Small Enterprises and Corporate Social Responsibility

India has one of the largest populations of small businesses anywhere in the world. Yet here is the puzzle: almost all of them stay small. Despite decades of government programmes, subsidies, and policy support, the overwhelming majority of Indian enterprises never graduate from micro to medium or large. At the same time, India introduced one of the world’s most ambitious mandates for corporate giving, requiring large companies to spend a fixed share of their profits on social causes. This topic explores both sides of that equation: why small firms refuse to grow, and whether forcing big companies to give back actually works.

The Size Puzzle: Why Indian Firms Stay Tiny

The numbers paint a striking picture. About 95% of all enterprises in India fall in the micro (very small) category, and only around 0.2% qualify as medium. This is not a new problem. The sector has received government support for decades, yet most firms remain small, unregistered, and informal. Instead of growing over time, many actually shrink rather than expand their operations.

This matters because small firms, on their own, cannot generate the kind of large-scale employment, innovation, or export capacity that India needs. The question is: what holds them back?

Six Barriers That Keep Firms Small

Several deep-rooted structural problems discourage firms from growing:

• Loss of government perks : The moment a business moves from the micro or small category into medium or large, it loses almost all government benefits. Subsidies, tax breaks, priority lending, and preferential treatment vanish the instant the firm crosses the threshold. This creates a perverse incentive: staying small is more profitable than growing.
• Compliance costs jump sharply : The money, time, and labour needed to comply with regulations rise dramatically once a firm enters the medium or large category. What was manageable paperwork at a small scale becomes a heavy administrative burden.
• Policy design favours starting, not growing : Most government schemes, like the Deendayal Upadhyay Antyodaya Yojana, focus on helping people launch businesses. Very few schemes support the next step: scaling those businesses up. The policy ecosystem encourages entry but not growth.
• Strict labour laws kick in : Firms that grow beyond a certain size come under rigid labour regulations that are expensive and difficult to comply with. Many business owners deliberately keep their workforce below the threshold to avoid triggering these laws.
• Weak marketing and branding capacity : Most small firms have good business ideas and solid products but lack the marketing strategy, branding knowledge, and distribution networks needed to compete at a larger scale. Without these capabilities, scaling up feels like a losing bet.
• Difficult business environment : India’s rank of 132 out of 173 on the Ease of Doing Business index reflected how challenging it was to expand a business. Red tape, procedural delays, and regulatory complexity made the cost of growth higher than the potential reward.

A Path Forward: Policies to Help Small Firms Grow

Fixing the small enterprise problem requires action across multiple fronts:

• Specialised finance : Small firms need banks and financial institutions that understand their specific needs. The launch of Payments Banks, MUDRA Bank (Micro Units Development and Refinance Agency), and Small Finance Banks (SFBs) was designed to fill this gap. These institutions cater specifically to micro and small businesses that traditional commercial banks often overlook.
• Labour reform through self-certification : Allowing firms to self-certify (declare their own compliance with labour laws) instead of facing repeated inspections helps reduce bureaucratic harassment and the exploitation that small firms routinely suffer. Alongside this, the apprenticeship programme provides a way for firms that cannot afford high wages to access technically skilled workers through structured training arrangements.
• A collaboration hub for knowledge sharing : Setting up a dedicated hub, on the lines of the Start-up India Hub, where governments, consultants, and R&D institutions work together would give small firms access to best practices, better technology, and expert advice through the exchange of ideas.
• Innovation incentives : Awards for innovation, as provided under the Atal Innovation Mission (AIM), push small firms to invest in research and development. When firms innovate, they become more competitive and better positioned to grow beyond their current size.
• A manufacturing push : The Make in India programme was designed to promote manufacturing with a specific focus on the SME sector. A dedicated e-commerce portal for small enterprises would also give them wider market coverage beyond their immediate geography.
• Skill development : The majority of workers in this segment are unskilled or semi-skilled. Building their capabilities through programmes like the Skill India Mission can be a game-changer, both for the workers themselves and for the firms that employ them.

