When a government provides benefits to a business or individual, it is called a subsidy. It can be direct (such as cash transfers) or indirect (such as loans, tax breaks, etc.). The subsidy is usually provided to overcome an economic problem and increase the quality of life for its individuals.
How does a subsidy work?
Because a considerable portion of the population lives in poverty, the government offers certain subsidies to businesses to make sure critical goods and services are more affordable to the poor. This subsidy company accounts for a significant portion of the government’s budget. Many entities across domains, such as agriculture, education, oil, and food, are given these subsidy benefits.
The subsidy expense for an entire fiscal year in India is typically in the lakhs of crores of rupees. The worldwide crude oil price is a major determinant of the government’s total subsidy expense, as India relies on imports for more than 80% of its energy needs.
Gasoline and diesel prices have been deregulated and become market-linked, removing the government subsidies burden. However, kerosene and LPG (home cooking gas) continue to be subsidised by the government.
Different categories of subsidies in India
When a country’s economic situation is in distress, the government introduces a subsidy company. Industries face financial stress due to foreign policies and geographical disadvantages. A subsidy can help these industries do better business and provide quality goods and services. This, in turn, builds the economic situation of a nation.
There are mainly three kinds of subsidies:
1. Direct subsidy
A direct subsidy is a payment made by the government to a third party for which no goods or services are exchanged. As a result, money is paid, but the government gets nothing in return.
Payments to both commercial firms and low-income individuals are examples of direct subsidies. This could include housing allowances, food vouchers for low-income families, or payments to private businesses as “cash in the bank” payments.
2. Indirect subsidy
Indirect subsidies assist the third party without providing a monetary advantage. For example, subsidy company loans can be considered a sort of indirect subsidy. Although it is not a monetary transfer, it does benefit certain firms.
In a nutshell, direct subsidies are monetary payments made to third parties. On the other hand, indirect subsidies benefit a third party without directly giving them money.
3. Subsidies provided by the government
The government offers a variety of government subsidies. Welfare payments and unemployment benefits are two of the most popular types of individual subsidies. They aim to assist citizens who are temporarily experiencing financial hardship. Other incentives, such as subsidised student loan interest rates, are provided to encourage people to continue their studies.
Government subsidies are given to enterprises to help them compete against overseas competition. These rivals may have dropped their prices to the point that the domestic business would be unprofitable without the subsidy. In the past, organisations in the agriculture, banking, oil, and utility sectors have received a great bulk of government assistance to outshine their competitors.
Types of Subsidies in India
Here is a list of types of subsidies available in India:
Food subsidy: The food subsidy benefits both consumers and producers. It is used to purchase grains from farmers at a price that makes farming profitable and then sell the grains to needy households at a lesser price or give them for free. Maintenance and other administrative costs account for a portion of the food subsidy. The federal government and the state purchase food grains for distribution through the PDS. The Food Corporation of India (FCI) purchases it for the Centre under “centralised procurement,” while many state agencies purchase it for their individual states under “decentralised procurement.”
Production subsidy: By partially compensating production costs or losses, a production subsidy encourages suppliers to expand the output of a specific product. The goal of production subsidies is to increase the production of a particular product so that the market will promote it while keeping the ultimate price to consumers low.
Consumption subsidy: A consumption subsidy encourages customers to behave in a certain way. Food, water, power, and education are all subsidised by governments on the assumption that everyone, no matter how poor, should have access to these fundamental necessities. Some governments provide ‘lifeline’ electricity prices, in which the initial monthly increment of electricity is subsidised.
EducationSubsidy: Education Loan Subsidy Schemes are types of financial aid that make it easier for students to repay their student loans. These subsidies are available to student loan applicants as interest rate reductions, debt forgiveness, or a refund on education loan payments. The Central Government’s education loan subsidy program offers a variety of perks to all types of loan borrowers to aid in their studies. In addition, several banks offer interest rate subsidy programs for student loans depending on internal criteria.
Tax subsidy: A tax subsidy is a reduction in the tax burden given to a specific business or industry in order to encourage consumption or production. It is a monetary benefit provided by the government as a financial incentive.
Employment subsidy: An employment subsidy is paid by the government to workers, either directly or indirectly, through their employers. Its goals are to redistribute money and avoid the welfare trap that previous forms of relief have created, thereby lowering unemployment. It’s most likely to be implemented as a change to the income tax system. Income tax is a payment made by a worker to the government based on his or her earnings. An employment subsidy is a payout that goes the other way.
Export and import subsidy: Export subsidy is a government policy that encourages the export of commodities while discouraging the sale of goods on the domestic market. It might take the form of direct payments, low-cost loans, tax breaks for exporters, or government-funded foreign advertising. International importers pay less because of an export subsidy. Therefore, local consumers spend more than foreign consumers.
