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Subsidy: Meaning, Types, Categories and Benefits of the Subsidy

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  • Last Updated : 07 Nov, 2022
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What is a Subsidy?

The subsidy is a discount provided by the government to the general public in order to supply critical items at accessible costs across the country. The amount that the government grants to a unit/industry that sells subsidized items to the public is known as a subsidy. Subsidies are a type of government non-planned spending in which the cost of the subsidy is significantly lower than the actual cost of production.

Occasionally, the government would grant financial support as a subsidy to aid the poor or needy persons. For business loans and equipment purchases, the government periodically gives subsidies to farmers, manufacturers, and consumers. According to the Budget document, for 2020-21, The government’s food, fuel, and fertilizer subsidy bill has been pegged marginally higher by 0.23 percent at Rs 2,27,793.89 crore.

Different Types of Subsidy:

There are many different types of subsidies, and we’ve included some of the more prominent ones below:

1. Fertilizer Subsidies:

The majority of farmers in our country are small farmers, which is why our country is known as an agricultural country. However, small farmers incur a lot of costs in cultivating, and farmers must use fertilizers for a good crop, which has become very expensive in today’s inflationary environment. Keeping the farmers’ expenditures in mind, the Government of India provides some assistance in the purchase of fertilizers through subsidies, allowing farmers to farm at affordable rates for fertilizers such as urea and others. Purchase a variety of fertilizers. This subsidy is offered for various businesses, such as milk, fish farming, poultry, and fruits, as well as many other small businesses. The food processing business can now get a subsidy from the central government of up to Rs. 5.00 crore.

2. Food Subsidy:

The Indian government gives this form of assistance to needy families living below the poverty line. Subsidies on essential food commodities such as rice, wheat, and sugar are provided by the government to assist such individuals financially. Through the public distribution system (PDS), the central government currently gives highly subsidized foodgrains at Rs 1-3 per kg to more than 81 crore citizens of India.

3. Cash Subsidy:

The government spends money directly to the targeted recipient’s account or firm as a cash subsidy. Cash subsidies include farm exports and the LPG subsidy. As you are aware, fuels such as LPG gas, kerosene, diesel, and others are utilized, and their value is growing with time. Poor folks are unable to purchase these items due to the increase in price. Keeping these factors in mind, the Indian government grants gasoline subsidies to the underprivileged. As a result, they are able to make a comfortable life. The Union Budget for 2020-21 allocates Rs 39,264 crore in subsidies for both fuels (Rs 35,605 crore for LPG and Rs 3,659 crore for kerosene), up from Rs 34,110 crore in the previous fiscal year. The government simply gives a quantity of money to a company or organization as a financial subsidy. The renewable energy industry is an example of a frequent cash subsidy in the United States; cash subsidies are offered to private enterprises in the renewable energy sector to support their expansion. The Central government’s part is 35.37 percent, which is almost half of the State government’s subsidies

4. Tax Subsidies:

The primary goal of the government’s tax subsidy program is to provide tax relief. There are several primary goals for doing so, including promoting all types of industries and expanding work prospects in any industry. The total value of social security benefits and subsidies provided by state governments is projected to be in excess of Rs. 600 billion (US$10 billion). As a result, the overall subsidy amount rises to Rs. 3,600 billion (US$60 billion). If your gross taxable income, after deductions, does not exceed Rs. 5 lakh in the financial year 2019-20 or assessment year 2020-21, you may be eligible for a refund of up to Rs. 12,500 as a resident individual.

5. Subsidies for Small-Scale Industries:

There are many jobless individuals in our nation, and the Government of India provides them with the required subsidies to enable them to establish their own business and become self-sufficient, resulting in all small businesspeople having to work on their own. The program is overseen by the Ministry of Small-Scale Industries. For qualified enterprises, the CLCSS provides a 15% up-front capital subsidy. The highest amount that may be received as a subsidy under the plan, however, is capped at Rs. 15 lakhs.

6. Subsidy for the Textile Industry:

As you may know, silk thread is used to make textiles in India, and silk thread is created from jute, cotton, and other natural fibers. People nowadays like silk-made clothing, but owing to the expensive cost, a trader must invest a significant amount of money to start a business in this area; therefore, if the government gives a subsidy in this area, such traders will have to invest less. India is a major textile and garment producer around the globe. India’s domestic apparel and textile sector accounts for 5% of GDP, 7% of industrial production in value terms, and 12% of export earnings. 

