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Why CSR does more harm than good

In August 2019, the Indian parliament threatened business leaders with up to three years in prison if they failed to comply with the requirements of the corporate social responsibility (CSR) provisions that were introduced in 2013. In addition to prison terms, any company that does not allocate its two per cent of annual profits to charity will have the money taken by the state and doled out to one of a list of government funds. What does the shift from voluntary to mandatory CSR over the past decade reveal about the relationship between the state, the market, and the social sector in India?

This law and its latest punitive revisions are best understood within the framework of neoliberal authoritarianism in tension with democratic demands.

Democratic theory suggests that policy-making is responsive to the squeakiest wheel. That is, interest groups of various kinds mobilise to demand legislation. Politicians who seek re-election must engage in policy-making with a view to pleasing their constituents and their campaign donors. Further research has suggested that businesses play an outsize role in shaping legislation because they are able to threaten damage to local economies. Article 135 of the Companies Act (2013) is puzzling because it seems to have no vested interest supporting it. It is an orphan law — one with no clear segment of society driving its adoption.

In 2011, Montek Singh Ahluwalia, as Deputy Chair of the Planning Commission, declared his opposition to the idea that Indian business should be required to set aside 2 per cent of their annual profits for CSR funding. He said, “If you want them to spend another two per cent, that’s like saying that corporate tax would be raised to 32 per cent. It’s better to do that. You cannot have a corporate tax and then say spend another two per cent. I am opposed to that.” He was articulating a view shared by most companies in India who were firmly opposed to this new mandate. They too argued that a higher tax rate made more sense than the requirements of the Companies Act under Section 135. But they were overruled and the law was adopted.

Meanwhile, within the philanthropic sector, there was deep cynicism about the prospects of mandatory CSR. “It is a crazy idea,” according to Venkat Krishnan, the CEO of GiveIndia. “Once you make it mandatory, people will find ways and means to get out of it.” He argued that philanthropy should be voluntary — a sphere of activity entered into with no coercion. By forcing businesses into the sector, he believes it will lead to malfeasance by unwilling corporations and could create problems of corruption within the civil society sector.

Outsourcing of governance

Rohini Nilekani, one of India’s largest philanthropists, said, “This is outsourcing of governance. This is taking the failure of the state and the corporates and trying to create a model out of it.” She articulates the concern that the creation of such a law is a way for the state to absolve itself of its responsibilities and to transfer them to the business sector. The opposition to the idea by philanthropists, NGOs, businesses, and economists all leave a major puzzle — who wanted this law and why?

In 2009, the Corporate Affairs Ministry first introduced the idea of the two per cent spending on CSR but faced immediate opposition. It relented and made the provision voluntary for the private sector but mandatory for the public sector. Large public owned enterprises have been required to follow this practice for some time. Minister Murli Deora explained the motivation for the law. “It is quite surprising that they (companies) do not spend even half a per cent of their profit in social welfare, but they forget that a prosperous society is a must for their own survival.” The justification for the law was that the rapid economic growth of recent decades has exacerbated inequality in India and big business is not doing its fair share to mitigate it.

The timing of the law coincided with the 2009 election campaign in which the ruling Congress party promised to promote inclusive growth and won decisively. It had expanded a number of welfare programmes that targeted the rural poor in the previous five years and promised to strengthen these social supports. It also worked closely with civil society to introduce and implement government programmes to provide a right to work, food, and education.

Author Arundhati Roy has argued that corporate philanthropy in the West has been a major tool of global capitalism as it sought to open and reshape developing countries through grants and training. She sees the rise of CSR in India in the early 1990s as a means by which corporations silence critics, buy off civil society, and proceed to plunder and exploit the masses. This suggests that a critical perspective is to see the adoption of this law as part and parcel of the neoliberalism of the Indian state and a means by which it works with the security establishment to steamroller the resistance to global capitalism.

Either way, the problem is the effects of rapid economic growth that benefits the few at the expense of the many. For the Congress party, and now the BJP, the solution is to muscle the business sector into the social sector. Should we understand this as a way for the state to seek innovate ways to more efficiently serve the public? Is it a way to whitewash the sins of corporate greed and corruption? Is it a way of disciplining the masses into being better consumers as their quality of life improves?

The consequences of this law are felt by the around 16,000 corporations in India. Of these, only 1,000 already had well developed CSR programmes. The other 15,000 have scrambled to set up the internal governance and expertise to dive into this field. The law generates at least $225 million annually as new money going into the civil society sector on top of the millions that were already being spent by NGOs and the state. The 3.3 million NGOs in India stand to gain new supporters, new partners, new funds, and new competitors for the social work they are doing. But my research suggests they are also in danger of losing their moral legitimacy as they become accustomed to working with corporations.

Civil society’s reputation

Twenty years ago, the main threat to civil society legitimacy came from critics who saw them as puppets of foreign governments who funded their projects. Within the development sector, sceptics of foreign funding argued that the agendas of NGOs were often co-opted and their interventions ended up being largely cosmetic. Today, in India, the concern should be that as NGOs are turning to domestic sources of funding, CSR has pushed companies into the social sector in spite of their ignorance of how to be effective agents of inclusive and sustainable development.

The money of CSR departments is likely to skew NGO agendas towards more quantifiable and output-oriented programmes rather than the longer term, process-oriented interventions that lead to transformational change. While the state may think it is using the superior efficiency of the corporate sector to respond to democratic demands, it is more likely to end up tarnishing the reputations of civil society organisations and businesses, too.

The writer is an Associate Professor of Political Science at Lehigh University. This article is by special arrangement with the Centre for the Advanced Study of India, University of Pennsylvania.

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