The
Companies Act 2013 requires large (above a specified threshold level)
firms to spend 2% of their net profits on corporate social
responsibility (CSR) projects. This law came into effect in April 2014.
The results on CSR expenditures by firms in the fiscal year 2015-16 were
released recently. It is certainly true that Indian firms collectively
are more than complying with the CSR law. According to Prime Database,
Indian companies spent Rs9,309 crore on CSR projects in 2015-16, which
was Rs163 crore more than the amount required by law, and Rs703 crore
more than the previous year.
The general reaction in the Indian press has been positive and
suggests that the CSR law has been a success. However, the CSR law is
only apparently successful, and in reality is harmful.
The problem
is that reported expenditure on CSR projects is not a good metric of
societal welfare. These numbers overstate the effect of the law. It is
not clear whether firms have really increased their CSR spending after
the law compared to what they were spending voluntarily before the law,
because CSR spending was not well reported historically. There is some
evidence that while firms that were initially spending less than 2%
increased their CSR activity, but those that were initially spending
more than 2% reduced their CSR expenditure. Another possibility is that
firms spent money on CSR activities that also lead to increasing firm
profits, such as inculcating goodwill and good public relations. There
is evidence indicating CSR spending leads to brand building and employee
engagement. In that case, firms would have carried out these activities
with or without the law.
Even if we take the CSR expenditure at
face value and assume these are valid numbers, there are still major
problems with the CSR law. A required expenditure that does not lead to
higher profits is essentially a tax. The CSR law can be viewed as a 2%
tax, albeit spent by the firms rather than given to the government. This
is a back-door way to increase corporate taxes without a transparent
political debate. The corporate tax rate in India is 34.61%—already one
of the highest, compared to a global average of 24.09%, according to
KPMG, an audit and consulting company. Given the emphasis on
liberalization and economic growth, it is unlikely that the Indian
polity desires an increase in the corporate tax rate. This certainly
will not help to make Indian firms more globally competitive nor attract
more foreign investment into India.
Even to the extent that there
has been a real increase in socially beneficial activities, the
spending has not gone to democratically determined priorities, but
rather to whatever the companies prefer to emphasize. Of the nine
different schedules prescribed by The Companies Act, two schedules:
combating various diseases and promotion of education accounted for 44%
of the total CSR expenditure, while reducing child mortality received no
funding and eradicating extreme hunger and poverty received only 6% of
the total CSR expenditure. Given that about 50% of children in India are
malnourished due to pervasive poverty, it is unlikely that the above
allocation of resources reflects the democratic will of the Indian
people. It is the government’s responsibility to determine high-priority
needs of society and target public expenditure in these areas. With the
CSR law, the government has abdicated one of its primary functions.
There
is also an issue of geographic equity. Five states: Maharashtra,
Gujarat, Andhra Pradesh, Rajasthan and Tamil Nadu account for well over
one-quarter of all CSR spending. Towards the bottom of the list are
Nagaland, Mizoram, Tripura, Sikkim and Meghalaya—all from the NorthEast.
This, of course, reflects the inclinations, interests, and priorities
of the business sector. But, it is the responsibility of the government
to help achieve a more egalitarian society.
CSR is a controversial
idea with many executives, academics and officials on both sides of the
issue. Thus, it is not surprising that the Indian law does not clearly
define CSR for the purposes of expenditures. The law lists only a few
genres of CSR activities: “eradicating extreme hunger and poverty”,
“promotion of education”, and “social business projects”. This is much
too vague to work as a legal definition. It is not surprising that the
law does not even discuss, let alone define, an enforcement mechanism or
penalties for non-compliance.
The CSR law is inherently
contradictory. CSR is fundamentally an inspirational exercise, and it is
very difficult to legislate aspirations. Laws only set minimum
standards, but do not create an impetus for positive action. For
example, it would be difficult to require that companies build
“excellent” schools; the legal requirement can be met merely by spending
money on education.
Inequality in India, which was already high,
has increased even more. The CSR law does not go far enough in reducing
inequality and helping the disadvantaged. Without a coercive enforcement
mechanism, it is unlikely that the law will result in widespread
compliance and real effectiveness. In other words, “required” CSR will
remain largely voluntary, but give the illusion of progress. This is
“greenwashing” on a national scale!
India is the first country to
require companies to expend resources on CSR. There is sound logic
behind why other countries have not done this, and India should not
either.
