A regular phenomenon in India — and policy making in general — has been that too often we’ve got our vision right but our policies all wrong. There are dozens of bad economic policies that were formulated by successive governments but the tragedy of our times has been that we’ve been far too slow in terms of moving away from these bad policies.
A good attempt at moving away from such policies was made in the 1991 budget but we got cold feet and subsequent reforms didn’t happen until 1999 and the early 2000s.
In many ways, one genuinely misses the days of former prime minister, Atal Bihari Vajpayee, as the economy experienced many deep reforms in terms of a new disinvestment policy, taxation reforms, trade reforms and a sharp reduction in interest rates. All of this was undone during the UPA terms as we aggressively moved towards socialism and entitlements while focussing less on growth.
Forget the macroeconomics for a second or a laundry list of bad policies that are yet to be revisited or scrapped. Documenting such a list would require an entire book and months of study as to why they were implemented in the first place.
Instead let us explore the critical issue of one provision that was introduced by the UPA government, and which has been only strengthened by NDA 2. No, I am not taking about the PDS (Public Distribution Scheme) or the MSP (Minimum Support Price) — although, they both are bad policies and yet they continue. I’m talking about the issue of Corporate Social Responsibility (CSR).
At the outset, it must be stated that there is a global debate regarding whether one should have CSR norms in place or not. Despite that, we in India have ignored this debate and have moved on to the Gandhian philosophy of ‘giving back to society’.
Well, it is important to give it back to the society and that is the motivation behind taxation, so why have CSR and taxation at the same time? If corporate social welfare can solve most of our social issues, then why has the government collected corporate tax to redistribute?
An important issue worth highlighting is that it is the job of the government to ensure wealth redistribution and social welfare while the job of the company is to be in business. As Dr Arvind Virmani rightly highlighted in a tweet, in India we have the government interested in business while it mandates corporates to work towards welfare. No wonder we’ve never really sustained a high growth rate of around 8 per cent!
While the CSR norms were introduced by the UPA, further strengthening of these norms by the NDA have raised concerns regarding the direction of economic policies of the current government. The issue is not regarding the amendments at present, but it is more about the CSR provision and why it must be removed.
The only incentive for a company is its profits and therefore, the responsibility with the management should be to maximize shareholder value, scale up the company and make it globally competitive. This is important because we live in a globalized economy and therefore, we need our firms to grow and scale. Doing so would require us to create a more conducive policy environment that enables such growth.
We’ve often discussed the need to have companies like Google, Microsoft etc. being created in India but the question worth asking is: why have we failed to create such giants? More importantly, we should ask why a company like Flipkart prefers to incorporate itself in Singapore rather than India and if we’ve done enough to ensure that in future, we have more such giants in India.
A major problem in India regarding the growth of our companies and their ability to scale is having some of the world’s worst taxation policies. Let us begin with the issue of corporate tax; in an earlier article I had expressed the need to reduce our corporate tax rates, which was one of the highest in the world.
The budget did slash the corporate tax rate, but the cut was far too little, and it left out some of the cash-rich firms of India. In another article jointly (and under the supervision) of Dr Surjit S Bhalla, we demonstrated the Laffer’s Curve and argued how India needs to be more aggressive in corporate tax cuts.
So, while we have some of the worst corporate taxation rates, a much worse dividend taxation policy, now to make matters worse, we also mandate additional CSR expenditure on companies. And we wonder why private investments are low in India! The answer is simple: companies have little money left to invest post deduction of taxes and such legal obligations.
The Economic Survey 2019 expressed the need to promote private investment and help increase the size of our firms to promote employment. Mandatory CSR norms are likely to do the exact opposite, yet the government hasn’t corrected this past mistake.
At a time when global supply chains are shifting and we’re trying to bring them to India, having such policies is doing more damage and it is likely to ensure that we miss this once-in-a-lifetime opportunity to truly transform India’s economy — specially the manufacturing sector.
Global growth is slowing, our economy has considerably slowed down since 2018 Q2 and to have such bizarre economic policies at such a time is only likely to worsen the slowdown.
Between FY2015-18 Indian corporates spent Rs 50,000 crore on CSR with the unspent amount being higher (Rs 60,000 crore) but if you look at the amount it is absolutely nothing compared to the annual outlay by the government on welfare programs. This in itself should be a motivation enough for the government to do away with the CSR provisions and enable companies to utilize this money in doing what they do the best — creating value.
The government has adequate resources to meet our welfare aspirations and rationalizing existing programs is likely to free up far more resources on an annual basis than the CSR funds. Therefore, the government should focus on expenditure rationalization, tax cuts that improve compliance, promote growth and increase revenue realisation. This is the only mantra for sustaining high growth and funding our massive welfare programs.
We’ve tried socialism for decades only to have failed and now is the best time for the government to realize that welfare without growth is likely to be unsustainable. Therefore, now is the time for us to depart from our conventional policies and move towards a more pragmatic set of policies.
Getting rid of the CSR provisions is only going to be a start of the process of dismantling our bad policies. Here’s hoping that a mandate of 303 is enough to enable this process.
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