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The main social purpose of small business development in india is not the middle class expansion, but the poverty reduction through employment. As the cornerstone of the middle class expansion, it is not a small business that has been chosen, but a small scale industry as an important component of industrial development, as well as the employment and export increasing. Thus, depending on the nature of the small industrial units, and, respectively, the problems they encountered, small scale industry have been divided in two sectors. The first sector is traditional usually home based village and cottage industries and handloom industry, which is seen primarily as a large reservoir of employment, and in some of its segments as a source of art including jewelry products handicraft industry.

It is basically a pre capitalist and early capitalist sector of small scale industry. With a strong oppression of the trade and usury capital and without government support, it cannot compete with imported products and those of indian factories. The second sector is a modern usually mechanized small scale industry, representing mainly the capitalist system and using more or less modern production techniques. This part of the small scale industry is regarded as the base for the industrial business expansion and increase of industrial production, with a relatively greater employment potential than the large factory industry. Support for small scale industry in india is done through a combination of measures. Protection on small scale industry on the market is implemented not only through the establishment of high import duties and import restrictions from which primarily benefits large factory industry , but also by protecting against the competition of the latter.

In addition, the state requires large factory industry enterprises particularly in the automotive industry to buy a certain proportion of the required parts and components from small scale industrial enterprises. As with agricultural sector, small scale industry, which had largely depended on usurious loan, was included among the priority projects of lending by commercial banks. In addition, to enhance the long term loans of small scale industry and coordinate all its funding streams, a special small scale industry development bank was established.