What Is Subsidy And Type Of Subsidies? – Indian Economy

Table of Contents

Subsidy means
- This grant may be in the form of either cash or kind and is generally given to promote an economic policy or social policy.
DIRECT SUBSIDY
- cash grants,
- interest-free loans
INDIRECT SUBSIDY
- tax breaks,
- premium free insurance, low-interest loans, depreciation write-offs,
- rent rebates

TyPES OF SuBSIDIES

There are six primary categories of subsidies as follows, divided by purpose:

Export subsidies,
Subsidies contingent upon the use of domestic over imported goods,
Industrial promotion subsidies,
Structural adjustment subsidies,
Regional development subsidies,
Research and development subsidies.
By beneficiary, there are two primary categories:

Subsidies that are not limited to specific businesses or industries (non-specific subsidies), and
Subsidies those are limited to specific businesses and industries (specific subsidies).

SUBSIDIES CAN ALSO BE DIVIDED INTO BROAD AND NARROW SUBSIDY.
The most common forms of subsidies are those to the producer or the
Producer/Production subsidies ensure producers are better off by supplying market price support, direct support, or payments to factors of production.
Consumer/Consumption subsidies commonly reduce the price of goods and services to the consumer.
Subsidies are commonly used by governments to promote general welfare (eg. housing, education, sustenance).
However, they can also be used as tools of political and corporate cronyism or to erect barriers to trade.

ESTIMATION OF SuBSIDy ON PuBLIC GOODS, MERIT GOODS AND NON-MERIT CLASSIFICATION

PuBLIC GOODS

Public good is a good in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.
Examples of public goods include fresh air, national defense, flood control systems, public transport and street lighting.
Since these services are available to all, they are normally characterised by nonrivalry and non-excludability in consumption.
Since these services are available to all citizens, they do not exclude anyone.
Thus, such goods cannot be priced and hence are not included in the calculation of subsidies.

MERIT GOODS

Merit goods are those goods whose consumption leads to positive externalities.
This implies that when a merit good is consumed, the public benefit is greater than the private benefit.
For example, vaccination against a contagious disease is a merit good.
Similarly, other merit goods are environmental protection and minimum level of education (primary education), for all.
The social benefit resulting from these goods/services is much greater than the sum of private benefits to individual consumers.
This is because these goods contain elements of ‘externality’ beneficial to the society as a
Other examples of merit goods are roads and bridges, flood control and research pertaining to agriculture, space, atomic energy, etc.
The availability of benefits in the form of externality justifies the subsidies on these

NON-MERIT GOODS

The non-merit goods are those goods whose consumption leads to negative externalities.
In consumption of such goods, the benefit of subsidies provided on such goods accrues to the individual consumers.
In case of non-merit goods, the cost of providing the commodity/service to the society is higher than the price fixed for providing it to the consumer.
These subsidies result in the transfer of benefits to the individual consumer in a number of ways as follows:
- Cash subsidies – Providing food or fertilisers to the consumer at prices lower than those at which the government procures the commodities.
- Interest or credit subsidies : Loans given at rates lower than market rates. This takes the form of concessional credit to small scale industries or priority sector loans to individuals to buy a taxi, an auto-rickshaw or to set up some small enterprise by buying some equipment.
- Tax subsidies:Tax exemption of medical expenses, postponing collection of tax arrears
- In-kind subsidies: Provision of free medical services though government dispensaries, provision of equipment to physically handicapped persons.
- Procurement subsidies: Purchase of foodgrains at an assured price which is intended to be higher than the prevailing market price.
- Regulatory subsidies: Fixation of prices of goods produced by the public sector at less than the cost with a view to providing inputs to industry or helping certain other categories of consumers. Examples are making steel, coal or other minerals available to industry, providing electricity to farmers at a rate much lower than the cost.

BuDGETARy SuBSIDIES

The subsidies which are provided in the Budget are budgetary subsidies.
The estimation of budgetary subsidies are computed as excess of the cost of providing a service over the recoveries from the service.
These costs are taken as the sum of the following:

Revenue expenditure on the concerned service;
Annual depreciation on cumulative capital expenditure for the creation of physical assets in the service; and
Interest costs of the cumulative capital expenditure, equity investment in public enterprises, and loans given for the service concerned including those to public enterprises.