Firms must make the moral case for markets: Capitalism, not handouts, has lifted millions out of poverty.

Is profit once again a "dirty word" in India? The country's first prime minister, the Fabian socialist Jawaharlal Nehru, infamously dismissed private gain in those terms. Now a bill awaiting passage in India's Parliament suggests the country's government still clings to this qualmish view of business.

The bill in question would push companies with revenues greater than 10 billion rupees ($183.7 million) to spend 2% of their profits on social-responsibility programs. These include poverty alleviation, education and health care. Companies that fail to meet the 2% target would have to justify themselves to the government or face penalties.

Demanding that private firms pick up the social-welfare slack for a government that already taxes them is, of course, absurd. But India's heavy-handed approach to corporate social responsibility also underscores a deeper problem: More than 20 years after the advent of economic reforms, Indian business has still not learned how to make a moral argument for pro-market economic policies. Their failure to explain how freer business activity helps all Indians has only invited further government interference, which in turn harms economic growth, now at a 10-year low.

The case for capitalism in India practically makes itself. Since the advent of economic reforms in 1991, which began to unwind India's notorious state controls on business, the country has pulled some 200 million people out of poverty. Millions now lead ordered and productive lives thanks to the Indian and foreign entrepreneurs who employ them. Private competition in everything from automobiles to aviation has lowered prices and dramatically improved product quality.

And yet, remarkably, this progress is not the backdrop to the debate that unfolds each day on India's front pages, in television studios and in Parliament, where populists instead harp on handouts and subsidies. Over the past four years, the government has cowed business using the blunt instruments of environmental and taxation policy, effectively creating a new (albeit tamer) version of India's old central planning scheme.

In private, businessmen complain about the investment climate, and those with the wherewithal are increasingly seeking opportunities overseas. But firms haven't pushed back publicly in a coherent manner.

In part, their timidity can be traced to India's welter of rules and regulations. Besides their obvious economic drag, these rules make even the most scrupulously managed companies hesitant to step out of line, for fear of violating some obscure regulation.

Institutional shortcomings compound Indian business's poor messaging. Industry bodies typically lobby for specific policies—usually driven by the short–term interests of their largest members—rather than for free-market principles. And Indian business has failed to back institutions such as think tanks to effectively challenge the harmful redistributionist policies of a populist political class and a left-leaning intelligentsia. The World Bank ranks India a dismal 132nd in the world in terms of ease of doing business, down from 120th in 2008.

Absent a strong counternarrative from Indian corporations, the image of business has taken a beating as government cronyism has spawned corruption scandals in telecommunications, mining and real estate. If 10 years ago the private sector was exemplified by the self-effacing N. R. Narayana Murthy of software giant Infosys, it just as easily brings to mind Gurdeep Singh "Ponty" Chadha, a millionaire who made his fortune through government-granted liquor licenses before being killed last year in a dramatic shootout with his brother.

According to Parth Shah of the Centre for Civil Society, a New Delhi think tank, six years ago most college students across the country polled by his organization would argue that a businessman did more for society than a social worker. Today this view finds few takers.

Reversing the suspicion of markets won't be easy, but to begin with, free-enterprise advocates ought to start framing their arguments in moral as well as financial terms. For instance, opposition to a proposed food-security bill that would supply subsidized grain to seven out of 10 Indians has centered on its fiscal implications. While these are indeed dire, the real danger is the creation of a culture of dependency that future generations will find difficult to end.

Similarly, the government's decision to waive more than $9.5 billion worth of farmers' loans during the past five years not only hurts the balance sheets of state-owned banks, it also sends the wrong message to society: Honesty doesn't pay. Pity the poor farmer who worked hard to repay a loan, only to watch his neighbor snag a waiver. And anyone who has had the misfortune of flying Air India should have no trouble articulating the sloth and apathy that mark India's bloated public sector.

In short, the private sector and its advocates in India have nothing to be apologetic about. But unless business finds its voice, firms are destined to forever play the 90-pound weakling bullied by a muscle-bound state.

- By Sadanand Dhume
Mr. Dhume is a resident fellow at the American Enterprise Institute, and a columnist for WSJ.com. Follow him on Twitter @dhume01

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