Does CSR Make Economic Sense?

By Avinash Kumar

When the Corporate Social Responsibility (CSR) Policy under the Companies Act was passed in 2013, one of the strongest criticisms was made on the grounds of this being an external, enforced and unnatural arm to an enterprise, which would constrict the real spirit of entrepreneurship. The argument was based upon the premise that corporate enterprise in itself entails value creation and this act will be more as an additional taxation directed towards cosmetic philanthropy. Prima facie, both left and right seemed to agree on the latter part that this might drive cosmetic lip service to the social responsibility of businesses. Almost five years down the line, while the results may seem mixed, what still needs some thinking through is whether CSR in itself makes good economic sense.

Today, the business of CSR needs to be seen in the wider context of increasing inequality. In last year, India has added 19 new billionaires, raising the number to 121. A few years ago, or in certain sections of society even today, it would be seen as a matter of great achievement, showcasing India’s triumph in the world economic order. Unfortunately, it also has a debilitating side to it. The classical understanding of wealth creation has been that wealth creation in itself is a sufficient condition for the larger social well-being. Recent history, however, has showed us that wealth creation without a responsible outlook can create perverse incentives. Hence, during the same year, according to the latest Oxfam report, the richest 1 percent bagged 73 percent of wealth created last year and the poorest half of India (comprising 67 crore people) got a meagre 1 percent. Clearly, mere free-wheeling wealth creation is not going to provide for the society at large.

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While the individual enterprise may be premised upon the idea of self-interest, the larger universe around it tells us that the individual self-interest has to be premised upon larger value creation guided under specific social and ethical paradigm. Fortunately, today’s is the world which is increasingly talking about responsible business and economic enterprise with an ethical responsibility. Incidentally, it is not simply activists of a certain kind who are talking about the debilitating effects of rising inequality and concomitant measures to mitigate the same.

Governments increasingly realise that for broader economic and social good, the base of the economic growth needs to be broadened and strengthened. In a country like India, where majority of the economic growth is driven through service industry sitting on a thin population base, the alternate way in the short run to make that base stronger is to broaden the base of the human capital. This means a healthy and well-educated skilled class of workers and entrepreneurs who need to continue to fuel the economy.

This is significant, since India has the distinction of being the fastest growing economy for a number of years; it is also home to the largest number of poor within its boundaries. While the implications for the poor are indeed not so good in this context, the rising inequality also leads potentially towards a socially and politically fragile society, leading to potential conflicts, and economic destabilisation of a country.

Coming down to a more specific example, a WSP (Water and Sanitation Programme of World Bank) report highlighted that the total economic impact of inadequate sanitation in India amounts to INR 2.44 trillion (USD 53.8 billion) in a year—this is the equivalent of 6.4 percent of India’s GDP in 2006. If we were to look at cumulative examples of work loss due to poor health and education indices, this loss is likely to go much higher.

It is in this context that Corporate Social Responsibility assumes a significant meaning. The model of shared responsibility means that the quest for profit (the bedrock of private enterprise), will have a Do No Harm policy, not simply as an externality but as an integral part of its practice. It is for this reason that Government of India passed National Voluntary Guidelines way back in 2011, outlining that the first principle of corporate responsibility is not contribution to social development but responsible business which include ethical business practices, respect for human rights, fair sourcing and environmental responsibility.

Additionally, Securities and Exchange Board of India mandates the top 100 companies to report on these principles in their sustainability reports. This responsible behaviour in itself lead to safety of workers’ rights, additional skill building in value chain leading to the increase in incomes of the workers, appropriate safeguard for women and children, preservation of natural resources, an environmentally futuristic approach to production, consumption and disposal of resources. Many of such practices, for example, recycling, reuse of wastewater, use of non-polluting renewable energy cannot just be cost saving practices but should open an entirely new line of wealth creation. All of this will be strong incentives towards a stronger and resilient economy.

Now comes the second part. The CSR Act of 2013 extended this argument for companies of certain sizes to pro-actively invest 2% of their net profit to social goods on a range of issues. This is the second part of the argument of re-distributive justice but with an economic lens. While the profits being earned by the corporate sector need to be sustainable, they need to further invest in broadening the sphere of value creation so that consumer communities could expand and become part of extended markets.

Many banking sector CSR interventions targeted towards micro credits or manufacturing sector providing skill enhancement as part of its supply chain are obvious examples of the same. But a good investment in preventive or curative health care systems, provisioning of safe water supply systems, safe sanitation practices driven through community participation could catalyse a more long term but entirely sustainable market base.

It is in this sense that the reports stating that at least 33 firms out of the listed 100 on the S&P BSE companies have not met their mandatory 2% investment under CSR law is unfortunate, to say the least. Gordon Gekko, that eponymous protagonist of the movie Wall Street said ‘Greed is God’ and by the end of the movie realised, it was not so. One just hopes, companies realise this faster than Gekko.

About the Author: Avinash Kumar, Director – Programmes & Policy at WaterAid India

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