A subsidy is a form of financial or in kind support extended to an economic sector

(or institution, business, or individual) generally with the aim of promoting economic and
social policy.
[1]
Although commonly extended from Government, the term subsidy can relate
to any type of support - for example from NGOs or implicit subsidies. Subsidies come in
various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks,
insurance, low-interest loans, depreciation write-offs, rent rebates).
[2][3]

Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The most
common forms of subsidies are those to the producer or the consumer.
Producer/Production subsidies ensure producers are better off by either supplying market
price support, direct support, or payments to factors of
production.[1]
[1]
Consumer/Consumption subsidies commonly reduce the price of goods and
services to the consumer. For example, in the US at one time it was cheaper to buy
gasoline than bottled water.
[4]

Whether subsidies are positive or negative is typically a normative judgment. As a form of
economic intervention, subsidies are inherently contrary to the market's demands. Thus,
they are commonly used by governments to promote general welfare (such as housing,
tuition, and sustenance). However, they can also be used as tools of political and corporate
cronyism.

Agricultural Subsidies
An agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to
supplement their income, manage the supply of agricultural commodities, and influence the
cost and supply of such commodities. Examples of such commodities include; wheat, feed
grains (grain used as fodder, such as maize or corn, sorghum, barley, and oats), cotton,
milk, rice, peanuts, sugar, tobacco, oilseeds such as soybeans, and meat products such as
beef, pork, and lamb and mutton. Such subsidies are extremely controversial, both because
of their complex effects and because of their political origins, which involve heavy lobbying
from groups representing the interests of agribusiness
The Pros and Cons of Agricultural Subsidies
Pros:

-A subsidized farming industry creates a very predictable and stable farming system. It enables
all farmers to have the most recent and efficient equipment availible.

-If farmers werent subsidized, consumers would face dramatic price spikes due to things as
simple as a bad harvest, and the cost of eating would potentially rise

-the subsidies contribute a large amount of money towards the growing science of ethanol,
which reduces carbon emissions.

-American subsidies are good for the impoverished developing world, because staples like milk,
wheat, and sugar are more affordable for those people.


Mathematically, the subsidy (S) in a service is obtained by:
S = RX + (d + i) K + i ( Z + L ) - ( RR + I + D )
Where:
RX = revenue expenditure on the service
L = sum of loans advanced for the service at the beginning of the period
K = sum of capital expenditure on the service excluding equity investment at the beginning
of the period.
Z = sum of equity and loans advanced to public enterprises classified within the service
category at the beginning of the period.
RR = revenue receipts from the service
I + D = interest, dividend and other revenue receipts from public enterprises falling within
the service category.
d = depreciation rate
i = interest rate
Services provided by the govt are grouped under the broad categories of general, social
and economic services.
General services consist of i) organs of state ii) fiscal services iii) administrative services iv)
defence services, and v) miscellaneous services. These services can be taken as public
goods because they satisfy, in general, the criteria of non-rival consumption and non-
excludability. The entitlement to these services is common to all citizens. Since they are to
be treated as public goods, they are assumed to be financed through taxes.
Important service categories in social services are i) education consisting of general
education, technical education, sports and youth services, and art and culture, ii) health and
family welfare, iii) water supply, sanitation, housing and urban development, iv)information
and broadcasting, v) labour and employment and vi) social welfare and nutrition.
Under the heading of economics services, the following are included i) agriculture and allied
activities, ii) rural development, iii) special area programmes, iv)irrigation and flood control,
v)energy, vi)industry and minerals, vii) transport, viii) communications, ix) science
technology and environment and x)general economic services.
In the estimation of subsidies these governmental services are divided into three groups:
Group1: all general services, secretariat expenses in social and economics services, and
expenditure on natural calamities are included in this subgroup. Being public goods, these
are financed out of taxation and are therefore not included in the estimation of subsidies.
Group 2: it consists of services with strong externalities associated with them. In the case of
these services, it is arguable that even though the exclusion may be possible, these ought
to be treated as merit goods or near-public goods. The provision of subsidies is most
justified in this case. Near zero recovery rates in these cases only indicate the societal
judgement that these may be financed out of tax-revenues.
Merit social services: elementary education, public health, sewerage and sanitation,
information and publicity, welfare of SC, ST's and OBC's, labour, social welfare and nutrition
etc.
Merit economic services: soil and water conservation, environmental forestry and wildlife,
agricultural research and education, flood control and drainage, roads and bridges, space
research, oceanographic research, other scientific research, ecology and environment and
meteorology.
Group 3: all the remaining services are clubbed under this head. In these cases
consumption is rival and exclusion is possible, therefore cost-recovery is possible through
user charges. These services are regarded as non-merit services in the estimation of
subsidies.

