The Companies (Amendment) Bill, 2019 which seeks to penalize the non-compliance of Corporate Social Responsibility (CSR) has been passed in Rajya Sabha. Now, the company officials could be booked for three years for not complying with CSR norms. The company could face a penalty ranging from 5,000 to Rs 25 lakh for violation of CSR norms.
The problem with Indian political economy is that, Indian government wants to do business and expects the corporate to provide welfare. This role reversal has kept the Indian states inefficient and people poor for decades.
The government’s decision to penalize the CSR violation is the worst form of socialism at display and the profit making is now being seen as ‘sin’.
Gandhiji’s trusteeship principle is with which profit-making can not be devoid of social responsibility. The amendments we are bringing now are only to sharp focus that and make it far more effective: Smt @nsitharaman
— NSitharamanOffice (@nsitharamanoffc) July 30, 2019
The compulsory CSR was brought by Congress led UPA government under the Companies Bill, 2013. The party was to face general election in less than a year and therefore brought populist policy of compulsory CSR.
Now Modi government which was elected on reformist agenda, is taking the archaic rule a step ahead by introducing penalization for non-compliance. Nirmala Sitharaman, the Minister of Finance and Corporate Affairs flagged Gandhi’s trusteeship principal while she spoke in favor of bill. “Gandhiji’s trusteeship principle is with which profit-making can not be devoid of social responsibility. The amendments we are bringing now are only to sharp focus that and make it far more effective,” said Sitharaman.
However, those aware of economic ideas of Mahatma Gandhi would suggest him as last person follow for a developing country like India. Gandhi rejected materialism and advocated protectionism. The first principals of Gandhian economic thought was minimizing one’s need. So, in other words Gandhi advocated that ‘Greed is not good’. But the people with even basic understanding of economics would argue that Greed is fundamental virtue for economic development.
The second principal of Gandhian economic thought emphasized on promotion of MSMEs. India has tried to do the same since independence and failed every time. The entire idea of bank nationalization was supported by prioritization of credit to MSMEs and the people are aware what happened thereafter. The MSMEs prioritization by India at a time when other East Asian nations went after large scale industries and manufacturing pushed the Indian economy decades back. Gandhi was also a ‘Luddite’ and his fear for large scale mechanized manufacturing is well known. India followed Gandhi and banned the import of machines which harmed the Indian capability in manufacturing and services sector.
The third principal of Gandhian Economics was ‘trusteeship’ which Sitharaman invoked in her speech to rationalize the compulsory CSR. The third principal argues that the profit earned by an enterprise should be held as trust for the welfare of poorest and most deprived. Given the scale of capital accumulation that is required to compete in modern day capitalist environment, if the business gives away the profit as CSR, a little would be left for future investment.
The third principal of Gandhi would be successful in an environment where first and second principal is applied. Given the fact, India has given up the first and second principal of Gandhi due to their inefficiencies; third principal should not be invoked.
The Gandhian economic thought advocated for rural economy based on above three principals. Those with basic lessons on economic history are well aware that economic growth comes with urbanization. There is not a single example in Human history where rural productivity was better than urban productivity. As a country gets richer, it urbanizes and vice versa.
If Sitharaman is seeking wisdom in ancient economic thought, there are some very good examples like Kautilya’s Arthashastra. Wealth creation was integral part of Dharma in India for millenniums and the country accounted for a quarter of Global GDP for most of global history. Sitharaman should learn economic history lessons from Kautilya who played integral role in making the country economic superpower, not from Gandhi whose ideas kept the country poor for decades.
Indian companies spent 8,365 crore rupees for CSR till October 2018, as per the government data. In 2016-17, the companies spent 14,242 crore rupees on CST obligations. The combined central and state government expenditure is around 60 lakh crore rupees which is many thousands time more compared to total CSR spending. It is obvious that the government is more efficient and has the mandate for welfare activities. The primary aim of corporate is to generate profit and pay taxes so that the government could perform its own responsibilities of governance, security and welfare. The government would be better off leaving the corporates with their primary responsibility and focus on its own.