 50 persons.
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Perhaps this definition has prompted the Industries (Development and Regulations) Act, 1951, to exempt units employing less than 50 workers with power, and less than 100 workers without power, from registration. This exempted sector came to be known as the small-scale sector.
Another criterion for differentiating small-scale and village industries from the large-scale industries has also been adopted.
This relates to the fixed capital investment in a unit. This limit has continuously been raised upwards. In 1991, the government raised the investment limit for small-scale industry to Rs. 60 lakh and for ancillary units to Rs. 75 lakh.
An extra incentive was given to small business engaged in export of their products. Their investment limit was further raised to Rs. 75 lakh on condition that they export at least 30 per cent of their output by the third year of their starting production.
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A policy announced on August 6, 1991 raised the investment limit for the tiny units to Rs. 5 lakh from the earlier limit of Rs. 2 lakh.
Economists advocate for a labour-surplus under developed economy industrialisation based on a network of dispersed, labour-intensive and small-sized industries. These industries are capital-light, skill-light, labour-intensive and dispersed.
They are of ‘quick’ investment type and by carrying the job to the worker they can overcome the difficulties of geographical immobility.
In the conditions prevailing in many underdeveloped countries the development of small industries may be the most economic form of industrialisation; it may be more economic than either large-scale organised industry or cottage industry.
It avoids the heavy costs which often result from agglomeration of large labour forces; the overhead capital costs stemming from such agglomerations are often high and do not directly increase productivity.
Moreover, small industry represents much less of a break with previously established modes of living and therefore represents less of strain than industrialisation in the form of large units.