What does subsidy mean | definition | economics | define | example

 What does subsidy mean | definition | economics | define | example
                        

Since from independence India has given more importance to maintain social justice. At the time of independence India’s per capita income was very low, to help the poor the government took several measures to provide the daily commodities at a price lower than the market price and giving subsidy was one of the important measure.

Then what does subsidy mean?

It is the type of financial support in the form of money given by the government to business institutions or industries to provide their products& service at lower price and the government will recoup their los

s.

How it works?

If a company is selling its product at Rs.100 to reduce the price burden for common people the government ordered the company to sell at Rs.60 and RS. 40 loss incurred by the company will be compensated by the government through subsidy. Though ethically this form may be beneficiary but if it is not implemented properly it will have negative or adverse effect on country’s economy in long term.

 We believe that giving subsidy will reduce the burden of poor people to meet their day to day expenditure on daily commodities. But in long term view there is something false notion relating to this subsidy.

For example whenever there is an increase in the price of product or commodity what the people actually do! They try to avoid its usage until & unless it is necessary this will in turn decrease the demand. When there is no demand gradually the price come down. But when there is subsidy for a product or commodity the common man may not feel or experience price hike or increase in price. This will leads to imbalance and uncontrolled in demand & supply for or which will leads to more demand that product or commodity.

The major part of subsidy amount spend by the government is on oil commodities, fuel, chemical fertilizers & food grains example: household LPG cylinder, diesel, petrol & kerosene etc. These are all controlled by central government sponsored companies like IOCL, BPCL &N HPCL through central government companies like ONGC, OIAL, GAIL the government will compensate these companies through subsidy by issuing oil bonds. The subsidy amount will be recoup through tax collection.

Subsidy may leads to fiscal deficit which means when a government’s total expenditure exceed the revenue that it generates excluding money borrowings. To make up this deficit the government will increase tax rates. If the government is giving Rs.10 for a product it will recollect by increasing Rs.15-20 in the form of tax.

If there is subsidy facility:

The common people especially the poor people will get daily commodities at low price.

The government will reduce its spending for development and welfare programmes.

There may be chance of misuse of subsidy and it may not reach the actual beneficiaries.

The subsidy may leads to fiscal deficit which in turn the government hike increase tax rates and this will reduce the value of rupee. So we can’t provide the products and service at competitive price at global level.

Subsidy has an impact on import of fuel, chemicals & gold where the majority of foreign exchange will be spent for these items. This will again reduce the value of money & a country has to import products at high cost which will create current account deficit which means the value of imports of goods/services/investment is greater than the value of exports. It is sometimes referred to as a trade deficit leads to imbalance in the economy.

If there is no subsidy facility:

The common people have to spend more on daily needs but after some days they will adjust to it.

The government will increase its amount spending for developmental programmes and welfare schemes which may leads to sufficient infrastructure development.

Leads to less chance for fiscal deficit which in turn increase in the value of rupee and our country can import goods at low price.

Tax rate will come down year by year.

It will avoid unnecessary expenditure by government.

This will leads to have better trade relationship with other countries.

People will cultivate the habit of utilisation of daily commodities and food grains as per their requirement.It may also helpful in eliminating corruption.

Conclusion:

A country cannot ban subsidy completely especially in a country like India which is having more poor and lower middle class people where there is a complete responsibility of the government to maintain social welfare and community development. But the government should ensure that subsidy facility is reaching the actual beneficiary and should take proper actions to avoid its misuse. Financially well settled people should give up their subsidy like our Prime Minister Narendra Modi has called people who have income of Rs.10 lakh & above should give up their LPG subsidy voluntarily. Like these economically self sufficient have to come forward to give their subsidy and this leads to an upward change and in turn leads to country’s economic development. What does subsidy mean | definition | economics | define | example