What is Subsidy: Meaning, Types, Categories and Business Schemes

March 08, 2021

8 min read

You must have come across the word ‘Subsidy’ that the government extends on different schemes. These subsidized schemes are meant to benefit varied sections of society; here, we will be discussing all the things related to the subsidy.

Subsidy

The term subsidy refers to the financial assistance in the form of discount or monetary grants by the Central government to public entities or private institutions. The objective is to make the products offered by these institutions affordable for public consumption. The transfer of money to the public/private institutions induces them to sell the products at lower prices. The subsidized products are necessary for the larger public good and are a means of supporting the community’s welfare.

Subsidies are provided by both the Central and the State governments and are a part of ‘non-planned’ expenditure. People receive subsidies in the form of cheap food products, tax rebates, cash payment, etc.

What are the different types of subsidies provided by the government in India?

The government’s main aim in providing subsidies is to ensure that the country’s population is not deprived of essential commodities. The subsidized goods are well within reach of the population. There are different types of subsidies offered by the government; some of them are:

Food Subsidy
Education Subsidy
Export/Import Subsidy
Housing Subsidy
Oil & Fuel Subsidy
Tax Subsidy
Transport Subsidy

Broadly, the categories can be divided into five types, these are:

Food subsidy

The food subsidy’s main objective is to provide essential eatables to a large section of the population living below the poverty line in India. The subsidized food products are distributed through the PDS system in our country. The major food items supplied to the BPL families varies as per the region, but the common foodstuff includes:

Wheat
Rice
Sugar
Milk
Cooking oil and more

Education subsidy

The Central government extends the education subsidy to eligible students to pursue higher technical and professional education.

Export subsidy

To make exports attractive and lend support to the companies, the government offer export subsidies. The export subsidies help make our products competitive in the international market and open new markets for domestic products.

Fertilizer subsidy

The government provides relief to farmers by providing the fertilizer at the discounted prices. The fertilizer is provided at a fixed MRP that is below the actual price; the government pays the difference between the actual coat and the MRP.

What is the different category of subsidies in India?

Depending upon the social and economic impact, the subsidies can be broadly divided into two categories, these are:

Economic Subsidy	Social subsidy
Irrigation and Flood Control	Health Care
Transport	Education
Industry	Women empowerment
Communication	Sanitation
Power and Energy	Housing
Agriculture	Water supply

How is subsidy implemented?

Depending upon the recipient and the sector there are different ways by which the government provides a subsidy to the people; some of the ways are:

Cash subsidy

The cash subsidy is a direct money transfer to the intended recipient’s account or the company by the government. Farm exporters, LPG subsidy, are examples of a cash subsidy.

Tax concession

Another type of subsidy is the tax concessions given to the targeted sector. Through the tax concessions, the individual’s or companies’ tax obligations are reduced.

Interest subvention

Reduced interest rates or interest payment waives off is another form of subsidy extended by the government to the targeted sector to facilitate growth or support the sector in challenging times.

What are the different subsidy schemes launched by the government?

Some of the welfare schemes launched by the Central government are given below.

