A new social contract for India

Written by Nirvikar Singh | Updated: May 31 2007, 05:30am hrs
On May 24, PM Manmohan Singh delivered a landmark speech at the Annual Summit of the CII in New Delhi. He laid out a Ten Point Social Charter as a basis for a government-industry partnership for inclusive growth. The need for a new social contract hits the nail on the head. Without it, India may go the way of much of Latin America, with a rich elite, but with the full potential of the nation and its people unrealised.

To analyse the PMs Ten Points, it is useful to frame them more broadly: the PM was using the occasion of addressing captains of industry to ask them to step up and make a difference. However, industry and government are both manifestations of a spectrum of institutions of collective action, including formal civil society organisations and informal social networks. For decades, government policies strangled civil society as well as business, and changing that will require careful attention to all such institutions. On to the ten points.

One: have healthy respect for your workers and invest in their welfare. The PM seems to imply that an attitudinal change must precede labour law reform, but the key to change may be worker training. There is no substitute for possession of valuable skills to engender respect in the workplace. How the skills are provided is part of the social contract that needs revision. If firms are to expand their role here, they should be given real policy incentives and opportunities to do so.

Two: corporate social responsibility should be defined within the framework of a corporate philosophy which factors the needs of the community and the regions in which a corporate entity functions. If this is the case, why should the government create SEZs, where firms are insulated from local communities It would be better to improve local government finances and functioning, to give communities stronger foundations, and allow them to organically attract businesses.

Three: industry must be proactive in offering employment to the less privileged, at all levels of the job ladder. The key to making this work again has to be through education and training, as well as non-discrimination policies. Corporate India cannot dent discrimination through isolated affirmative action.

The solution lies not in corporate India becoming more moral or altruistic, but in pervasive institutional reforms
Four: resist excessive remuneration to promoters and senior executives and discourage conspicuous consumption. Practical policies are needed if this is to work. Controlling executive pay and perks requires more effective corporate governance frameworks, which the government has to help build. Discouraging conspicuous consumption requires calibration of the tax system, though simplicity should be preserved above all else.

Five: invest in people and in their skills. The background here is that the government has crowded out private efforts by restricting entry or favouring political cronies in managing civil society efforts in education and training. The government must create the institutional framework for corporate India to invest massively here, including liberalisation of restrictions and transparent financial support.

Six: desist from non-competitive behaviour. This is totally an area where the government has to step up. Corporations cannot be expected to be angelic. Indias competition policies and their implementation still need modernisation.

Seven: invest in environment-friendly technologies. Again, the key to making this happen is to work through the tax code. But it may be better to encourage innovation of all sorts, combined with enforceable standards for emissions and fuel efficiency. The government must develop a broad institutional framework, not try to pick winners.

Eight: promote enterprise and innovation, within firms and outside. Ditto.

Nine: fight corruption at all levels. Yes, but the government has to take the lead in increasing transparency and self-monitoring, in reducing needless controls that create corruption opportunities, and improving its own selection and training of employees, and organisational culture and incentives. The media and civil society should be allowed more leeway.

Ten: promote socially responsible media and finance socially responsible advertising. This should be the lowest priority for corporate India. It is for citizens to value and demand socially responsible media. Corporate India can create good workers. The government needs to create good citizens, not reduce them to clients of patronage.

India desperately needs a new social contract. The PM has done a wonderful job of bringing the issues to attention. But the solution lies not in corporate India becoming more moral or altruistic, but in pervasive institutional reforms. Three things must happen. First, the government must improve its own structures and functioning. Second, it must provide incentives for business to act in ways that serve a new social contractthis includes legal and regulatory reforms. Doing business in India is unnecessarily costly and difficult. Third, civil society is the key third player in developing a new social contract. The government must stop manipulating civil society organisations, and let them act as a check on corporate excess as well as government failure.

Nirvikar Singh is professor of Economics at the University of California, Santa Cruz