Subject: Governance

Context

• The debate that began with an RBI 2022 report on state finances followed by Prime Minister Narendra Modi’s comment on revdi culture aka freebies, has garnered substantial attention so much so that the Supreme Court is hearing on this issue. Freebies have now assumed more importance than ever.

What are freebies?

• Freebies could be defined as non-merit subsidies. The term Freebies is not new; rather it is a prevalent culture in Indian politics (in the name of socialism).
• The political parties are always trying to outdo each other in luring the Indian voters with freebies.

What are Subsidies?

• Subsidies are money transfers (implicit or explicit) by the government in an attempt to drive prices artificially below market prices.
• As a National Institute of Public Finance and Policy (NIPFP) study by Sudipto Mundle and Satadru Sirkar puts it, budget subsidies, in particular, are defined as the unrecovered cost of economic and social services.
• However, all subsidies cannot be easily classified into merit or non-merit.

What are the objectives behind providing freebies?

• Welfare state: It could be said that providing freebies empowers the state to, first, deliver welfare as a welfare state should, by providing subsidised merit goods like health and education;
• Combating poverty: To help households combat poverty (especially in economically stressed times characterised by fewer job opportunities, lower incomes, high inflation, etc.) by providing subsidised public goods like food, electricity, etc.
• Populist spending: To appeal to the electorate through outright populist spending.

Question of classification between a merit and a non-merit freebies?

• Blur Boundary: The boundaries between the aforementioned objectives begin to blur when it comes to classifying one form of freebie as a merit or a non-merit subsidy.
• Few examples: Are corporate tax cuts non-merit subsidies or a measure to boost investment? 2. Is making bus rides free for women in the national capital a non-merit subsidy or a way to boost women’s mobility and labour-force participation? 3. Are free laptops to students in Tamil Nadu not a way to bridge the digital divide in education?
• Varying definition: The existing arguments develop an understanding that freebies cannot be defined in a finite context, and that the definition varies across space and economic conditions.

How freebies impact revenue of the state?

• Adverse impact on revenues: Regardless of which one gets classified as good or bad, freebies are simply expenditures or foregone revenues. Any freebie-induced debt burden could have an adverse effect on the state finances if, one, it hasn’t been properly accounted for through transparent budgeting procedures (including off-budget borrowings in debt calculations)
• Increase in Fiscal deficit: Either way, they lead to an increase in fiscal deficit whose financing could necessitate taking on debt. It threatens fiscal sustainability, i e, it limits the state’s ability to service its debt-related commitments without making an unrealistic fiscal adjustment.
• Lack of data leading to leakages: The targeting of beneficiaries to ease the burden on the exchequer is one way to check these expenditures but lack of data has forced a situation wherein leakages and duplication of beneficiaries is commonplace.
• Jeopardises long-term growth and development: In the absence of adequate avenues of revenue mobilisation, any fiscal adjustment achieved by contracting critical expenditures on the social sector and capital formation further jeopardises long-term growth and development. The emanating risk of fiscal sustainability means a “revdi” today would take a toll on tomorrow’s generation.

What could be the solution?

• Setting up an independent fiscal council: Setting up an independent fiscal council that has been recommended by the FRBM Review Committee (2017), and recently constituted Finance Commissions too, including the 15th Finance Commission.
• Providing information and advisory: FRBM report says, the council will serve both an ex-ante role providing independent forecasts on key macro variables like real and nominal GDP growth, tax buoyancy, commodity prices as well as an ex-post monitoring role, and also serve as the institution to advise on triggering the escape clause and also specify a path of return.
• Monitoring finance: Such a council should work for the union as well as the states. Monitoring of finances and fiscal rules could also help ensure that states comply with a medium-term fiscal policy framework, which has been long argued for by economists.

Conclusion

• Freebies cannot be defined easily, and constitutionally, any state government should be empowered to spend the way it wants, provided the fiscal policy is sustainable. The message from the freebies debate is to make informed economic decisions whilst attending to key development objectives.

Mains Question

Q. There is nothing wrong in having social security programme that aims to lift the poor get out of poverty and empower the vulnerable sections of the society. In this context, where do you see the goal of sustainable economic development? Comment.

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Context

• Since the establishment of the Corporate Social Responsibility (CSR) regime in India under Section 135 of the Companies Act 2013, CSR spending in India has risen from RS.10,065 crore in 2014-15to Rs.24,865crore in 2020-21.But there is no data to verify whether this increase is commensurate with the increase in profits of Indian and foreign (having a registered arm in India) companies.