Subsidy Categorized into Two Groups:

  • Social subsidy
  • Economic subsidy

Social Subsidy:

  • Health care
  • Education
  • Women Empowerment
  • Sanitation
  • Housing
  • Water supply

Economic Subsidy:

  • Irrigation and Flood Control
  • Transport
  • Industry
  • Communication
  • Power and Energy
  • Agriculture

The majority of businesses have their products subsidized by the government in order to provide them at a reduced cost to those in need or families living below the poverty line. The Mahatma Gandhi Employment Guarantee Act is the world’s largest subsidy (MGNREGA). The Indian government would invest around Rs 45,000 crore under this Act. Gives a subsidy for employment.

Objectives of Subsidy:

Subsidies affect demand and supply choices by driving a wedge between consumer prices and production costs. Subsidies frequently go toward:

  • Achievement of social policy goals such as income distribution and population control, etc.
  • Wage subsidies for industries with high labor costs can increase employment.
  • Increasing consumption and/or output.
  • Balancing out market flaws, including absorption of externalities.

Effects of Subsidies:

  1. A locative effects: These have to do with how resources are distributed by sector. Subsidies encourage the allocation of greater resources to the subsidized industry.
  2. Redistributive effects: These generally rely on the elasticities of the relevant groups’ desires for the subsidized commodity, the elasticities of the supply of the same good and the method of subsidy administration.
  3. Fiscal effects: Since a large fraction of subsidies come from the budget, they obviously have an impact on the economy. Fiscal deficits are so immediately increased. Indirectly, subsidies may have a negative impact on the budget by diverting funds from tax-producing industries to those that could have a poor potential for tax generation.
  4. Trade effects: A fixed price that is markedly less expensive than the market clearing price might decrease domestic production while increasing imports. However, subsidies to domestic manufacturers may allow them to provide prices that are competitive internationally, either lowering imports or increasing exports.

Benefits of Subsidies:

The government launches subsidy schemes for a number of reasons, some of which include:

  • In the case of food subsidies, PDS has significant leakage in addition to having a low coverage of the poor and a very tiny benefit that the poor receive.
  • The unit cost of energy has risen more quickly than the applicable tariff rate, both the household and agricultural sectors have seen an increase in subsidy rates. Additionally, there is a wide range in the amount of per capita subsidies, which is significantly larger than that in the poorer states.
  • When utilized in conjunction with HYV of seeds, chemical fertilizers, power, and other relevant inputs, water has a very high marginal productivity in the case of public irrigation. Because they have the ability to apply these complementary inputs, wealthier farmers may experience significantly greater advantages.
  • When it comes to health care subsidies, a bias in favor of the wealthy may be seen in the higher emphasis on curative healthcare costs, but preventative healthcare costs, which have considerably bigger externalities, would undoubtedly benefit the economically disadvantaged sectors of society more.

Disadvantages of Subsidies:

  • India has the lowest public higher education spending per student globally, according to UNESCO.
  • The theft rate for subsidized kerosene is 39%.
  • Additionally, subsidies may have negative or unanticipated economic repercussions. If enforced in a market where there is competition, they would lead to an ineffective allocation of resources.
  • By shifting financial resources out of places where their marginal productivity would be higher. Widespread subsidies are a waste of resources.
  • Price controls may result in decreased production, shortages, and the creation of illicit markets, which enrich their operators and provide economic rent to privileged individuals who have access to the distribution of the regulated commodity.

Achievements of Subsidies: 

  • Each unit should design a strategy for staff reduction that includes limiting new hires, planning for worker redeployment, and implementing voluntary and occasionally required retirement plans.
  • It is important to continue researching subcontracting, unbundling, and privatization strategies for the private provision of publicly funded private products.
  • Education, sports, and the arts and humanities get more than one-fifth of non-merit social subsidies.
  • Irrigation makes up over a quarter of economic services, whilst power makes up about 12%.
  • State public firms receive substantial subsidies, yet there is very little return in the form of interest or dividends.

Conclusion:

Overall, the subsidy program benefits a large number of people across the country. It is simple for MSME dealers to do business, farmers receive assistance in farming, and equipment purchases are accessible, as well as low-cost financing. Loans to the impoverished are also introduced to the mainstream as a result of this.


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