Meaning and Needs of Incentives and Subsidy

What is meant by incentive and subsidy?

Contents

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 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 confer benefits on a particular industry, while a subsidy is given in the interest of the nation.

‘Concession is the act of conceding. Something granted specially by a government to be used for a specific purpose’.

The term ‘incentive’ means encouraging action. It is a motivational force which makes an entrepreneur take a right decision and act upon it.

Economic incentives — both financial and non-financial — push an entrepreneur towards decisive decision and action.

Incentives are the financial and promotional assistance provided by the Government to the industries for boosting up industrial development in all regions. This is given particularly to backward areas for industrial development. These are provided mainly :

(i) To spread industrial development of all regions uniformly.

(ii) To encourage tiny, small scale entrepreneurs to start industries.

(iii) To encourage export-oriented units to obtain foreign exchange.

(iv) To spread industrial entrepreneurship in all areas.

(v) To develop more new entrepreneurs as this leads to entrepreneurial development,

(vi) To increase the ability of entrepreneurs to face competition successfully:

(vii) To induce the overall problems of small scale entrepreneurs.

Needs for Subsidies and Incentives

The following points focus on the needs and importance of incentives schemes.

1. 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 offering several ways and means.

2. To correct regional imbalances 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 utilization of regional resources, removal of imbalances in income and levels of living and contribute to a more integrated society.

3. To provide competitive strength, survival and growth : While some incentives are available at the time of promotion of industrial units, several other incentives are 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. To encourage the growth of certain areas by offering to the industrialists various inducements. The technique of setting up of industrial estates and export processing zones are the ways to encourage industrialists participate in growth of some specific areas having potential.

4. To generate more employment : The proper use of incentives and subsidies will generate more employment by accelerating the industrial growth Market adjustments and external economics 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.

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