By Anuradha Parmar
The performance of national industries can be used as a key indicator for economic growth in India. These industries keep the chain of employment and products flowing. They are the foundation on which metrics like GDP (Gross Domestic Product, which specifies the value of goods and services produced) are dependent. Most importantly, the success of industries determines the capability of the economy to meet the basic needs of human survival. New industrial policies affect every item, every business, every industry, and by extension, each citizen of the country.
In this article, we will talk about the government’s new industrial policies on subsidies, and it’s role in industrial development.
How do subsidies help in the economic growth of India?
Typically, generational businesses can easily avail of financial assistance based on their past performances. But, new industries, or large-scale ones that import advanced technology, conduct research or sell essential goods need an extra leg up. To ensure that everyone has an equal opportunity in the world of business, the provide subsidies.
Cambridge Academic Content Dictionary defines subsidy as follows:
- money given as part of the cost of something, to help or encourage it to happen
- money given by a government or an organisation to reduce the cost of producing food, a product, etc. and to help keep prices low:
Thus, subsidies serve two purposes: promoting businesses and reducing the cost of producing goods or providing services. The subsidy bill in FY25 in the Indian Union Budget presented earlier this year allocated major shares towards food, fertilisers and petroleum subsidies.
Main types of subsidies in new industrial policy of India
Directly transferring amounts to the industries provided they reach the eligibility criteria
Any enterprise willing to avail of the subsidy scheme falling in the mentioned categories by the Indian Industrial Policy can apply by submitting relevant proofs. Post verification, the said subsidy gets deposited in their business bank account. They can also apply for interest or interest-free loans.
The Ministry Of Communication And Information Technology of India (MCIT) through The Technology Incubation and Development of Entrepreneurs (TIDE) (Source: MSME) gives a grant-in-aid of up to Rs. 155 lakh, for setting up/strengthening technology incubation centres.
Allowing a discount on the purchase of raw materials or services
Some subsidy schemes under the Industrial Policy of India reduce the purchase cost for the industries. An enterprise planning to purchase advanced technology to make its goods eco-friendly can apply to get a discount on the applicable items. Amongst the schemes run by the National Small Industries Corporation (NSIC) of India is a Raw Material Assistance scheme (Source: MSME) wherein financial assistance can be availed by MSEs to procure raw materials.
Industries can also avail refunds on purchases/services mentioned in the schemes. For e.g., subsidies on pollution control devices, state freight refunds, etc.
Fixing a minimum selling price on the products/services. Also, directly purchasing from these industries and then supplying them to the public at a further lower price
Setting a Minimum Selling Price (MSP) for essential items like foodgrains and then supplying the same to the general public at an extremely reduced price (the process is named as “Public Distribution System or PDS) is also a kind of subsidy provided to the industries.
Providing reimbursements, tax exemptions or deductions on certain purchases of goods and services by the industries
Industries can claim reimbursements on expenses or tax deductions, as decided by the Indian Industrial Policy, given they complete the mandatory requirements. E.g., toll tax exemption on the import of certain goods, GST (Goods and Services Tax) reimbursement etc.
MCIT has been promoting software exports by providing tax and duty exemptions to software companies. Under the Ministry of Commerce and Industry of India schemes,100% tax exemption is available for net foreign exchange-earners.
Why are subsidies necessary for economic growth?
The intent of the Indian Government and the Indian Industrial Policy to create a favourable environment for businesses is visible through its multiple programmes like StartupIndia and Ease of Doing Business, especially for MSMEs (Micro, Small and Medium Enterprises). The following stories have splurged to growth due to the subsidies and various schemes of the Indian Industrial Policy:
- Green Castle Food & Beverages of Chennai sought advice from the MSME department before even setting up their business. Registering the entity in Udyog Aadhaar got their business loan application of INR 26L with Canara Bank easily approved
- Attending the Entrepreneurship Development Programme organised by MSME Development Institute in association paid off for Guntur’s Fortune Homecare Industries. Later, they got financial assistance of Rs 12.48 lakhs from the SBI, Guntur.
