Five smart things to know about subsidy

1) A subsidy is the amount spent by the government to provide goods and services at prices that are lower than the market rates as a welfare measure.

2) Subsidies ensure equitable availability of essentials to low income groups and encourage higher consumption or production of certain products.

3) Subsidies represent a sizeable government expenditure. In India, food, fertilizers and fuel subsidies are estimated at Rs 2.5 lakh crore per year.

4) Subsidies can distort both supply and demand. Producers may be unwilling to increase supply if they are unhappy with the price the government pays.

5) Consumers may not adjust behaviour if subsidies make goods cheaper. Investment in public transport may have been hurt by fuel subsidies that help private transport.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.