Effect Of Subsidies On Nation Income
Similar to the indirect taxes, the various subsidies which are forwarded by the governments need to be adjusted while calculating national income. They are added to the national income at market cost, in the case of India. Subsidies are added in the national income at the market cost to derive the national income at factor cost. This is because of the price at which subsidized goods and services are made available by the government are not their real factor costs (subsidies are forwarded on the factor costs of the goods and services) otherwise we will have a distorted value (which will be less than its real value). Thus, the formula will be:
National Income at Factor Cost = NNP at Market Cost + Subsidies
If the national income is derived at the market cost and governments forward no subsidies there is no need for adjustments for the subsidies, but after all, there is not a single economy in the world today which does not forward subsidies in one or the other form.
Putting ‘indirect taxes’ and ‘subsidies’ together, India’s National Income will thus be derived with the following formula (as India does it at factor cost):
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes + Subsidies
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