Wednesday, December 3, 2008

Promoting ‘Inclusive Capitalism’ in India

The latest issue of IndiaKnowledge@Wharton carries an article on the concept of ‘inclusive capitalism’ and its effect on India. It also considers prospects for the future. The article discusses some examples where inclusive capitalism has been implemented. It begins with a study of Fabindia Overseas, and then moves on to discuss the concept in detail:

“The venture is one of several recent examples of “inclusive capitalism”, a profit-driven business model with its roots in the cooperative movement. The premise behind inclusive capitalism is that India can’t succeed if it leaves its people behind. But while Fabindia and other high-profile success stories indicate that businesses founded on this model can be a great benefit to those who participate in them and to society at large, some experts wonder how wide an impact inclusive capitalism can have, and how willing corporate India will be to change its traditional views on wealth ownership in the absence of any regulatory reform.”

If regulatory reforms don’t take place, “corporations will be forced to do inclusive capitalism. Otherwise, there will be social unrest. The issue then will be about the level of commitment of the corporates given that they always have to walk the thin line between their responsibilities toward the shareholders and the society at large.

In order for inclusive capitalism to work, corporations “must start to realize that they are part of a large society and part of a complex network and that all the wealth that they produce is not their own” … “We need to move away from the Anglo-Saxon model and start looking at other models like the Scandinavian and German models. The first step toward this is to generate public discourse and debate. At the moment, there is only one hegemonic discourse, and that is we must be like America. But America has failed. So, obviously, that model is not working.

“It’s a win-win for all stakeholders. I believe that the government should lead the way through policies that trigger inclusive capitalism. The private sector has the will and the resources; it only needs to be shown the way.”
The entire discussion seems to suggest the need for regulatory reforms before ‘inclusive capitalism’ can be introduced in a meaningful way. However, it is not clear what the nature of such reforms ought to be. The existing regulatory regime seems perfectly conducive for inclusive capitalism. For example, there already exists a vibrant cooperative movement in India, with Amul and Lijjat being the prime success stories. Even from a company law standpoint, the Companies Act, 1956 does contain the concept of ‘producer companies’, which is meant to be a form of inclusive capitalism. Producer companies are expected to continue after the company law reforms as well; they find a place in the Companies Bill, 2008.

Even from a theoretical standpoint, corporate law has been shaped by India’s socialistic origins. It therefore follows a stakeholder-centric approach rather than a mere shareholder-centric approach. For instance, company law provides forms of protection to constituencies other than shareholders, such as creditors, employees and even the overarching constituency of “public interest”. It is therefore acceptable for companies to cater to the interests of stakeholders, a term wider than just shareholders. It is quite often the case that when stakeholder interest is pursued, shareholder interest is preserved (and even enhanced) indirectly.

Several companies have been successfully adopting the approach of pursuing a stakeholder-centric approach while at the same time pursuing profits for their shareholders. Apart from instances cited by IndiaKnowledge@Wharton, the ITC e-choupal has been prized as one of the successes for other companies to emulate. The regulatory basis does exist for inclusive capitalism (and there does not appear to be any need for major change). But, what is required is for more companies to adopt the stakeholder philosophy. While there are several examples in India, it may be time that this philosophy permeates into the Indian corporate ecosystem.

On this and related topics, a suggested reading is C.K. Prahlad’s The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.

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