The Ancient Indian Economic Thought and The Concept of Welfare State

Harshita Jain Indian Economic Thought 1
The Ancient Indian Economic Thought and the Concept of Welfare State
Harshita Jain
Shri Ram College of Commerce, University of Delhi
January 12, 2019
Abstract
It is generally believed that the systematic study of economics and its principles was started in 1776 with the
publication of An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith, who has
been universally held as the founding father of economics. Prior to Adam Smith, many economic concepts
and theories were developed from the early 16th century to the middle of the 18th century. Economics as a
science trails its origin from the perennial philosophy of great ancient and medieval thinkers from the
Buddhist literature to Kautilya. The research paper attempts to dwell into ancient economic and political
theories, bringing to the forefront their relevance even today. A polymath of diverse abilities, Kautilya was
one of the defining forces responsible for shaping not just the Mauryan Empire, but Indian history itself.
Considered the most comprehensive account of economic principles, ideologies, and thought, Kautilya’s
Arthashastra provided an important precursor to classical economics. As the text abounds in generalities,
Chanakya seeks to make his ideas relevant across situations and eras. Regrettably, for the development of
ancient economic thought, Kautilya’s ideas were unknown to Renaissance philosophers and thinkers who
are largely credited for the creation of modern economic thought. While the modern economic theory
focuses on the pursuit of self-interests and material pleasures, Indian texts have treated ethics and welfare
as one of the important life objectives. The lacuna created due to ignorance and lack of awareness has
prevented individuals and corporations in acknowledging and implementing the economics practices
mentioned in ancient religious and political texts. The text addresses this issue and evaluates the Indian
economic thought. Of course, the objective here is not to advocate Indian economics as a separate economic
thought process. Laws of economics are universal. Economic agents, irrespective of their culture, country,
and know-how, would respond to incentives and coercion in almost the same way (Swami, 2012).
Keywords: Adam Smith, Wealth of Nations, Buddhist literature, Material pleasures, Kautilya’s Arthashastra,
Indian economic thought
JEL Classification: B1, B3
Electronic copy available at: https://ssrn.com/abstract=3762752

Research Methodology
This study is based on a qualitative research methodology called hermeneutics. In the current context,
hermeneutics can be described as the interpretation and understanding of ancient literatures and texts. The
scope of hermeneutics also includes the investigation and interpretation of not only ancient texts, but of
human behavior generally, including language, social institutions, and ritual behaviors.
Various ancient sutras are commented upon and interpreted for the correct understanding of the ancient
Indian economic theories.
The text is an analytical study and is based on secondary sources.
The study is based on a deductive approach wherein a hypothesis is drawn based on existing theories and
explanations.
Having identified the key concepts of the Arthashastra, economic welfare, and contemporary strategic
thought, this paper will compare and contrast the ancient and modern concepts and draw inferences thereby
focusing on ancient economic antecedents and assessing the contemporary geopolitical environment. It aims
to create awareness amongst readers regarding the existence of Indian literature, which provide many
valuable theories and concepts in the field of economics.

Contents-
Abstract.............................................................................................................................................................1
Research Methodology.....................................................................................................................................2
Chapters............................................................................................................................................................3
 Ancient economic thought and literature........................................................................................... 4-6
 Economic thoughts in Sanskrit literature and Vedas..............................................................................................4
 Influence of Buddhism and Jainism....................................................................................................................5-6
 Buddhist Economics.................................................................................................................................5
 Economics of Mahavira............................................................................................................................6
 Introduction to Kautilya and his Arthashastra................................................................................................7-11
 Chanakya’s Arthashastra – A forgotten inheritance...............................................................................................7
 Visiting the Kautilyan State – Understanding the Social and Economic Structure............................................8-9
 Chanakya’s Integrated Approach..........................................................................................................................10
 Kautilya’s Vision..................................................................................................................................................11
 Arthashastra – An Insight into Kautilya’s Economic theories.....................................................................12-29
 Theory of Taxation..........................................................................................................................12-17
 Taxation System in Ancient India.....................................................................................................12-13
 Principles of Taxation.......................................................................................................................13-14
 Kautilya and the Laffer Curve...........................................................................................................15-17
 Theory of Good Governance...........................................................................................................18-21
 Concept of Good Governance...............................................................................................................18
 Economic Governance............................................................................................................................19
 Kautilya’s Economics of Corruption.................................................................................................19-21
 Labour Theory.................................................................................................................................22-23
 Human Resource Management in Kautilya’s State...........................................................................22-23
 Textile Industry - Division of Labour and Specialisation
 Payment of Wages – Piece-rate System.................................................................................................23
 Labourers’ rights.....................................................................................................................................23
 Women’s Employment...........................................................................................................................23
 Principles of Salary Fixation..................................................................................................................24
 Chanakya’s Accounting Methods and the role of Ethics................................................................25-26
 Scope of Accounting...............................................................................................................................25
 Accounting errors...................................................................................................................................25
 Ethical Climate of the State....................................................................................................................26
 Kautilyan Foreign Policy analysis...................................................................................................27-30
 Mandala Theory...............................................................................................................................27-28
 The Six-fold Policy of the Arthashastra............................................................................................29-30
 Western Perspectives....................................................................................................................................31-32
 Kautilya, Physiocrats, and Mercantilists......................................................................................................................31
 Kautilya and Adam Smith............................................................................................................................................32
Hypothesis.......................................................................................................................................................33
Conclusion.......................................................................................................................................................34
Literature Review...........................................................................................................................................35
Bibliography...................................................................................................................................................36

