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.
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.
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