CIRCUIT BREAKER. Welfarism at gunpoint?

Does the government’s new ad campaign urging you to voluntarily give up your LPG subsidy give you a warm and fuzzy feeling? If it doesn’t, it should. This is the first time an Indian government is actually seeking your permission before appropriating your money to fund one of its welfare initiatives.

This is not about the taxes that you pay to the exchequer. We are talking about a battery of additional costs you bear as a consumer in India, due to the private sector’s invisible ‘social obligations’.

You may not have caught on to it. But there is hardly any sector in India in which the government or regulator hasn’t intervened to impose some sort of social mandate.

For commercial banks, there are targets to be met on priority sector lending. Not only do all banks have to make sure that 40 per cent of their net lending flows to specified priority sectors, this target is also carved out into sub-limits such as 18 per cent for agriculture, 7.5 per cent for MSMEs, 10 per cent for advances to weaker sections and so on. Compliance is monitored on a quarterly basis by the RBI; banks which default are hauled up.

In the general insurance sector, to counter the high accident rates, players are required to meet compulsory quotas on third party liability cover on motor vehicles.

In the agri-input sector, firms making fertiliser and seeds are forced to sell their output at below-market prices so that farmers can get input subsidies. Yes, the fertiliser subsidy is given by the Centre, but it can take a long time coming.

But such social obligations are not confined to the so-called essential goods alone. Telecom companies are required to pay 5 per cent of their gross revenues every year to the Department of Telecom towards the Universal Service Obligation Fund, intended to deliver mobile and internet connectivity to the rural hinterland. Though this fund has accumulated over ₹50,000 crore, rural internet access continues to be in a sorry state.

Mutual fund houses that manage to get in investors from outside the top 15 cities (B-15 cities) are allowed to charge higher fees (30 basis points extra). They are also required to spend 2 basis points out of every scheme on investor education.

On top of all this, there is, of course, the blanket CSR rule introduced by the new Companies Act. This rule requires all companies of a certain size to spend 2 per cent of their average annual net profits on poverty alleviation, promoting education, women’s empowerment or other such approved causes.

But wait, what is wrong in the government asking corporate fat cats to do some good on the side while they’re raking in profits from commercial activities? Good question. There are three main practical problems that arise from the government ‘outsourcing’ its basic welfare role to the corporate sector.

For one, it is not the companies, but their consumers who ultimately end up paying for these enforced social endeavours. In some sectors, the impact on the consumer is quite visible and direct. In the mutual fund industry, for instance, the B-15 rule has led to a sharp escalation in fund fees, reducing effective investor returns.

In others, the impact is indirect, but significant nevertheless. Take the case of banking, where the lower-cost loans or asset quality risks that a bank takes on due to priority sector loans, are bound to be recovered through higher lending rates or lower deposit rates that hurt retail savers.

The second problem with such enforced philanthropy is that it can add enormously to the complexity of doing business and prompt firms to use jugaad solutions to meet the quotas. When this happens, not only does the social objective fall by the wayside, the regulator gets burdened with unnecessary workload to try and ensure compliance.

The SEBI chief recently hauled up mutual fund houses for running spurious seminars for their distributors under the guise of ‘investor awareness’ camps.

The RBI has for long been engaged in a skirmish with private sector banks, on whether their indirect lending through securitisation can qualify as a ‘priority sector’ loans.

Enforced of social obligations can lead to other market distortions too. Take the compulsory third party insurance quota for general insurers, which has spawned an entire industry of ambulance-chasers, saddling the players with escalating losses. IRDA’s solution has been to step in with convoluted ‘third party motor pool’ mechanism where profitable players contribute to the losses of other players.

With the new corporate CSR initiative too, there is the risk that unscrupulous promoters could use this route to siphon off shareholder profits to ‘trusts’ controlled by friends and relatives.

To guard against this, companies are required to constitute elaborate CSR committees and hire external social auditors to certify to the genuineness of these efforts. Wouldn’t this time be better spent on supervising the company’s core activities and governance structure?

These instances drive home the point that abrogating the government’s welfare work to private enterprises simply doesn’t work. Instead, it would be far better to ask the private sector to lend its expertise voluntarily and on commercial terms, to governmental welfare projects. Recent Modi government initiatives such as the Jan Suraksha Yojana rely on this model.

More such experiments may be essential to ensure that Indian consumers aren’t forced to do good at gunpoint.

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