SMEs are powerful tools for poverty alleviation and for empowering marginalised sections of society. Reforming the ecosystem so that these firms can actually grow is not just good economics; it is essential for inclusive development.

Corporate Social Responsibility: When Companies Give Back

Shifting from small firms to large ones, the question changes: what obligations do big companies have toward the society they operate in?

Corporate Social Responsibility (CSR) refers to social activities that companies undertake to bring about a positive change in the environment and society around them. The idea is straightforward: companies benefit enormously from the infrastructure, workforce, and markets that society provides, so they should contribute something back beyond just profits and taxes.

India’s Mandatory CSR Framework

In 2013, India took a step that very few countries have attempted. The Companies Act was amended to make CSR spending mandatory for companies that met any one of three financial thresholds:

• Net worth of at least Rs. 500 crore, OR
• Turnover of at least Rs. 1,000 crore, OR
• Net profit of at least Rs. 5 crore

Any company crossing even one of these benchmarks was required to spend 2% of its average net profit over the preceding three years on CSR activities.

The potential impact is significant. With thousands of companies falling above these thresholds, the total CSR pool each year runs into thousands of crores. If directed well, this money could make a real difference on social and environmental issues.

Where CSR Falls Short: Ground-Level Problems

The reality of CSR implementation has been less impressive than the vision:

• Incomplete compliance : Not all qualifying companies actually make their full CSR contribution. Some simply ignore the requirement.
• Tick-box approach : Many companies allocate their CSR budget, pick a charity, NGO, or government project to fund, and move on. A large portion of this money ends up in general funds like the PM’s Relief Fund rather than being directed toward specific, measurable social outcomes.
• Lack of in-house expertise : Identifying the right projects and spending money effectively requires skills that most companies do not have. Without dedicated CSR teams, the spending becomes unfocused.
• The 2% ceiling effect : According to accountancy firm KPMG, some companies that were voluntarily giving more than 2% before the mandate actually scaled back their spending to match the legal minimum. The law set a floor, but it also inadvertently created a ceiling.
• Sectoral imbalance : Most CSR funding flows into education and healthcare, while equally pressing areas like hunger and nutrition receive far less attention.
• Regional inequality : CSR spending is geographically uneven, with some states receiving far more attention than others.
• Circular donations : In some cases, companies donate to charities and then receive business orders from those same charities. The money flows back to the company in disguise, turning CSR into a business transaction rather than a genuine social contribution.

The 2019 Amendment: Tougher Rules, Sharper Debate

The Companies Amendment Act 2019 tightened the CSR framework with three key changes:

• Unspent money goes to the PM’s Relief Fund : If a company does not spend its full CSR allocation, the remaining amount must be transferred to the PM’s Relief Fund.
• Criminal penalties for non-compliance : For the first time, failing to meet CSR obligations could attract not just fines but also imprisonment. This was a dramatic escalation from the earlier approach.
• Central government rule-making powers : The Centre was given authority to frame detailed rules governing how CSR should be implemented.

Why Critics Pushed Back Against the Amendment

The 2019 changes sparked strong criticism from multiple angles:

• Discouraging genuine engagement : When non-compliance carries the threat of jail time, companies will focus on simply moving money to avoid penalties rather than investing time and thought into meaningful CSR activities. The amendment risks turning CSR into a compliance exercise rather than a social one.
• Penalising corporates for government failures : Social welfare, poverty reduction, and environmental protection are fundamentally state responsibilities. Forcing companies to do this work, and punishing them when they fall short, amounts to shifting the government’s burden onto the private sector.
• Bureaucratic interference : Giving the Central Government broad rule-making powers opens the door to greater bureaucratic discretion, creating more opportunities for red tape, delays, and interference in how companies run their CSR programmes.