THE BILLION PRESS
Without a coercive enforcement mechanism, it is unlikely that the law will yield effective results
The
Companies Act 2013 requires large (above a specified threshold level)
firms to spend 2% of their net profits on corporate social
responsibility (CSR) projects. This law came into effect in April 2014.
The results on CSR expenditures by firms in the fiscal year 2015-16 were
released recently. It is certainly true that Indian firms collectively
are more than complying with the CSR law. According to Prime Database,
Indian companies spent Rs9,309 crore on CSR projects in 2015-16, which
was Rs163 crore more than the amount required by law, and Rs703 crore
more than the previous year.
The general reaction in the Indian press has been positive and
suggests that the CSR law has been a success. However, the CSR law is
only apparently successful, and in reality is harmful.
The problem
is that reported expenditure on CSR projects is not a good metric of
societal welfare. These numbers overstate the effect of the law. It is
not clear whether firms have really increased their CSR spending after
the law compared to what they were spending voluntarily before the law,
because CSR spending was not well reported historically. There is some
evidence that while firms that were initially spending less than 2%
increased their CSR activity, but those that were initially spending
more than 2% reduced their CSR expenditure. Another possibility is that
firms spent money on CSR activities that also lead to increasing firm
profits, such as inculcating goodwill and good public relations. There
is evidence indicating CSR spending leads to brand building and employee
engagement. In that case, firms would have carried out these activities
with or without the law.
Even if we take the CSR expenditure at
face value and assume these are valid numbers, there are still major
problems with the CSR law. A required expenditure that does not lead to
higher profits is essentially a tax. The CSR law can be viewed as a 2%
tax, albeit spent by the firms rather than given to the government. This
is a back-door way to increase corporate taxes without a transparent
political debate. The corporate tax rate in India is 34.61%—already one
of the highest, compared to a global average of 24.09%, according to
KPMG, an audit and consulting company. Given the emphasis on
liberalization and economic growth, it is unlikely that the Indian
polity desires an increase in the corporate tax rate. This certainly
will not help to make Indian firms more globally competitive nor attract
more foreign investment into India.
Even to the extent that there
has been a real increase in socially beneficial activities, the
spending has not gone to democratically determined priorities, but
rather to whatever the companies prefer to emphasize. Of the nine
different schedules prescribed by The Companies Act, two schedules:
combating various diseases and promotion of education accounted for 44%
of the total CSR expenditure, while reducing child mortality received no
funding and eradicating extreme hunger and poverty received only 6% of
the total CSR expenditure. Given that about 50% of children in India are
malnourished due to pervasive poverty, it is unlikely that the above
allocation of resources reflects the democratic will of the Indian
people. It is the government’s responsibility to determine high-priority
needs of society and target public expenditure in these areas. With the
CSR law, the government has abdicated one of its primary functions.
There
is also an issue of geographic equity. Five states: Maharashtra,
Gujarat, Andhra Pradesh, Rajasthan and Tamil Nadu account for well over
one-quarter of all CSR spending. Towards the bottom of the list are
Nagaland, Mizoram, Tripura, Sikkim and Meghalaya—all from the NorthEast.
This, of course, reflects the inclinations, interests, and priorities
of the business sector. But, it is the responsibility of the government
to help achieve a more egalitarian society.
CSR is a controversial
idea with many executives, academics and officials on both sides of the
issue. Thus, it is not surprising that the Indian law does not clearly
define CSR for the purposes of expenditures. The law lists only a few
genres of CSR activities: “eradicating extreme hunger and poverty”,
“promotion of education”, and “social business projects”. This is much
too vague to work as a legal definition. It is not surprising that the
law does not even discuss, let alone define, an enforcement mechanism or
penalties for non-compliance.
The CSR law is inherently
contradictory. CSR is fundamentally an inspirational exercise, and it is
very difficult to legislate aspirations. Laws only set minimum
standards, but do not create an impetus for positive action. For
example, it would be difficult to require that companies build
“excellent” schools; the legal requirement can be met merely by spending
money on education.
Inequality in India, which was already high,
has increased even more. The CSR law does not go far enough in reducing
inequality and helping the disadvantaged. Without a coercive enforcement
mechanism, it is unlikely that the law will result in widespread
compliance and real effectiveness. In other words, “required” CSR will
remain largely voluntary, but give the illusion of progress. This is
“greenwashing” on a national scale!
India is the first country to
require companies to expend resources on CSR. There is sound logic
behind why other countries have not done this, and India should not
either.