Central government subsidies[edit]
Trends in the subsidies given by Central Government ( Year 1994-
95)[edit]
The bulk of the Central Govt's subsidies arise on the provision of economic services,
which account for 88% of the total subsidies (10% on merit services and 78% on non-
merit).
The recovery rates in the social end economic services are very low (around 10%).
Subsidies on non-merit goods are more than five times those on merit goods, which
reflects on an unduly large and ill-directed subsidy regime.
The bulk of subsidies on merit goods go for the construction of roads and bridges,
followed by elementary education and scientific research.
Amongst non-merit services, the biggest recipients are industries and agriculture and
allied services.
78% of subsidies which go for non-merit economic services are amenable to economic
pricing. Even if one allows for a part of these subsidies being given in the interest of
redistribution or provision of human needs, a substantial part must be due to inefficiency
costs of public provision of these services and/or inessential input or output subsidies.
Subsidies to Central Public Enterprises are estimated separately as the excess of
imputed return on the equity held and loans given by the central government to these
enterprises, over actual receipts in the form of dividends and interests. Subsidy in this
manner is calculated for each enterprise. They are aggregated according to cognate
groups.

Why petro products subsidies should
be done away with
By a columnist
July 03, 2014
First Published: 12:08 IST(3/7/2014)
Last Updated: 15:16 IST(10/7/2014)
- See more at: http://www.hindustantimes.com/comment/indiapoliticswatch/why-subsidies-on-petroleum-
products-should-be-done-away-with-immediately/article1-1236194.aspx#sthash.0hX0g5hS.dpuf

When India gained independence in 1947, it started following socialist policies under Jawaharlal Nehru.
India was a newly-born economy and the per capita income was low and that's the reason the
government provided essential fuels at less than market price to protect consumer interests. India has
come a long way from being an under developed economy to a developing one and things are very
different today and hence a change is needed.
Selling fuel at less than market prices result in under-recoveries for oil marketing companies (OMCs) like
Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum
Corporation Ltd (HPCL).
Government of India (GoI) compensates these OMCs by directing upstream oil companies like Oil and
Natural Gas Corporation Ltd (ONGC), Oil India Ltd (OIL), GAIL India Ltd to provide discount on crude oil
purchases by these companies and issuing oil bonds. Oil bonds have been replaced by cash
compensation from fiscal year 2011 onwards and are part of the budget. The government has over the
years ensured that OMCs remain profitable and honour their financial obligations.
Total under-recoveries of the OMCs have increased from $6.7 billion in FY06 to $23.3 billion in FY14 due
to increase in crude oil prices and depreciation of the rupee versus the dollar. Aggregate under recoveries
have been to the tune of $138.9 billion during this period. This has been compensated for by the
upstream companies through cash discount (USD 53.2 bn) and GoI through oil bonds/cash subsidy (USD
85.7 bn).
Subsidies on kerosene have increased from Rs. 12.92/litre to Rs. 34.80/litre and LPG cylinders
from Rs. 175.04/cylinder to Rs. 522.10/cylinder during the same period. Diesel accounts for 45%, LPG
33% and kerosene 22% of the total under-recoveries.
To rein in subsidies, petrol prices were de-controlled in June 2012. However, it did not have a significant
impact on under recoveries because petrol accounts for only 10% of total petroleum product consumption
in the country.
In January 2013, the government decided to increase diesel prices by 50 paise per month and limiting the
number of subsidised cylinders to 12 per family per year. This has helped to contain subsidies to some
extent.
- See more at: http://www.hindustantimes.com/comment/indiapoliticswatch/why-subsidies-on-petroleum-
products-should-be-done-away-with-immediately/article1-1236194.aspx#sthash.0hX0g5hS.dpuf