Consider the following statements regarding "Subsidies" in India: 1. They are an important policy instrument aimed at increasing welfare. 2. Implicit subsidies are those which are explicitly mentioned in the budget documents. 3. Defence expenditure is a form of explicit subsidy. Which of the statements given above is/are correct?

The correct option is 1 only Explanation Subsidies are financial aids or support extended by the government to an economic sector, business, or individual. They are a crucial component of public expenditure used to promote economic and social policy objectives, such as price stability and income redistribution. Statement-wise Analysis: - Statement 1 is Correct: Subsidies are a significant fiscal policy instrument used to enhance social welfare. They aim to make essential goods and services (such as food, fuel, and fertilizers) affordable for vulnerable sections of society and to support specific industries (like agriculture) to ensure national food security and economic stability. - Statement 2 is Incorrect: Subsidies are broadly categorized into explicit and implicit subsidies. Explicit subsidies are those clearly specified and allocated in the budget documents (e.g., food, fertilizer, and petroleum subsidies). Implicit subsidies are hidden costs that arise when the government or public entities provide goods or services at prices below their cost of production (e.g., underpriced electricity, water, or higher education). Implicit subsidies are not explicitly mentioned as subsidy line items in the budget. - Statement 3 is Incorrect: Defence expenditure is classified as public expenditure (specifically Revenue and Capital Expenditure) incurred for the maintenance of national security. It is the provision of a public good (security) by the state, not a transfer payment or financial aid to reduce the market price of a commodity for a consumer or producer. Therefore, it is not considered a subsidy. Key Takeaway: Explicit subsidies (like Food and Fertilizer) are recorded directly in the budget, whereas implicit subsidies arise from the under-recovery of costs in public services. Defence spending is a form of government consumption and investment, not a subsidy.

NCERT Class 12 Economics — Chapter 7: Government Budget and the Economy

mcqmedium

Consider the following statements regarding "Subsidies" in India:

They are an important policy instrument aimed at increasing welfare.
Implicit subsidies are those which are explicitly mentioned in the budget documents.
Defence expenditure is a form of explicit subsidy.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 3 only
B2 only
C1 only
D1, 2 and 3

Did you get this right?

Solution

The correct option is

1 only

Explanation

Subsidies are financial aids or support extended by the government to an economic sector, business, or individual. They are a crucial component of public expenditure used to promote economic and social policy objectives, such as price stability and income redistribution.

Statement-wise Analysis:

Statement 1 is Correct: Subsidies are a significant fiscal policy instrument used to enhance social welfare. They aim to make essential goods and services (such as food, fuel, and fertilizers) affordable for vulnerable sections of society and to support specific industries (like agriculture) to ensure national food security and economic stability.
Statement 2 is Incorrect: Subsidies are broadly categorized into explicit and implicit subsidies. Explicit subsidies are those clearly specified and allocated in the budget documents (e.g., food, fertilizer, and petroleum subsidies). Implicit subsidies are hidden costs that arise when the government or public entities provide goods or services at prices below their cost of production (e.g., underpriced electricity, water, or higher education). Implicit subsidies are not explicitly mentioned as subsidy line items in the budget.
Statement 3 is Incorrect: Defence expenditure is classified as public expenditure (specifically Revenue and Capital Expenditure) incurred for the maintenance of national security. It is the provision of a public good (security) by the state, not a transfer payment or financial aid to reduce the market price of a commodity for a consumer or producer. Therefore, it is not considered a subsidy.

Key Takeaway:
Explicit subsidies (like Food and Fertilizer) are recorded directly in the budget, whereas implicit subsidies arise from the under-recovery of costs in public services. Defence spending is a form of government consumption and investment, not a subsidy.

Your note

More from Chapter 7: Government Budget and the Economy

Consider the following statements regarding the "Annual Financial Statement" in India: 1. It is a statutory requirement under the Fiscal Responsibility and Budget Management Act, not the Constitution. 2. It includes estimates for the coming financial year. 3. It distinguishes between the revenue account and the capital account. Which of the statements given above is/are correct?

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With reference to the "Allocation Function" of the government budget, consider the following statements: 1. It addresses the provision of public goods that cannot be provided effectively by the market mechanism. 2. Public goods are characterized by being rivalrous in consumption and excludable in nature. 3. The "free-rider" problem is easily solved by charging a user fee for public goods. Which of the statements given above is/are correct?

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Consider the following statements regarding "Public Provision" and "Public Production": 1. Public provision implies that goods are financed through the budget and used without direct payment. 2. Goods provided by the government must necessarily be produced directly by the government. 3. Public goods may be produced by the private sector. Which of the statements given above is/are correct?

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Consider the following statements regarding "Capital Receipts": 1. Recovery of loans is considered a revenue receipt. 2. Capital receipts either create a liability or reduce the financial assets of the government. 3. Market borrowings are considered non-debt creating capital receipts. Which of the statements given above is/are correct?

hard

Consider the following statements regarding "Revenue Expenditure": 1. It includes expenditure that does not result in the creation of assets. 2. Interest payments on debt are classified as capital expenditure. 3. Grants given to state governments are treated as revenue expenditure even if they are meant for the creation of assets. Which of the statements given above is/are correct?

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The correct option is

1 only

Explanation

Statement-wise Analysis:

Statement 1 is Correct: Subsidies are a significant fiscal policy instrument used to enhance social welfare. They aim to make essential goods and services (such as food, fuel, and fertilizers) affordable for vulnerable sections of society and to support specific industries (like agriculture) to ensure national food security and economic stability.
Statement 2 is Incorrect: Subsidies are broadly categorized into explicit and implicit subsidies. Explicit subsidies are those clearly specified and allocated in the budget documents (e.g., food, fertilizer, and petroleum subsidies). Implicit subsidies are hidden costs that arise when the government or public entities provide goods or services at prices below their cost of production (e.g., underpriced electricity, water, or higher education). Implicit subsidies are not explicitly mentioned as subsidy line items in the budget.
Statement 3 is Incorrect: Defence expenditure is classified as public expenditure (specifically Revenue and Capital Expenditure) incurred for the maintenance of national security. It is the provision of a public good (security) by the state, not a transfer payment or financial aid to reduce the market price of a commodity for a consumer or producer. Therefore, it is not considered a subsidy.