What will it mean for India's non-profits?

We live in a world where frugality is a virtue. Spending is superficial, base, immoral even. And nowhere is this association more pronounced than in the non-profit sector. The rules that allow for-profit companies to thrive do not apply to social causes. Rather, a different rule book exists for non-profits, one that can be summarised as "Thou shalt not scale revenue." With an almost global scorn for high overhead costs and advertising, the global economy has more-or-less universally decided to crack down heavier on companies professing to do good than on companies expressing no desire to uplift those involved. Bizarre? I would think so.

Just this week, the Lok Sabha passed the Foreign Contribution (Regulation) Amendment Bill, 2020. The Bill assumes that those from India's 3.4 million NGOs who receive foreign aid are guilty till they can prove their innocence. Meaning the burden of proof is reversed, lying with the NGO to establish their pure intentions and clean operations.

The timing is especially unfortunate. Between 2015 and 2018, Indian NGOs lost 40 per cent foreign funding due to previous policy restrictions. On top of this blow, from 2019 Indian NGOs now must also battle a co-Covid world. What the non-profit sector needs now is more global collaboration, not less. Developing economies require increasing support of entities with capital, since already-vulnerable populations have been most affected by the lockdown. And the non-profit sector is of course not restricted to the Covid response. Scientific research, livelihood efforts, and research will slow down in general. The purpose of a State is to facilitate mutually beneficial global associations, not slow them down. Comparable to (and perhaps more urgent than) the 'ease of doing business' metric, 'ease of facilitating social change' takes a hit with this Bill.

Most concerning is that the Bill greatly curbs NGOs' overhead spending. Previously, the cap on overhead costs was 50 per cent of total foreign donations received; the revised limit is now 20 per cent. Why this switch? Why the need to keep overhead low for charities and ensure their frugality? Dan Pallotta explained the answer brilliantly in his 2013 lecture that would still hold water if delivered today.

The context behind this perspective is unfortunately another episode of white philosophical history that found its way into global law. The Puritans immigrated to America from England in the 17th century with two opposing needs. The first, to make truckloads of money; the second, to cleanse their Christian souls of this greed. The solution? To be aggressively capitalist in business but then give to charity without the expectation of profit. Business and charity were thus kept mutually exclusive, because one is the sin and the other is the repentance. Thus came about the split between the for-profit and non-profit sectors, both expected to operate on different moral goals.

Fast forward to this century and everyone even outside the Puritans consider making money off charity a crime. Pallota wonderfully illustrates the absurdity of our moral system: "You wanna make $50 million selling violent video games to kids, go for it! We'll put you on the cover of Wired magazine. But if you want to make $500,000 trying to cure kids of malaria and you're considered a parasite yourself."

Thus, the social sector faces a host of additional scrutinizing mechanisms to ensure its non-profit status. And this is where the issue of overhead comes in. When it comes to capital devoted to charity, it gives the average person shivers to think that a large chunk of those resources are being spent in administration alone. It makes the donor wince to think their contributions aren't directly reaching the food bowls of the hungry child they saw on the poster, but rather to sustain the graphic designers who made the poster, or the copywriter who emailed it to them, or the janitor who cleans their office.

Capping overhead is a way of reaffirming to those working towards social causes that "thou shalt not be greedy". Meanwhile, the for-profit sector is praised for scale, it's success measured in the 'size of the pie' i.e their bulk of revenue. The only way to increase the size of a pie is to invest. Invest in advertising, in fundraising, in customer service -- all of which comes under the demonised term 'overhead'. Thus, the new rules effectively limit non-profits abilities to increase the amount of resources available to tackle the causes they were created to resolve.

The most immediate outcome will be a decrease in the market salary for non-profit employees. Working in the social sector comes with great scrutiny. There is pressure on applicants looking for jobs in non-profits not to have an expectation of a life as comfortable as that of their for-profit peers. There is the understanding that non-profit employees must make personal sacrifices to sustain their causes. After all, the cause is bigger than the individual.

Capping overheads will immediately lead to cost-cutting measures that will negatively affect those working tirelessly for a better, more equitable nation. The wage gap between professionals in the non-profit and for-profit sectors has always been shamefully massive. This move will only disincentive the youth from devoting themselves full-time to the causes they feel strongly about. Rather, they will find it more suitable to their comforts to earn in the corporate world and then donate to the non-profit sector. Given the increasing unemployment rates in the country, India would be better off encouraging investment in our non-profit employees rather than curbing it.

As development sector veteran Venkatesh Nayak points out, the ultimate consequence will be that operational NGOs will be restricted in size. Instead of a well-established and far-reaching NGO infrastructure, India will see a fractured network with many small and disconnected NGOs working towards the same cause. Because regardless of the amount of funding, no operation can scale up if it can't use these funds to attract and harness more human power. Given all these factors, it is a mystery why NGOs are demonised for high overheads. At the end of the day, if this overhead brings in more revenue, increases the size of the pie, and brings in more resources to tackle the issue, then why do we still demand that NGOs remain frugal? It is counterproductive to securing equity for those left behind in Indian development.

What also is concerning is that it is unlikely governments in the years to come will reverse the established restrictions. Director of the Centre for Social Impact and Philanthropy Ingrid Srinath points out that the trend with the FCRA has been to crack down heavier and heavier on non-profits. Thus, the social sector finds itself governed with entirely restrictive policies for the foreseeable future. It is unfortunate that the FCRA Bill furthers this trend. I believe it is time for lawmakers around the world to re-evaluate whether and how to allow the non-profit sector an opportunity to operate on a level playing field with the corporate world so as to increase the size of their pie.

(The author is founder of Upsurge Global & Senior Advisor, Telangana State Innovation Cell )