Subsidy: An analysis

Date: March 07, 2015

mgnrega tax reduction Social Subsidies


Meaning -

Subsidy is a  benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public in general.

Subsidies are a kind of incentive which play an important role in economic development of  countries especially developing countries. Subsidies bring out desired changes by effecting optimal allocation of resources, stabilizing the price of essential good & services, redistributing income in favor of poor people thus achieving the twin objective of growth & equity of nation.

Types of subsidies

i- Cash Subsidy: Providing food or fertilizer to consumer at lower price.

ii- Interest or credit subsidies

iii- Tax subsidies

iv- In kind subsidies

v- Procurement subsidies

vi- Regulatory subsidy

In India subsidies can be classified in two categories

A- Economic Subsidies Power Agriculture & Irrigation Communication & & Industry Transport & others Cooperation Flood Control, Energy

B- Social Subsidies Water Supply Education Health & Sanitation Rural,Housing and others




Subsidies : Good and Bad

Good subsidy-

The good subsidies can be seen as:

a- Subsidies on public transport, to reduce pollution and congestion on roads and reduce petrol consumption.

b-Subsidies on medical equipment or medicines, during some epidemic, which can ensure that all sectors of populations receive medication.

c-Subsidies for loans given for secondary agriculture initiatives, to reduce the burden on primary agriculture activities, and reduce disguised unemployment in agriculture.

d-Subsidies to ensure flourishing of MSME, so as to reduce the top to bottom approach of progress currently employed by the govt.

e-Subsidies to encourage renewable energy usage at public places and in residential areas, like Prakash Path in New Delhi, which is to be nationalised after full scale implementation in the capital.      

Bad Subsidy-

Some of the bad subsidies include:

a-The one which harm the environment, like subsidies on nitrogenous fertilisers, which have led to their overuse and harmed the soil, alongwith increasing the deficit.

b-Schemes which give only a short term relief, without any skill development in the persons involved, which makes them overly dependent on the scheme, like MGNREGA.

c-Subsidies/ schemes started, without much brainstorming, due to which the target population does not benefit much. Example, the loan waiver initiative only benefitted the well off farmers who have borrowed from the formal sector, and not the farmers who use the informal credit system.