THE BLOG

Here's How We Can Make Social Impact Investing Really Take Off In India

14/10/2016 2:36 PM IST | Updated 17/10/2016 8:24 AM IST
NEW! HIGHLIGHT AND SHARE
Highlight text to share via Facebook and Twitter
Paper Boat London

In the last decade, India has witnessed mixed periods of economic growth, with the country recently retaining its tag of being the fastest growing economy in the world. However, this neo-liberal approach of achieving GDP growth has come at the cost of a rising income inequality. With over 58% of the population living on less than $3.10 per day, the gap between the top and the bottom of the pyramid has considerably widened.

India ranks 102 among 135 nations on the Social Progress Index, highlighting the huge funding gap that threatens to slow down the development of social infrastructure.

At the heart of India's response to these challenges is the work of Social Enterprises, bonafide NGOs, and government programs. As per the Economic Survey 2015-16, social expenditure forms 6.7% of GDP; however these initiatives have not been able to deliver meaningful impact. India still ranks 102 among 135 nations on the Social Progress Index, highlighting the huge funding gap that threatens to slow down the development of social infrastructure.

In recent years, impact investing has become a prominent financial tool at the global stage to channelize private capital to generate measurable positive social and environmental benefits in addition to financial returns. In India, the industry is witnessing growth and a cumulative $2 billion has been invested by around 50+ funds in over 300 social enterprises.

Globally, the industry has witnessed tremendous growth with assets under management estimated to be around $60 billion. There are certain policy changes required to make impact investing a success in India, and we can learn from the successful global initiatives to accentuate its development.

1. Promoting social finance

Global regulators are taking the impetus to promote social finance. In the United States, the Social Impact Bond Act has been introduced, requiring the Secretary of the Treasury to seek proposals from states or local governments for social impact bond projects which produce measurable and clearly defined outcomes that result in social benefit.

In the UK, the Social Investment Tax Relief (SITR) has been a key driver in attracting commercial capital to the Impact landscape. SITR enables individuals making an eligible investment to deduct 30% of the cost of their income tax liability, either for the tax year in which the investment is made or the previous tax year. Such policy initiatives in India could trigger the initial momentum required to catalyze the development of the market.

2. Bridging the gap between early stage development and venture financing

Global efforts have been made to bridge the gap between early stage development and venture financing, eventually leading to impact investment. In the UK, the Cabinet Office launched the £10 million Investment and Contract Readiness Fund (ICRF) in 2012 to build social enterprises' capacity through business support and to help them become investable and scalable. Capacity building, as this example suggests, focuses on the demand for capital rather than the supply. By building more effective demand for investment, capacity building can open the door to a wider range of investors and types of investments.

3. Measurement and evaluation standards

Global policy makers have felt the need to establish a standard for measurement and evaluation of impact investing. In the UK, Big Society Capital launched an outcomes matrix to help social investment financial intermediaries and social enterprises plan, measure and learn about the outcomes they deliver.

If India can get this right we stand a chance of realizing the dream of one day becoming an inclusive society.

On the same lines, India could launch its own knowledge and resource centre to provide information and set standards for the impact investing market. Standardization in the marketplace could build credibility and incentivize the funders to help social sector organizations.

4. Expanding the scope of CSR funds

If the scope of Corporate Social Responsibility (CSR) funds is expanded to include investments in Social Venture Funds (SVFs), it could act as a stepping stone to build investors' confidence in the impact marketplace. The current mandate of 2% CSR allocation distinguishes India from the global sustainability ecosystem, and could be a key beneficial factor in developing India as a major impact investing hub.

5. Establishing a National Social Entrepreneurship Institute (NSIN)

Establishing a National Social Entrepreneurship Institute (NSIN) to connect social incubators to collaborators, mentors and partners, could provide social entrepreneurs with cutting-edge tools, learning resources and much needed mentorship to commercialize their business models. A case in point is the Social Entrepreneurship Network (SEN) of the European Union, comprising managing authorities of the European Social Fund and social enterprise organizations from nine European Union countries who are devoted to improving the way the EU's structural funds are used to promote social enterprises.

6. Launching a Social-Startup platform

India could launch a Social-Startup platform along the lines of Tech4Startup, Marketing4Startup and Finance4Startup, which have been undertaken by the UK. The Social-Startup platform will enable budding social entrepreneurs to showcase their business model and connect with policymakers and VCs. Such a platform could be pivotal in creating demand for the impact investing market in the form of robust investible social enterprises.

***

If India can get this right we stand a chance of realizing the dream of one day becoming an inclusive society. Social investments give us an opportunity to not only direct the flow of capital towards serving the needs of economically weaker communities but also to connect two polarized worlds. Through impact investments, rich socio-economic groups and corporations will not only provide the funding for the betterment of these groups but also foster engagement with communities from which they were previously detached.

We are standing today at the dawn of the new opportunity, and it is time for us to seize the moment to make this change a reality. It is a daunting task that cannot be done by policymakers alone. When all the major stakeholders—in the private, public and social sectors—commit together to the cause, we can make it happen soon!

More On This Topic