Is CSR Effective?

Has CSR guidelines led to a paradigm shift in approach?

- Aneel Karnani

India is the only major country in the world that, by law, requires firms above a specified threshold size to spend 2% of their net profits on CSR projects. This law came into effect in April 2014. For the latest fiscal year, Indian firms collectively are more than complying with the law. According to PRIME Database, India Inc spent ₹ 9,309 crore on CSR projects in 2015-16, which was ₹ 163 crore more than the amount required by law, and ₹ 703 crore more than the previous year.

The general reaction in the Indian media has been positive and this suggests that the law has been a success. However, the law is only apparently successful—compliance with the law is not a good measure of its success. What matters is not the amount of money spent, but rather the outcomes achieved. In fact, the law mandating CSR expenditures is harmful to achieving the nation’s goal of inclusive development.

The compliance numbers overstate the effect of the law. It is not clear whether firms have really increased their CSR spending after the law compared to what they were spending voluntarily before it because it was not well reported historically. Based on a study of the 100 largest Indian firms, Professors Dhammika Dharmapala and Vikramaditya Khanna found that while firms that were initially spending less than 2% increased their CSR activity, those that were initially spending more than 2% reduced their CSR expenditures. It is possible that the 2% level intended as a threshold becomes an unintended focal point (or an anchor), both a floor and a ceiling.

The ‘comply or explain’ structure of the law is almost designed for weak enforcement. According to PRIME Database, for the fiscal year 2015-16, 920 firms were subject to the CSR provisions of the Companies Act. Of these 920 firms, 376 did not spend enough on CSR to meet the 2% level, including some prominent companies such as Bharti Airtel, HDFC Bank, Tata Consultancy Services, and Infosys.