*Scheme*	*Ministry*	*Description*
Technology up-gradation fund scheme (TUFS)	Ministry of textiles (GOI)	To induct the latest technology for textile units. It is meant for the jute and textile industry.
Establishment/Modernization for the food processing industry	Ministry of food processing (GOI)	To setup, modernize, or upgrade food processing industries. It is applicable to all segments.
Integrated development of leather sector (IDLS)	Ministry of industries and commerce (GOI)	It is meant to upgrade leather-based industries for productivity gains.
Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS)	Ministry of MSME (GOI)	It aims to upgrade technology in the MSME sector and make them competitive
Technology and Quality up-gradation for MSME (TEQUP)	Ministry of MSME (GOI)	It aims to make the MSME sector energy efficient and increase their competitiveness.
Government subsidy for small business for cold chain	Ministry of food processing (GOI)	Its aim is to integrate the cold chain and preservation facilities from the farms to the end consumers.
Extension of financial assistance for coir units in the brown fibre sector	Ministry of MSME (GOI)	It provides financial assistance to different coir units.
Marketing assistance scheme by NSIC	Ministry of MSME (GOI)	It is meant to provide assistance for marketing products at various exhibitions, trade fairs, promotional events, and buyer-seller meet.
ISO 9000/ISO14001 certification reimbursement scheme	Ministry of MSME (GOI)	Financial assistance to the MSME sector for marketing. Bar code registration is encouraged, and the registration fees is reimbursed.
Support for entrepreneurial and managerial development of SMEs	Ministry of MSME (GOI)	The funding requirement of innovative business ideas is met through the scheme.
Lean manufacturing competitiveness scheme for MSMEs	Ministry of MSME (GOI)	It aims to encourage the MSME sector to adopt lean manufacturing techniques.
Prime Minister Employment generation programme (PMEGP)	Ministry of MSME (GOI)	Khadi and Village industries commission or KVIC implement the scheme, and State KVIC is also a partner.

What are the benefits of the subsidy?

The government starts subsidy schemes for various purposes; some of the benefits are:

Lower the prices of essential commodities and at the same time provide necessary essential commodities to a large section of the population at low rates.
Subsidies to industries are meant to stop the decline in the industrial sector due to multiple factors. It is an indirect method to support employment and manufacturing in the country.
Subsidized education has long-term benefits to the country and the society besides providing skilled manpower to industries.
Subsidies like MNREGA help in fighting unemployment and poverty eradication in the country.

The subsidy is a type of incentive given by the government to individuals or industries to make them more competitive or live a dignified life respectively. It is provided through grants, cash, tax breaks, etc and has extensive benefits to society.

Subsidy FAQs:

1. Are there any disadvantages of subsidy?

Yes, there are several disadvantages of subsidy to society. Some of the disadvantages are high taxes, shortage of goods, subsidy leakage, etc.

2. What are the different subsidies provided to the farmers?

The different subsidies provided to the farmers by the government are:  Input subsidy: It is on fertilizer, seed, power irrigation, bank loan, irrigation, etc.  Price subsidy: MSP is declared to ensure farm products are sold at or above MSP.  Infrastructure subsidy: To install solar pumps, etc., are a kind of infrastructure subsidy.  Export subsidy

3. What is the direct benefit transfer scheme?

It is the scheme launched by the government to provide financial assistance directly to the beneficiary’s account without the involvement of any middleman.

4. What is the highest subsidy in India?

The food grains and other eatables provided under the food subsidy is the highest in India. The food subsidy is distributed through PDS.

5. What are the different modes of subsidy administration?

The different modes are –  Subsidy to producers  Subsidy to consumers  Subsidy to different producers of inputs  Providing incentives instead of subsidizing  Production/Sales through Public enterprises  Cross subsidization

6. What is PMAY or Pradhan Mantri Awas Yojana?

It is a central scheme launched by the government to provide a house to the urban poor. The scheme was launched in 2015 and intends to provide a pucca house by 2022.

7. Is farm subsidy beneficial for farmers?

Farm subsidy is essential and very beneficial for small farmers as they can not purchase the fertilizers, seeds etc., at the market prices. It helps in improving productivity besides fighting poverty at the rural level.

8. Is the fertilizer subsidy given directly to farmers?

No, the farmers are not given subsidy directly as it is not administratively possible to provide a direct subsidy. The farm subsidy is based on various parameters and the quality and quantity of farmers’ products.

9. Why subsidy system is often criticized?

There are several loopholes in the system which leads to subsidy leakage. Subsidy distribution is criticized because instead of the direct beneficiaries, the middle man in collusion with corrupt officials loots the subsidy meant for the poor.

10. Who can apply for the NREGA scheme?

Any Indian national residing in rural areas can apply for the NREGA scheme. Under the scheme, he/she is entitled to 100 days of guaranteed employment.