India: State Subsidies In India

Last Updated: 26 October 2015
Article by Bhavesh Thakkar


Today, India is considered to be one of the major forces in the global economic market. Due to its large consumer market, rapid infrastructural developments, ample pool of talent, abundant natural resources and low manufacturing cost, India scores over other countries in terms of being an ideal destination for business investments. The "Make in India" campaign, launched by the new Modi Government is being marketed in a big way. Though economists, industrialists and relevant stakeholders are still awaiting to declare it a 'Success' but with it, now, the focus is on manufacturing and employment generation, which was hitherto missing. India being a federal economy and for the country to be made a manufacturing hub, the contribution and role of the state governments cannot be overlooked. Rather, the role of the State Governments is predominant to attract investors to set up a manufacturing facility in their respective states. Last two years have been an era of competitive federalism wherein the State Governments are trying to outdo each other in attracting investments. Of late, this has become a very important indicator of the state's economic growth.

In the quest to attract investments there has been stiff competition amongst various states to offer subsides and grants to industries evaluating set up. Each state is trying to surpass the other in declaring the Industrial Policy, offering maximum possible benefits.

The industries planning to invest in India are required to be acquainted with these subsidies as these can significantly impact the cash flow and payback period of their enterprise. There are innumerable instances wherein manufacturing units have failed to claim these substantial benefits because of lack of awareness and knowledge of the same. The benefits range from a huge 30% to 100% of the capital cost and thus cannot be ignored.

Though each state comes up with its own policy, there are certain fundamental tenets on which all state subsidies are based, which are summarised as –

  • Each state develops an Industrial Policy generally spanning a period of 5 years. The applicable period may be different in each state depending on the formation of Government in that state.
  • The Industrial Policies are applicable mostly to all Manufacturing Enterprises. In the recent past even sector specific policies have been unveiled. For example, Maharashtra and Gujarat have a Textile Policy, Tamil Nadu has a new Automobile Policy and so on.
  • The states have generally been divided into zones. For a lesser developed zone, the percentage of benefits is more. This is in line with practices followed worldwide, like in Germany, for example. Some states do not follow the zone-wise classification and offer uniform subsidies across the state.
  • There is a common misconception that subsidies are available only to new units set up in the state. But the fact is, even existing units which undergo expansion are eligible for these benefits.
  • The percentage of benefits normally depends on the size of investment. It is important to note that the benefits for large projects with substantial capital or employment generation capabilities are kept flexible and normally decided by a special committee. This is to provide tailor made subsidies to those units and help states compete with other states to formulate the benefits.
  • None of the policy differentiates in the benefits available to a foreign company and a domestic company i.e, the benefits available to an Indian domestic company are same as available to foreign companies.

What are The Benefits

The benefits can broadly be summarised into 2 categories:

a) Cost Reductions -

The benefits are in the form of reduction in payments for certain percentage of power, stamp duty, water or other utility bills that the manufacturing unit needs to pay. This helps the unit in reduction of cost of production and makes the product competitive in the market.

b) Tax Reimbursements -

The benefits are linked to the capital cost of the company. The benefit is capped as a certain percentage of the capital cost and the encashment of the benefit is in the form of tax reimbursements of the various taxes paid to the State Government.

There are two methods by which the tax reimbursements are given by the State -

i) Cash Back Method

ii) Deferral Method

Majority of the state governments currently follow the cash back method and other states are also expected to phase out the deferral method and switch to the cash back method.


The percentage of benefit of subsidy is high and forms an important part of the decision making process. Like in the state of Rajashthan or Madhya Pradesh, the benefit percentage is 100% of the investment which is a substantial. Subsidies cannot be the sole guiding factor in choosing the location of the enterprise but the benefit percentage being so high, it is certainly one of the most important factors of the decision making process. The moot point is the awareness of the scheme which is pretty low and the manufacturing units set up in the recent past have not claimed these benefits. Investors need to be enlightened on this front so that they do not miss these benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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