India’s CSR law: A national experiment to drive social development

By Rachita Mehrotra

In 2013, India put in place one of the most progressive laws around corporate social responsibility (CSR). It set minimum contributions for mandatory CSR, requiring Indian businesses with a net worth of ₹500 crore (US$ 77.5 million), revenue of ₹1,000 crore (US$155 million) or net profit of ₹5 crore (US$ 660,000) to channel 2% of their profits towards CSR initiatives. The new legislation was a watershed moment: it has succeeded in mobilizing an impressive ₹46,300 crores (US$ 6.11 billion) to tackle the country’s myriad development challenges. This injection of capital was expected to trigger widespread development. However, six years on the law has fallen short in driving collective national progress. One reason for this is that a large proportion of funding is flowing to a small proportion of states.

I believe that instituting mandatory CSR was an inventive move by the government to meet the social sectors funding shortfall. The law put the corporate sector front and center, making it an important partner in ameliorating India’s development challenges. However, while the government concerned itself with the supply side of the equation, inefficient allocation of funds has resulted in a mismatch between states that need funding and those that receive it.

Inequitable distribution across states should concern the government. The country is no stranger to inequality, but the gap is widening further. Inequitable distribution will only exacerbate this. Take, for example, the cases of Maharashtra and Bihar. The former is India’s richest state and is home to the commercial and financial capital of the country, Mumbai. It has consistently received the largest share of CSR funding; in 2019 it received over 15% of the pool. Comparatively, Bihar, the state with the lowest Human Development Index score, received just 0.7%. Few major companies have operations in, let alone are headquartered out of Bihar.

This trend is evident across the country. Wealthy states with comparably higher standards of living, benefit from a stipulation in the CSR law which allows companies to determine which regions receive their funding. Without the right incentives, corporates will continue to channel funding to states where they operate, the most visible sectors from a public relations perspective, and to social sector organizations that they have a relationship with. This begs the question: Can the government implement policies and incentives that drive capital more equitably?

A lack of guidelines within the law for how companies can execute CSR spending creates further obstacles. This lack of clarity is not uncommon—both demonetization and the country’s COVID-19 lockdown were implemented without prior notice causing widespread panic and confusion. While in both cases, the government clarified some of the confusing aspects, many social sector organizations stepped in to fill the gap that implementation created. To date, there has been no solution proposed to address the inequitable distribution of CSR funding. In fact, further amendments to the CSR law are being considered which would constrict the social sector by excluding trust and societies from the list of entities eligible to receive CSR money. This may exacerbate the uneven funding distribution. The rationale for blacklisting social organizations is not clear. Many of which operate across multiple states and have made significant contributions to the social sector and comprise some of India’s most influential philanthropic institutions. Instead of using the law to constrict the sector, the government needs to examine how it can help the sector reach its full potential.

It is clear that the cost of not working to ensure equitable distribution of CSR funds is too high. To make a real difference in meeting India’s development goals, CSR money must be invested more strategically. The national government has a role to play in addressing this and has solved half the equation: it has sourced the funds needed. Finding innovative solutions to channel resources to the states that need them would be an important next step to fully leverage the potential of the CSR law and take India to the next level.