Subsidy

Reviewed by Anjaneyulu | Updated on Aug 27, 2020

Introduction

A subsidy, often seen as a tax converse, is a fiscal policy instrument. The term subsidy originating from the Latin word 'subsidium' means, literally, coming from behind to support. Subsidies are useful both for the economy and also for individuals, and they have long-term economic results.

One example is the Green Revolution which provided good quality grain to farmers at the subsidised prices. Similarly, we can see how India's government is trying to reduce air pollution through LPG subsidies.

Objectives of Subsidies

Objectives of subsidies are to lead towards a change in the demand/supply decisions by forming a wedge between consumer prices and production costs.

Subsidies are often targeted at: - Promoting higher consumption/production - Mitigating market imperfections, including external internalisation - Achieving social policy goals, including income redistribution, population control, etc.

Types of Subsidies

The World Trade Organization (WTO) describes subsidies in a broader sense. It says a subsidy is any financial benefit a government provides that gives an unfair advantage to a particular industry, company, or even person. The WTO lists five forms of subsidies:

  • Cash subsidies
  • Tax concessions, such as deductions, discounts, or deferrals
  • Risk acceptance, such as guarantee for loans
  • Public procurement policies to pay more than the free market price
  • Stock purchases to hold the stock price of business above market levels

Direct subsidies are given in the form of cash grants and interest-free loans. Direct subsidies increase the beneficiary's buying power and may help to raise living standards. When it comes to agriculture, direct subsidies help farmers buy the necessary inputs from the markets. Proper identification of beneficiaries represents a major obstacle in the direct subsidy disbursements.

Indirect subsidies are provided in the form of tax rebates, health premiums, low-interest loans, write-offs depreciation etc. An example of indirect farm subsidies is the cheap loans given to farmers for agriculture.

Modes of Administering a Subsidy

The various alternative modes of administering a subsidy are: - Subsidy to producers - Subsidy to producers of inputs - Subsidy to consumers - Production/selling through public enterprises - Providing incentives instead of subsidising - Cross subsidisation