To investigate the hypothesis that CSR is an intermediary institution arising from processes of functional differentiation, these processes must be identified. This chapter focuses on the functional differentiation of the Indian economic system. It describes how monetization and the development of markets and incorporated firms under British colonial rule created the conditions for a modern capitalist economy to develop. As the chapter shows, this process of functional differentiation remained partial. A significant part of the economy remained ‘embedded’ in functionally undifferentiated social structures, in particular with regard to the rural agrarian economy. And economic transactions and non-economic spheres of society remained enmeshed within the core of India's modern capitalism.

In particular, large Indian industrial companies were not driven by the sole axiom of profit maximization, but by a blend of economic and non-economic logics. After independence, the adoption of state-based economic development policies triggered significant structural reconfigurations in India's political economy. However, while the functional differentiation of the economy progressed under this new setting, extensive regulation and political interventions restricted the role of profit-driven calculations in the economy.

In the following pages, the institutions and processes underlying this partial functional differentiation of India's corporate capitalism are analysed in four domains of business–society interplays: corporate governance, labour relations, relations between companies and politics, and companies’ non-business activities that are formally directed towards the common good, in particular corporate philanthropy.

Economic relations in pre-modern India

The formation of a functionally differentiated economic system in India is tightly connected with European colonialism, which asserted its power on the subcontinent from the mid-eighteenth century onwards. At that time, following the death of Emperor Aurangzeb in 1707, the Mughal Empire had already disintegrated into several hundreds of kingdoms and local chieftains. These feudal political units were more or less bounded into an unstable and war-prone system of allegiances and alliances, which was dominated by a few groups such as the Marathas, the Rajputs, the Bundelas, the Jats, and the Sikhs.