Has India's multibillion dollar CSR law delivered for development?

In 2013, India became the first country in the world to pass a law making it compulsory for companies to allocate profits to corporate social responsibility. The law says that companies with an annual net worth of at least 5 billion Indian rupees — equivalent to around $61 million — or a net turnover of 10 billion rupees, or net profits of 50 million rupees, must spend at least 2% of their average net profit on CSR. Despite high initial levels of non-compliance, official data shows that regulating CSR spending has resulted in a large year-on-year increase in spending, now worth more than $3 billion a year. The law requires companies to commit funds to a small number of development sectors, such as education, health, the environment, and gender equality. But has this huge pot of money led to better results? Academics and policy experts say it has not. Instead, they say, the CSR law has functioned effectively like a new tax, diverting money into government projects of questionable use, and leading to less CSR cash going to small local nonprofits than it did before. A compliance mindset An analysis of the data shows funds are not always allocated where they would have the most impact. A study published in the journal Public Money & Management in 2021 used qualitative data to research the impact of the regulations on what it calls state-owned enterprises — a group of entities set up in the 1950s and 1960s to promote the state-led development of core industries, generate local employment, and increase self-sufficiency after the end of British rule. These entities, also known in India as public sector undertakings, or PSUs, have a well-established history of social sector engagement and represent a significant percentage of the Indian economy. The study found these entities largely believe that the law has reduced innovation and resulted in investment in less impactful CSR activities. Previously, they would voluntarily donate to local initiatives or ones aligned with their values, as a form of community engagement. Now regulations require them to implement lengthy monitoring and impact assessments, and file reports to multiple different government bodies on all activities. “That's creating a lot of duplication and cumbersome paperwork,” explained Dr. Ameeta Jain, lead author of the paper and senior lecturer in finance at Deakin University, Australia. The study concluded that regulations and a high burden of compliance push companies toward projects which are easy to report on, rather than ones that the company believes would benefit from their specialized knowledge or that most directly address the needs of the community. “Forcing SOE managers to adopt a compliance mindset is likely to be counterproductive,” it notes. A focus on compliance at the expense of innovation and engagement is against the original spirit of CSR, says Noshir H. Dadrawala, CEO of the Centre for Advancement of Philanthropy, an organization that offers legal and compliance advice on India’s nonprofit sector. “CSR has just been reduced to simple arithmetic,” he says. “It's all about giving money. It's not about giving of your corporate time [or] employee engagement.” The wrong organizations This compliance mindset appears in some cases to have actively facilitated the redirection of funds away from smaller nonprofits toward government-backed projects. To attract CSR funds, nonprofits must be able to provide the monitoring and impact assessments on their projects which are required for CSR compliance. But many, particularly the smaller ones, lack the primary skills, says Jain. “Companies are struggling to find the right NGO. That is the biggest issue today,” she said. Dadrawala said many companies prefer to donate to just one nonprofit or fund in order to minimize their compliance requirements. By default, this results in the exclusion of many smaller nonprofits, which cannot absorb the million-dollar CSR budgets of large businesses. This leads to CSR money being directed away from initiatives that have an impact in rural areas, or ones that may be deeply embedded in a community or specific development issue. “The bigger you are as an organization, the more funds you can attract, and the small ones who may be doing some tremendous grassroot level work, just continue to languish and suffer,” he said. A focus on government Funds are not just allocated away from smaller nonprofits, but away from NGOs altogether, the data shows, with a sizable chunk of CSR funds going to government-funded initiatives. “Government funds take the advantage because these are huge projects — whether it's Swachh Bharat, which is about building toilets, or whether it's the [National Mission for] Clean Ganga,” said Dadrawala. Not only can government projects absorb large CSR budgets, but they do not require companies to monitor progress and produce impact assessments — as the regulatory body itself, the government, is the one doing the development work. This makes government projects particularly alluring for companies that want to reduce compliance. “You give it and it's over,” Dadrawala said. With the government itself acting as a regulatory body, CSR managers may also feel subject to political pressure. Multiple studies have found that many companies feel coerced into allocating funds toward projects identified in government directives, or report being forced to entertain unofficial requests from local politicians to fund “pet projects.” This has resulted in the controversial allocation of funds toward projects with questionable public benefits — for example, the building of the Statue of Unity, the world’s tallest monument, which depicts India’s first deputy prime minister and leading independence figure Vallabhbhai Patel, and which received CSR funds from several oil companies. Built in Gujarat, the statue was announced in 2018 by Prime Minister Narendra Modi — at the time chief minister of the state — to mark his tenth year in office. Critics have suggested that companies use CSR funds as a tool for political signaling. Data shows, for example, that some companies allocated as much as 92 million rupees to animal welfare initiatives focused specifically on protecting cows. The cow is a sacred animal in Hinduism, and its status has often been promoted by the ruling Hindu nationalist Bharatiya Janata Party. Spending as fast as possible An amendment introduced in 2021 has made it yet more likely that funds will be directed to political projects, according to the Doing Good Index 2022 report produced by The Centre for Asian Philanthropy and Society, or CAPS, a research and advocacy organization based in Hong Kong. “The new CSR rules have complicated project implementation, increased compliance costs and created room for the transfer of resources from [sustainable development organizations] to government institutions,” states the report. The amendment, ostensibly an attempt to improve poor compliance levels, introduced stricter reporting requirements and a new rule which mandated that any unspent funds be returned and reallocated toward a government fund. However, Dadrawala, who advised as an India country expert in the writing of the CAPS report, believes that compliance levels were already slowly improving, and would have continued to do so without the need for stricter new regulations. However, the increase in red tape has led to the further redirection of funds toward government projects, he said, with many CSR managers now feeling that CSR has now become more like an additional form of corporate tax. Perhaps the most visible example of this redirection was during the COVID-19 pandemic when many businesses chose to allocate CSR funds toward the newly created Prime Minister’s Citizen’s Assistance and Relief in Emergency Situations Fund, or PM-CARES Fund, an emergency relief fund established by the government of India. In 2021, the fund received an estimated one-third of the average pre-pandemic annual CSR budget. “During the Covid years, we definitely saw a lot of funds diverted, we know that the nonprofit sector actually suffered a serious crunch,” said Dadrawala. Despite various ongoing court cases, the PM-CARES Fund is not currently subject to normal regulations on transparency, meaning that the impact of this CSR spending is unknown. What next? To make the best of the CSR budget, advocates are calling for more transparency, better dialogue, and a collaborative approach between the nonprofit sector, companies, and the government. Currently, the biggest barrier to the effective implementation of CSR funds is the “tremendous mistrust” between the government and the non-profit sector, said Dadrawala. Jain argues for less focus on regulations, instead calling for a flexible, participatory approach to governance. She said this would bring a shift in corporate culture toward community engagement which would act as a far more effective incentive than strict regulations and penalties. “Regulation won't work,” she said. “It needs to be dialogue. And encouragement.”