Diving deeper, the following points make subsidies significant in the industrial development of a country:
Advantages of subsidies at a macro level
Subsidies play a major role in building a bank of indigenous industries
If the industries stay and survive, they bring down the cost of product production or the value of the service. This benefit of the low-cost output ultimately helps the final product become cheaper, making the product/ service relatively affordable to the final consumers. Manageable prices pull customers and eventually increase the demand, which makes industries self-sustainable and profitable, building a revenue-generating bank of industries.
To appreciate valuable and innovative business ideas, the Development Commissioner (DC-MSME) has set up the Entrepreneurial and Managerial Development of SMEs through Incubators Scheme. The scheme provides early-stage funding by giving
- Bank Credit Facilitation by NSIC
- Capital Goods Scheme by the Ministry Of Heavy Industries And Public Enterprises
amongst others. Hence, the new industrial policy of India guarantees that any industry at any stage of its business existence receives the right support and direction.
Generate employment and prevent brain drain
Industrial growth allows the country to make the best use of its available human resources by employing localities and making them contributors to the economic development of the country.
Adding to this, the new Indian industrial policy also makes sure that the employees benefit from the training schemes before they apply for jobs. Like, the Ministry Of Human Resource Development of India runs the National Scheme of Apprenticeship Training to fill/match, any gap, in practical/hands-on experience of fresh graduate engineers, diploma holders and 10+2 vocational pass-outs in 10,000 Industrial establishments/ organisations.
Low outflow of generated industry income
With the industries blooming from the schemes mentioned in the Industrial Policy of India, the income generated stays in the producing country and is not forced to go out in the form of any international tax. This increases the national income which is handy for the government to invest in the industry development schemes. Thus what is earned in the country, stays in the country.
Reduction in imports and increased exports
Expansion of businesses and industries boost exports, bringing in valuable foreign currency. As the industrial sectors start relying less on foreign materials and technology, governments can reduce imports, again maintaining the country’s foreign currency cash flow. Subsidies also help industries to export their products/services and be a part of the international business game.
Transparency in industrial management and records
Usually the businesses willing to apply for subsidies must submit proofs of their existence like incorporation documents and financial performance reports. Thus, to fulfil the eligibility criteria stated in the new Industrial Policy of India, it is pertinent to maintain proofs and records. Documentation by such eligible companies brings transparency and accountability, thus making the process of transferring subsidies transparent. Such companies are also less likely to fail compliances, thereby bringing down the number of non-performing or default businesses.
Encourage specific industries or sectors
To achieve economic goals, governments push certain industries by giving subsidies. Factors like gender, place of business, sectors, global importance, etc are duly considered and subsidy schemes are prepared accordingly.
For eg., the Mahila Udyam Nidhi Yojana Scheme financially encourages women-led businesses in production, manufacturing, and service-related industries. They can access collateral-free loans of up to Rs. 10 lakhs at concessional interest rates.
Disadvantages of subsidies
In planning and executing the distribution of subsidies, the following factors play a spoilsport:
- Improper selection of industries by policymakers
- Corruption amongst the executory authorities leading to the wastage or misuse of funds
- Making subsidy plans to satisfy election agendas
- Subsidised businesses operating on unfair competitive advantage over ineligible business, contributing to an uneven economic growth of India
- Creating an unfair market ground for international enterprises and blocking technological advancement
- Claimants of subsidies not achieving anything post-subsidy usage
- No periodic evaluation and subsequent feedback on subsidy utilisation
Economists claim that beyond a point, industries should not be dependent on subsidies. Post a certain period, they should be withdrawn or reduced.
Finally, a lot depends on the planning and execution of the new Industrial policy of India by the authorities and how businesses manage the subsidy facilities. Simultaneous programmes like financial and legal literacy, spreading awareness of new technological advancements, association with prominent institutes like IIM (Indian Institute of Management) to offer programmes for mentorship etc also add to the effective utilisation of subsidies by the industries.