The Ancient Literature
Economic thoughts in Vedas:
The term Veda denotes the entire divine literature on humanity comprising Rigveda, Yajurveda, Samveda,
Atharvaveda, Brahmanas, Aranyakas, Upanishads, and six Vedangs. In the Vedic tradition, there are
fourfold visions of life or human existence - Dharma, Artha, Kama, and Moksha. Out of these four aims of
life, Dharma
- righteousness or right behaviour and social order - is considered more significant than Artha - wealth.
Artha refers to the idea of material prosperity, not to be understood solely as material assets, but numerous
other forms of wealth such as knowledge, friendship, and love. Artha occupies the second position amongst
the fourfold values of life above kama (physical or emotional pleasure) but below dharma (righteousness)
and moksha (liberation).
In the Vedic literature, wealth is a means of happiness and contentment and is therefore considered vital for
every human being. The capacity for empathy, the quality of fairness, and the willingness to see the welfare
of others are important components of a good life. The economic ideology of Vedas suggests an impartial
sharing of food and wealth. One of the hymns of Rigveda describes that a person who eats alone is nothing
but a sinner.1 Similarly, Gita (a Hindu scripture) condemns a person who eats single-handedly without
considering the needs of others.2
Utilization of wealth-
According to the Vedic literature, the wealth acquired should be utilized for the welfare of all. 3 It should be
effectively used for individual nourishment and for the wellbeing of others. Although some hymns of the
Veda advocate equal allocation of wealth and equal opportunities to all (social and economic equality) but
they do not promote absolute equality4. Furthermore, during those times, nobody was allowed to hoard
unlimited wealth by snatching away the wealth of others and disturbing their livelihood. Thus, the profusion
of wealth, without its effective utilization was condemned. Emphasis was laid on earning wealth by honest
means.
During ancient times, agriculture was the primary source of sustenance and affluence and trade was
considered important to increase the wealth of the kingdom. Several types of taxes were imposed for the
maintenance of public, for the security of the state, for fulfilling people’s wishes, for expanding the
kingdom, and for achieving the desired ends.
Thus, wealth played a very significant role for personal as well as societal development. The abundance of
wealth and food was considered crucial for the happiness of family and society. The Vedic society was a
complete society in all respects, in which people pursued various occupations and economic activities -
agriculture, animal husbandry, weaving, construction etc. - for sustenance.5 Proper attention was paid to
ensure judicious use and development of economic resources available in the state. Economic policies were
framed and modified according to social conditions, ethical values, and spiritual views.
Buddhist Economics6:
“We came to this world without any invitation, we leave this world not knowing where we will go.” 7
Buddhism encourages everyone to have a satisfactory life without going to any extreme in earning,
consumption, or saving. It focusses on achieving economic stability and advises people to realize the
importance of every single person in the community so as to achieve the objective of establishing a peaceful
and stable world. Buddhism emphasizes on three important components of macroeconomics:
 disposable income and consumption,