Import subsidies are subsidies on commodities and services paid to resident producers when the goods cross the economic territory’s border or when services are delivered to resident institutional units.
Transport subsidy: On 23rd July 1971, the Indian government launched the Transport Subsidy Scheme (TSS) to promote industrialisation in remote, hilly, and inaccessible areas. All industrial units were included in the scheme (barring plantations, refineries, and power generating units both in public and private sectors, irrespective of their size). Subsidies on transportation costs for raw materials and finished goods to and from the unit’s location and the designated railhead are reimbursed under the program.
Fossil fuelsubsidy: Government laws that lower the cost of fossil fuels and their production are referred to as fossil fuel subsidies. Basically, it’s anything that favours fossil fuels above alternate energy sources. Direct funding and tax breaks are the most obvious subsidies. However, other activities also qualify as subsidies, including low-interest loans and guarantees, price controls, governments providing fossil fuel companies with resources like land and water at below-market rates, research and development funding, etc.
Housing subsidy: Subsidised housing is any government action aimed at lowering housing expenses for marginalised communities. Non-profit housing and rental assistance are examples of subsidies.
Agricultural or farm subsidy: A government incentive subsidy company geared towards agribusinesses and farms to supplement their income, manage the supply of agricultural commodities, and impact the cost and supply of such commodities is called an agricultural or farm subsidy. Wheat, corn, milk, sugar, and meat products are examples of farm subsidies.
Benefits of subsidies
Subsidies aid in the affordability of everyday necessities such as food and fuel. Food subsidy is a fundamental requirement for a developing nation.
The government provides subsidised education so that the country’s youth can gain employment and contribute to the country’s GDP.
Subsidies are also offered to certain industries through tax breaks to stimulate industrialisation. Subsidies on public transportation, for example, have made travel more inexpensive.
Subsidies include the NGERA rural employment creation scheme, midday food programs, healthcare, women empowerment, and farm debt forgiveness, to name a few. These subsidies have helped empower women, poor people, and other marginalised sectors of the country.
One of the most significant advantages of a governmentsubsidy is that it can reduce negative externalities. For example, subsidies can help mitigate the negative externality of pollution by subsidising public transit.
Government subsidies for agriculture play a pivotal role when the nation’s economic condition is concerned. India is primarily an agriculture-dependent state. These schemes benefit the nation’s agricultural produce and provide farmers with a better life.
Drawbacks of subsidies
When the government subsidies a product, it lowers its price while increasing its usage. While this may initially benefit customers due to the lower price, it will also result in shortages as producers struggle to keep up with the rapid increase in demand. Consumers who cannot locate the product in their area due to overconsumption and product shortages may find this to be an unfortunate development. These customers are unable to purchase the product for a lower or original market price.
Subsidies help decrease negative externalities. However, it is impossible to evaluate the amount of a subsidy’s success by measuring its positive externalities. Despite its many advantages, the government will find it difficult to assess the success of subsidies to make an informed judgment regarding their future deployment.
Governments struggle to provide funds to some industries, businesses, or individuals without first taxing residents. This means that all government subsidies are accompanied by a tax expense. Citizens will eventually have to pay greater taxes to fund government subsidy programs.
Difference between direct and indirect taxes: A deeper understanding
Taxes are divided into two categories:
Direct Tax
Indirect Tax
It is based on the amount of money earned and the actions that are carried out.
It is a tax that is imposed on a product or service.
In the event of direct tax, the tax burden cannot be moved.
The burden of indirect taxes has shifted.
It is paid directly by the person in question.
It is paid by one person, but they recover it from another, i.e., the person who is the final consumer of the tax.
It is paid once the revenue reaches the taxpayer’s hands.
It is paid before the products or services are delivered to the taxpayer.
It’s difficult to collect taxes.
The collection of taxes is pretty simple.
Example Taxes on income, wealth, and so on.
GST, excise duty, customs duty, sale tax, and service tax are just a few examples.
Government Subsidies List
Here’s a quick look at some of the top government subsidies:
Credit Linked Capital Subsidy Scheme (CLCSS): The scheme, launched in October 2000, intends to improve MSMEs’ competitiveness via technology upgrades.
Food Security Act of 2013: This food subsidy aimed to offer subsidised food grains to around two-thirds of the country’s marginalised population.
Pradhan Mantri Gramin Awas Yojana: Formerly known as Indira Awas Yojana, this is an Indian government-sponsored social welfare program that aims to provide housing to the country’s rural poor.
Conclusion
There is always a debate going on whether subsidies are a good idea. Most economists are of the opinion that subsidies help a nation grow. Some are against it. India has a lot of subsidies, and more might be on the way.
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Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.
