Meaning of Incentives and
Subsidy

Meaning of Incentives and
Subsidy

The term “incentive’ is a general one and includes
concessions, subsidies and bounties ‘Subsidy’ denotes a single lump sum which is given by a government to an industry. It is granted to an industry which is considered essential in the national interest. The term ‘bounty’ denotes
bonus or financial aid which is given by a government to an industry to help it compete with other units in a nation or in a foreign market. It is given in proportion to its output.Bounty confers benefits on a particular industry, while a subsidy is given in the interest of the nation.

These subsidies and incentives offer the following advantages:

(a) They act as a motivational force which makes theprospective entrepreneurs to enter into manufacturing line.

(b) They encourage the entrepreneurs to start industries in backward areas.

(C) By providing subsidies and incentives the Government can

(i) Bring industrial development uniformly in all
regions

(ii) Develop more new entrepreneurs which leads
to entrepreneurial development

(ill) Increase the ability of entrepreneurs to face
competition successfully

(iv) Reduce the overall problems of small scale
entrepreneurs.

Need For Incentives

1. To remove regional disparities in development-
While developed regions in a country are overcrowded with industrial and business activities the backward areas remain ignored for want of facilities for industrial development. Incentives are used as baits to lure industrialists to locate their units overlooking such deficiencies. In the long run the backward areas become developed and regional imbalances are corrected. Such a development may lead to the effective utilisation of regional resources, removal of disparities in income and levels of living and contribute to a more integrated society.

2. To promote entrepreneurship and strengthen the entrepreneurial base in the economy. The new entrepreneurs may face a number of problems on account of inadequate infrastructure facilities and other supporting services such as market assistance, technical training and consultancy and other institutional services etc. All these problems may demotivate them. The various incentives normally tend to mitigate some or all of the problems by several means. Industrial estates, growth centres, power tariff concessions, capital investment subsidies, transport subsidy, etc., are a few examples of incentives and subsidies which are aimed at encouraging entrepreneurs to take up new ventures without much reluctance.

3. To vide competitive strength, survival and
growth-While some incentives are available at the time of promotion of industrial units, several other incentives and made available over a long period. Reservation of products to small units, price preferences, concessional finance, etc., contribute towards the competitive strength, survival and growth of certain industrial units.

4. To generate more employment and remove underemployment and unemployment. The proper use of incentives and subsidies will generate more employment by accelerating the industrial growth. Market adjustments and external economies play a significant role in economic development. Entrepreneurs will move from developed to backward areas to start more number of units. This will create more number of jobs which will help to reduce the problems of unemployment and under-employment.

Problems of Incentives

1. The antagonists argue that the incentive schemes may deteriorate into useless tax-give away schemes if they are not implemented properly.

2. Empirical studies reveal that the incentive schemes are being highly misused rather than properly used. Some of the units are located in backward areas with a view to mainly
avail the subsidies and concessions. The real objective of providing incentives is hardly achieved.

3. Favouritism and corruption have crept into the
administrative machinery which has caused much financial strain on the exchequer.