 investment, and
 savings.8

“Whatever income you have, you should only utilize one fourth to consume, half of your earnings you
should reinvest to acquire further income and the last portion of your income should be kept for emergency
acquisition as future savings.” 9
According to Buddhism, the workforce needs to be honest and driven. As there used to be closed economies
during those times, agricultural trade, government services, and skilled services were considered as lawful
professions. Once the income was earned, the next challenge was how to spend it in the most judicious
manner. In line with the Buddhist economic theory, one should use his/her income appropriately and wisely
so that the needs of every member of the household are satisfied and there are no conflicts between the
members of the household. Consumerism should be thoroughly analyzed and evaluated. According to
Buddha, consumption expenditure should be limited and there should be investments for future utilization as
well. Consistent savings are crucial in order to have a stable life.
Buddha urged people to think about their financial stability without being caught in the vicious circle of
poverty. Another thing that Buddha stressed on was the concept of Right Livelihood, which means that one
should abstain from making his/her living through a profession that brings harm to others, such as trading in
lethal weapons, intoxicating drinks, poison etc. 10 One should engage in a profession which is respectable
and legal. The objective of work is threefold according to Buddhism:
• to give a person a chance to utilize and develop his faculties;

• to enable him/her to develop holistically by working in a team on a common task;
• to produce goods and services needed for existence.11
Buddha believed that economic stability and peace go hand in hand. So, he advised policymakers,
administrators, and rulers to work towards reducing social inequalities in order to achieve stability. To
overcome inequalities, administration should help poor people to stand on their own feet and become
financially independent. He also emphasized that women should also be given an opportunity to become part
of workforce. Thus, buddhist economics aims to clear the confusion about what is harmful and what is
beneficial in the range of human activities by introducing the concept of Right Livelihood involving the
production and consumption of goods and services, ultimately focussing on making human beings ethically
mature. It concentrates on the psychology of human mind and tries to build a society that is politically and
economically stable. Also, the concept of Gross National Happiness was based on the Buddhist philosophy
of wellbeing. 2
Economics of Mahavira:
Economics in Jainism is influenced by Mahavira and the principles and philosophies of non-violence and
non- absolutism13 propounded by him. There are two core political-economic systems in the society -
Communism and Capitalism. The former is meant to be more socialistic and the latter capitalistic. However,
Mahavira found no difference in both these systems because both were driven by materialism. Jain
philosophy was intensively opposed to materialism and promoted wellbeing of living and non-living things.
In Jainism, non-violence itself is a religion and not merely a part of religion. According to Mahavira,
passions like pride, anger, deceitfulness, and greed are responsible for committing violence. Thus, freedom
from passions is non-violence. He emphasized that life is sacred irrespective of caste, color, creed or
nationality and advocated the philosophy of coexistence. All living beings are treated as equal and
exploitation of non- living being is avoidable. Mahavira said that nobody can object to economic
development in society. But it should be achieved through the ethical means of non-violence and not by
unethical means of violence.
Jainism advocates ethical performance - earning wealth by honest means - in order to ensure the well-being
of the society in the long run. According to Mahavira, basic needs of everyone should be satisfied and
economic prosperity should not affect the interests of the poor. Though the scope of ethics defined by
Mahavira is very narrow in today’s context, still it provides a general sketch of the role of ethical means in
promoting societal development.
In modern society, there is a dichotomy between ethics and economics though some of the economists like
Amartya Sen (1987) and Hausman (2006) argue that greater attention should be paid to ethical
considerations to enrich economic theory.
In Jainism, Parigraha means extreme possessiveness about both living and non-living things like family,
money, property etc. Mahavira believes that greed for possession has no bounds and causes great economic
discord in the society. The essence of the economic virtue of Aparigraha is that one should set a limit to
one’s own desire and whatever surplus one may accumulate beyond this limit should be disposed of.
Human beings need to limit their desires and make judicious use of available resources. Human values and
ethics should not be sacrificed in the name of economic development. Development devoid of human values
and ethics leads to the impoverishment of people, thereby causing economic instability.
Thus, jainism promotes relative economics which is based on ethical means. Relative economics and the
philosophy of non-violence help to attain sustainable economic development. Hence, the role of ethical
religion based on nonviolence is important to control the tendency of extreme possessiveness through
internal awareness to achieve sustainable economic growth.
3
Kautilya’s Arthashastra – A forgotten inheritance
Chanakya, also known as Kautilya, was an ancient Indian teacher, philosopher, economist, and royal
advisor. He is believed to be the chief minister in the court of Chandragupta Maurya (one of the great
emperors of India). