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Tata Capital > Blog > Generic > What is Subsidy: Meaning, Types, Categories and Business Schemes


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

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

You must have seen that small shop with a long queue of people standing outside with empty bags and bottles in their hands. These are government shops for distributing essential items like food and oil to the public below the poverty line. The main benefit of these Public Distribution System (PDS) shops, commonly known as ‘Ration ki Dukaan’, is that items are provided to the public at a discounted or subsidised price. The Government of India occasionally introduces beneficial schemes designed to improve the well-being of its citizens.

These schemes serve multiple purposes, with some focusing on uplifting people economically and others enhancing their overall quality of life. Besides that, the Indian government also extends different subsidies to MSMEs to foster their growth and development.

So, in this article, we will explain everything about subsidy like, what is subsidy, its types and categories, and discuss a few popular business subsidy schemes provided by the Indian government.

What is subsidy? 

A subsidy is a financial benefit or support the government gives to institutions or individuals. It can be either a direct or indirect subsidy.

Direct subsidy refers to the support given in the form of cash. The indirect subsidy, conversely, refers to the assistance offered through tax cuts or low-interest loans. The loan subsidy meaning is to provide the loan at lower interest rates and with other features that help the business grow. And the government subsidy meaning is the financial help given by the government to ease the burden on the recipients and encourage activities in the public's interest.

Types of subsidy

There are broadly six types of subsidies, as explained below.

#1. Food subsidy

Its main aim is to provide essential food to people below the poverty line. Public Distribution System (PDS) is a government initiative providing essential food items to Below Poverty Line (BPL) households at subsidised rates. These include wheat, rice, sugar, milk and cooking oil.

#2. Export subsidy

The government provides export subsidies to encourage small domestic businesses to diversify their customer. One such scheme is Merchandise Export from India. It aims to promote the export of notified goods manufactured in India.

#3. Production subsidy

A production subsidy allows companies to reduce their production cost. They can increase production value by cutting down their losses and investments. This helps in making products available at a lower price, improving affordability.

#4. Subsidies based on industry

These subsidies are tailored to meet the needs of the industries they are intended for. They cover various sectors, including transport, health, and agriculture. The government, for example, has launched several transport schemes to make transportation more affordable.

It also gives subsidies to help farmers and businesses reduce the initial input cost. This includes providing fertiliser, seeds, power supply, and irrigation facilities at subsidised rates.

#5. Tax subsidy

This subsidy program grants eligible parties a tax rebate and other benefits. It relieves the financial burden on business owners, allowing them to improve production, extend services, and offer products at a lower price.

#6. Employment subsidy

These schemes are designed to tackle unemployment. The government offers incentives such as lower initial investment costs or reduced real estate rates to organisations to start a company. These measures are aimed at promoting job growth and reducing unemployment.

Now that we know what is subsidy, let’s look at its different categories.

What are subsidy categories?

There are two categories of subsidies, namely, social and economic. Depending upon its impact, it falls into either of the two categories. Here’s a detailed breakdown of the two categories.

Social SubsidyEconomic Subsidy
Rural housingTransport
Water supplyIrrigation and food control
Women empowermentCommunication

Indian Goverment Subsidies for Business

MSMEs play a crucial role in boosting India's economy. The subsidy provided by the Indian government supports their growth. A few of them are mentioned below.

#1. Credit-linked Capital Subsidy Scheme (CLCSS)

This government subsidy loan for business aims to fund technological upgrades in Small-Scale Industries (SSIs). The funds can be used to revamp business production and activities to reduce the cost of creating and providing goods and services. SSI units that get benefits include tiny units, khadi units, village units and coir industrial units.

#2. Marketing Assistance Scheme

It is a scheme provided by the Ministry of MSME, inter-alia, through the National Small Industries Corporation. It helps MSMEs market their products at exhibitions, trade fairs, and buyer-seller meets.

#3. Mahila Coir Yojana 

This subsidy scheme helps eligible rural women avail of a one-time subsidy of up to 75% of the total cost of the new motorised ratt or Rs. 7,500, depending upon the case.