What is Corporate Social Responsibility (CSR)?

• Voluntary spending: Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically oriented practices.
• Ministry Corporate Affairs: The National Corporate Social Responsibility Data Portal is an initiative by Ministry of Corporate Affairs, Government of India to establish a platform to disseminate Corporate Social Responsibility related data and information filed by the companies registered with it.
• Companies Act, 2013: The Corporate Social Responsibility concept in India is governed by Section 135 of the Companies Act, 2013 (‘Act’), Schedule VII of the Act and Companies (CSR Policy) Rules, 2014 wherein the criteria has been provided for assessing the CSR eligibility of a company, Implementation and Reporting of their CSR Policies.

How CSR helps in achieving social justice?

• Sustainable Goals: India having the most elaborated CSR mechanism and implementation strategy has started its journey to set a benchmark in attaining sustainability goals and stakeholder activism in nation building.
• Corporate philanthropy: company donations to charity, including cash, goods, and services, sometimes via a corporate foundation.
• Community volunteering: company-organized volunteer activities, sometimes while an employee receives pay for pro-bono work on behalf of a non-profit organization
• Socially-responsible business practices: ethically produced products that appeal to a customer segment.
• Corporate social marketing: Company-funded behaviour-change campaigns, Company-funded advocacy campaigns, donations to charity based on product sales.

Why there is need to review the CSR?

• Declining number: There was also a decline in the number of companies participating in CSR 25,103 in FY2019 to 17,007 in FY2021.
• Flaw in the law: If a company spends an amount in excess of the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years. Ideally, companies should have been shown courage to spend more than this.
• Own trusts: many private companies have registered their own foundations/trusts to which they transfer the statutory CSR budgets for utilisation. It is unclear if this is allowed under the Companies Act/CSR rules.
• Geographical bias: The first proviso to Section 135(5) of the Act is that the company should give preference to local areas/areas around it where it operates. This is logical. However, a report by Ashoka University’s Centre for Social Impact and Philanthropy says that 54% of CSR companies are concentrated in Maharashtra, Tamil Nadu, Karnataka, and Gujarat(receiving the largest CSR spends) while populous Uttar Pradesh and Madhya Pradesh receive little.
• Spending on environment: Item (iv) of Schedule VII of the Act deals with broader environmental issues to create a countervailing effect. However, an analysis of CSR spending (2014-18)reveals that while most CSR spending is in education (37%) and health and sanitation (29%), only 9% was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several States
• Incomplete information: The Standing Committee on Finance had observed that the information regarding CSR spending by companies is insufficient and difficult to access. As per the ‘Technical Guide on Accounting’ issued by the Institute of Chartered Accountants of India, a company is only required to mention its CSR spends, non-spend, under-spend, and overspend in the ‘Notes to Accounts’.

What are the suggestions to improve the mechanism of CSR?

• Centralized platform: There is a need to curate a national level platform centralised by the MCA where all States could list their potential CSR admissible projects so that companies can assess where their CSR funds would be most impactful across India with, of course, preferential treatment to areas where they operate.
• India Investment Grid: Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for such efforts. This model would be very useful for supporting deserving projects in the 112aspirational districts and projects identified by MPs under the Government’s Sansad AdarshGram Yojana.
• Increase environment spending: Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environment regeneration.
• Public participation: All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
• Transparency: Recommendations by the high-level committee in 2018 should be incorporated in the current CSR framework to improve the existing monitoring and evaluation regime. These include strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies, etc.; bringing CSR within the purview of statutory financial audit with details of CSR expenditure included in the financial statement of a company, and mandatory independent third party impact assessment audits.
• Monitoring by government: The MCA and the line departments need to exercise greater direct monitoring and supervision over CSR spend by companies through the line ministries (for public sector undertakings) and other industry associations(for non-public units) instead of merely hosting all information on the Ministry’s website.

Conclusion

• Corporate social responsibility is an effective tool to address the social and income inequality. Present legal arrangements are toothless and based on voluntary actions. For an effective change CSR spending should be made more transparent and accountable.

Mains Question.

Q.Present arrangement of CSR is not yielding the desired result. Enlist the current weakness in CSR spending Suggest the changes needed for efficient implantation of CSR.

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