What Is Subsidy: Definition, Types, Categories and Business Schemes

A subsidy is a benefit given by the government to an individual, a business, or an institution. It can be given directly in the form of cash payments, or indirectly in the form of tax breaks. A subsidy is generally given in order to reduce the economic burden on the financially disadvantaged sections of society and make basic necessities such as food and housing more affordable. Many entities in various sectors such as agriculture, education, oil, and food are given subsidies. In this article, we will explore the different types, benefits, and subsidy schemes in more detail.

Types of Subsidies in India

There are various forms of subsidies in India, given to alleviate the financial burden on the economically challenged sections. Below are some common types of subsidies:

1. Food Subsidy: This subsidy aims to provide the necessary food to those below the poverty line. It is beneficial to both producers and consumers, as it helps protect farmers against low market prices, and provides consumers with affordable food items.
2. Production Subsidy: The purpose of production subsidy is to increase the production of a certain good or service so it can be brought to the market while keeping the cost to consumers low. It helps suppliers cut losses and reduce the overall production cost to increase affordability.
3. Education Subsidy: An education subsidy is a type of financial aid given to students to make education loan repayments easier. These subsidies are available in different forms, such as interest rate reduction, debt waiver, or refund of loan payments. The government’s subsidy program offers incentives to borrowers to aid their education. Further, lending institutions have their own interest rate subsidy programs based on their internal criteria.
4. Tax Subsidy: A tax subsidy is a financial incentive given to reduce the tax burden on a specific business or industry, and boost consumption or production. 
5. Export/Import Subsidy: Export subsidy is given to businesses to boost the export of commodities and encourage sales in more diverse markets. This can be in the form of direct payment, tax breaks, low-cost loans, or government-funded foreign advertisements. Import subsidies are subsidies on commodities or services paid to resident producers.
6. Agricultural Subsidy: This type of subsidy is given to agribusinesses and farms to supplement their income and manage the supply of commodities. This influences the cost and supply of commodities. 
7. Consumption Subsidy: This subsidy is aimed at reducing the cost of essential goods and services for consumers, particularly those from low-income groups. It can apply to utilities like electricity and water, fuels like LPG, or even essential medicines, ensuring that basic necessities are affordable and accessible to all sections of society.

What Are Subsidy Categories?

Based on the impact they have, subsidies can divided into 2 broad categories: economic and social. The economic subsidy definition specifies that these subsidies are aimed at improving economic efficiency by addressing market failures, promoting specific industries, or stimulating economic growth. Social subsidy meaning refers to the subsidies intended to promote social welfare and public interest by addressing inequality, providing essential services, or supporting disadvantaged groups. 

The categories can be broken down with the help of the below table:

Stand-Up India Subsidy Schemes

Stand-Up India is a government subsidy designed to promote entrepreneurship among Scheduled Castes (SC), Scheduled Tribes (ST), and women in India. It was launched in 2016 by the honourable Prime Minister Narendra Modi. It aims to facilitate bank loans between INR 10 lakhs to INR 1 crore to at least one SC/ST person and one woman per bank branch for setting up a Greenfield enterprise (a venture that is not constrained by prior work, such as a new factory built from scratch).

Here is an overview of the features of stand-up India subsidy schemes:

What Are the Benefits of Subsidy?

The government introduces subsidies as a way to boost the purchasing power of economically challenged classes, and also to help businesses with cost-effective production. However, efficient implementation and regular evaluation are vital to maximise the advantages. Outlined below are some benefits of subsidy:

1. Subsidies boost affordability. Subsidies on essentials like food, housing, etc support low-income households.
2. Subsidies on education provide youth with access to education so they can be gainfully employed, contributing to GDP.
3. Subsidies encourage industrialisation by introducing tax breaks and other incentives like subsidised public transportation. Subsidies on industries like agriculture and manufacturing boost production, employment, and GDP growth. They also lead to job creation in subsidised industries.
4. Subsidies prevent the long-time decline of industries such as fishing and farming.
5. Subsidies help control inflation by regulating prices and ensuring the affordability of essential goods.
6. Subsidies help attract investments in sectors like infrastructure, renewable energy, and research.
7. Subsidies like Stand-Up India help promote inclusive growth by supporting marginalised communities and underrepresented groups.
8. Subsidies can help reduce adverse external influences. For example, transport subsidies can help mitigate the effects of pollution by boosting public transport.

Conclusion

From making essential consumer goods more accessible to helping individuals or businesses grow their ventures, subsidies can be a valuable tool. Their effectiveness also depends on careful planning, implementation, and regular monitoring.

If you are exploring options to expand your business or smoothly manage its daily operations, check out business loans from SMFG India Credit. We offer unsecured business loans up to INR 75 lakhs* at competitive interest rates. Check our eligibility criteria and apply with a hassle-free online process.