#4. Amended Technology Upgradation Fund Scheme (ATUFS)

The Ministry of Textiles launched ATUFS. It aims to convert existing looms to better technological looms to improve productivity and quality. Some of the beneficiaries of this scheme are the jute, silk, and garment sectors.

#5. Technology & Quality Upgradation (TEQUP) Support for MSME 

Technology & Quality Upgradation(TEQUP) is an initiative by the Ministry of MSME. Its main objective is to make the MSME sector energy efficient and increase competitiveness.

#6. Government Subsidy for Small Business for Cold Chain

The Ministry of Food Production Industries launched this scheme. It provides an integrated cold chain without any break from the farm gate to the buyer. It covers pre-­cooling facilities at production sites, mobile cooling units, reefer vans, and value-addition centres.

What are the benefits of subsidy?

As a subsidy is a social and economic welfare scheme by the government, it has many benefits:

#1. Subsidised education helps further contribute to the nation's GDP, as increased education leads to higher employment. It also leads to an increase in skilled workers.

#2. It helps struggling markets by lowering the burdens and providing financial support for future ventures. It's an indirect means to support the country's employment and industrial sectors.

#3. Subsidies provide incentives and tax benefits to business owners. This leads to increased production and a continuous flow of demand and supply. 

#4. It helps lower the cost of essential items and make them affordable to the general public.

#5. Besides helping the traditional sectors, such as agriculture sectors, to flourish, subsidies also encourage the advancement of new areas of research and development.

What Is the Difference Between Direct and Indirect Subsidies?

Direct subsidies involve the actual payment of money to a group or individual. These are often in the form of cash payments, grants, or specific financial support to reduce the recipient's cost of goods, services, or production.

On the other hand, indirect subsidies do not involve direct financial payments. Instead, they include measures such as tax breaks, reduced interest rates, insurance, or rebates that indirectly reduce costs or provide economic benefits to businesses or individuals.

Parting thoughts

So, after learning everything about what is subsidy and its benefits, we understand that subsidies can be a powerful tool for promoting economic growth and improving people's lives. While it can help keep prices low for consumers and boost production, it provides opportunities for people and MSMEs to start and grow their businesses. The Indian government has launched several subsidy schemes to support small-scale industries in India.

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1. What is a subsidy loan?

A subsidy loan is a type of financial assistance provided by the government to promote the growth of businesses in various sectors. These loans are offered at reduced interest rates, and a portion of the interest rate is subsidised by the government, making the overall cost of the loan more affordable for the borrower.

2. Which is an example of a subsidy?

An example of a subsidy is the food subsidy provided to people below the poverty line. It aims at providing essential food to people at subsidised rates to eradicate hunger. The Public Distribution System is a government initiative that provides essential food items, such as wheat, sugar, rice, and cooking oil to Below Poverty Line (BPL) households at a subsidised rate.

3. What do you mean by subsidy?

Subsidy is financial assistance provided to support the growth of specific businesses, industries, or individuals. It aims to promote economic and social development by making goods and services more affordable, encouraging production, or supporting the incomes of certain groups.

4. What is the subsidy given by the government?

A subsidy is a financial incentive provided by the government to businesses, institutions, or individuals through cash, grants, reduced interest rates, or tax breaks to ease the financial burden on the recipients. It aims to promote social and economic policies in the public's interest.

5. How many types of subsidies are there in India?

A subsidy is broadly categorised into two types- direct and indirect subsidy. Within indirect subsidy, there are six types of subsidies: production subsidy, export subsidy, food subsidy, tax subsidy, employment subsidy, and subsidy based on industry.

6. What is the classification of a subsidy?

Subsidy can be classified as direct and indirect. Direct subsidy involves financial transactions between the government and specific recipients, such as cash payments or grants. Meanwhile, indirect subsidy does not involve direct cash transactions but includes measures that reduce the price of goods and services. Indirect subsidies include tax breaks, reduced interest rates, insurance, etc.

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