Scrap CSR law, it will only further interests of crony capitalists

Most of the ills plaguing the Indian economy over the last few years can be attributed to just two factors - the RBI’s policy of continuous debasement of the Indian rupee and a highly regulated economic environment wherein ministers/ bureaucrats decided market outcomes through legislations and preferential treatment rather than consumers. In fact, as I have written in Forbes India ( Give Capitalism a Chance ), the only two prerequisites for high and sustained growth are limited government and sound money.

Much of what I have written in Firstpost for the last year pertains to the topic of “sound money”. While Raghuram Rajan’s appointment and his day-zero speech promised much, his subsequent actions and words are pretty much proving that the above-mentioned speech will forever remain the high point of his tenure as the RBI chief. Much like Kevin Spacey in American Beauty, it has been one steep downhill ever since that “illustrious” beginning.

Consider his recent observation on raising rates . Not only is his observation wrong, but it also happens to be the exact opposite of the truth. Inflation/ debasement of the currency is never a panacea to achieve long-term sustained growth - developed economy/ developing economy etc. doesn’t matter. But a developing country, which by definition is much more capital constrained than a developed economy, can afford currency debasement even less than a developed economy. So developing countries like India need a sound money policy much more than a developed economy and in not raising rates, and consequently debasing the rupee further, Rajan is actually hurting the economy. The above error is so very obvious and it is really surprising that he goes scot-free after making Sushilkumar Shinde-like observations on basic economics.

Enough said on sound money and so let’s turn the focus onto limited government. Limited government refers to limiting the role of the government to just two functions i.e. protection of private property and enforcement of contracts. In simple terms, this would refer to the police/army and the court system. All other decisions are left to the markets. Most people cannot imagine how an economy would function without public schools and government involvement in infrastructure, but one should study how the US transitioned from a primitive economy to a developed one with these ideals.

The current topic that I want to write about - Corporate Social Responsibility - is a fairly innocuous sounding issue. But like the proverbial camel’s nose under the tent, it ought to be nipped in its early stages, else there is no telling of how disastrous it would turn out under the hands of a more zealous minister. At the outset, Corporate Affairs Minister Sachin Pilot should understand that compassion is not demonstrated by how we spend other people’s money. It’s what you do with your own hard-earned one.

[caption id=“attachment_577139” align=“alignleft” width=“380”] Corporate Affairs Minister Sachin Pilot. AFP[/caption]

So what’s wrong with CSR? Everything, I would say. By definition, what constraints growth in almost all the companies is capital. By diverting scarce capital towards activities other than productive ones, the bill would actually diminish the growth potential/ ability to sustain investments of these companies. Forget the 3 percent limit, even if it is 0.3 percent, the future investments would be less by that amount. It means less jobs, less output and less GDP growth than would otherwise be the case.

I would actually go onto say that the social responsibility of every company is to grow and produce more - ethically and legally. In the process of creating wealth for themselves, these companies serve the needs of the consumers and also create jobs uplifting the standards of the society without directly targeting the same i.e. what Adam Smith referred to as the invisible hand of the free market leading to the best outcomes for everybody concerned. One can easily see that the IT industry has lifted the living standards of millions of Indians just in the process of satisfying their customer needs. NRN has served the country through his act of creating Infosys much more than what he could have achieved in following his earlier ambition of starting an old-age home (or something like that).

So the karma of companies is to satisfy their consumers to the best of their abilities and in doing so, they create wealth for themselves and the society at large. In crippling the companies by acts such as CSR, the government is actually limiting the ability of the companies to serve the needs of the consumers and hence, the society.

I believe that the observation “that the road to hell is paved with the best of intentions” is valid for most government actions. This CSR is another classical example of the above.

Am I saying charity is bad? Not in the least. Plenty of companies have done admirable jobs of the same and even encourage employees to spend some time as part of their CSR initiatives. But as I said before, compassion is what you decide to do with your own money and legislating compassion is a horrible idea to begin with. CSR bill or no CSR bill - companies and individuals like Infosys, NRN, Premji and Tatas will do plenty - and probably far exceeding the CSR prescribed limits - that this bill really serves no purpose to the well-intentioned.

To the crony capitalists, this bill would just provide another avenue to direct their CSR funding towards politically connected “social entrepreneurs” as a quid pro quo to some clearances. This is just opening another Pandora’s box to the already existing set of complex legislations and regulations in India and given the weak state of the economy, we could well do without one.

Mr Pilot, please give India a New Year gift by abolishing your well-intentioned but with horrible unintended outcomes CSR bill.

Shanmuganathan “Shan” Nagasundaram is the founding director of Benchmark Advisory Services - an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted at shanmuganathan.sundaram@gmail.com.