Wednesday, December 27, 2006

Private virtue, public vice December 17, 2006

In 1989, a much admired and powerful lady who was raising funds for her NGO, asked me what I did for a living. I told her that I worked for a company. “Oh, but what do you really do—I mean for society?” she said. I became defensive and began to recount our philanthropic activities in the districts where our factories were located. ‘Is that all!’ thundered the eminence grise. I was hurt by her dismissive attitude, and recently remembered this incident when Sonia Gandhi reminded fawning businessmen in the same imperious tone about their corporate social responsibility (CSR). CSR has become a buzz word these days, and one newspaper even has a CSR reporter. But why is it that something so worthy and high-minded leaves me uneasy? I think it is because companies have no business engaging in philanthropy and businessmen should value more what they do.

“The social responsibility of business is to make a profit,” famously said Milton Friedman, the Nobel Prize winner who died last month. He explained that in making a profit a company creates thousands of jobs, both directly and indirectly through suppliers, distributors and retailers. It imparts valuable skills to its employees. It pays crores in taxes. It improves the lives of millions of satisfied customers with its products and services. This is an enormous service to society. If some shareholders get rich on the way, so what? Companies should focus single-mindedly on their competence, providing goods and services better than their competitors, and not get distracted by extraneous activity. A company’s social responsibility is to make profits legally, not to harm nature, and uphold the highest standards of governance.

Yet, I intensely admire individuals who engage in philanthropy. I was deeply moved by Warren Buffet’s selfless gesture when he gave away all his wealth to Bill Gates’ foundation. I agree with Andrew Carnegie that to die rich is to die disgraced. If it is immoral to spend the company’s money, it is businessmen’s duty to spend their own money on charity (from after-tax profits). It is a theft against Reliance’s shareholders if Reliance Industries builds a hospital, but it is Mukesh Ambani’s duty to do so. Hence, Tatas do their charity work through their trusts, from dividends received from Tata companies. CSR should thus be relabelled ISR, Individual Social Responsibility, and each of us ought to feel the need to give back.

This is fine in theory, but the reality is that few Indians feel the philanthropic urge, which emerges it seems at a later stage of capitalism. In order that the few sources of present funding don’t dry up, we cannot allow corporate funding to cease. We can ensure its legitimacy if companies fix rigorous criteria for giving. Corporate philanthropy must enhance company profits, strengthening the brand or promoting goodwill in the community. For example, when Citibank funds a college to train micro-finance professionals, it enhances its brand.

Glib talk about CSR reflects our prejudice against businessmen. Adam Smith wrote in his Theory of Moral Sentiments that he didn’t much care for those who spent their lives chasing “baubles and trinkets”, but he was “immensely grateful that such creatures abounded for the whole of civilisation, and the welfare of all societies depended on people’s desire and ability to accumulate unneeded capital and show off their wealth. Indeed, it …first prompted men to cultivate the ground, to build houses, to found cities and commonwealths and to invent all the sciences and arts which ennoble and embellish human life.”

Thali to plough December 3, 2006

Last week’s Mittal-Walmart deal is symbolic of an India which is changing quietly. Indians now consume less cereals and more milk, vegetables and fruit. In the past 20 years, per capita consumption of vegetables has trebled in villages and doubled in towns; milk and milk products have doubled in urban and rural areas. The share of high value foods has risen in India’s agricultural output from 32 to 44 percent from 1983 to 2003. Cereal consumption has declined even among those below the poverty line, according to the economist, Ashok Gulati’s analysis.

While we have been agonising over cotton farmers’ suicides, India has become silently the world’s second largest cotton producer, crossing the United States. NCDEX has become the world’s third largest agro-commodity exchange. The cotton revolution was made possible by the much reviled Bt cotton seed, which protects against bollworm, the dreaded pest which used to destroy half the crop. Misguided activists delayed its entry into India by 5 years.

The farm, meanwhile, has been shrinking. It is now 1.4 hectares--so small that it’s difficult to make a living. The only viable farming on small holdings is vegetables, poultry, and high value crops. But growing these is riskier. Hence, contract farming is a good idea. It transfers the risk from farmers to companies. Farmers lease their land; get employment; and a guaranteed return. The contracting company invests in better seeds, scientific practices, and raises productivity. Studies show that contracted farmers earn 30 to 100 percent higher. Punjab Agro, the government’s mediating company, has 160,000 acres under contract with 25,000 farmers. Some worry that marginal farmers will be left out, but curiously small holdings can be highly competitive because the family provides free labour.

In the long run, however, people will have to leave the farm. Too many Indians (57%) are trying to eke out a living from agriculture. Peasants have faced this dilemma in all societies: Is it better to starve on an unviable plot or become the urban proletariat in Marx’s words? Everywhere they have chosen the second alternative. This is why I favour the SEZs. With all their flaws, SEZs could create millions of jobs for unemployed farm youth in construction and other non-farm areas. I disagree with Sonia Gandhi--farmers should sell their unviable plots to SEZs in exchange for urban jobs. SEZs don’t need tax breaks; they need less red tape. They could be the tipping point for our industrial revolution (unless bureaucrats again kill SEZs at birth).

President Hu’s recent visit reminded us that China’s reforms began by privatising agriculture in 1978, and delivered even better results than our green revolution. Not only did agriculture boom, but their household responsibility system generated spectacular growth of labour intensive manufacturing in rural areas. Our green revolution achieved food self-sufficiency but didn’t make manufacturing linkages because of the Licence Raj. Unlike our first green revolution, the private sector will drive changes in the rural economy this time. This is the significance of the Mittal-Walmart deal. Politicians, farmers, activists don’t realise it, but Dalal Steet does. Hence, three mutual funds, primarily with rural portfolios, began in 2006. They comprehend that India could soon be feeding the Middle East.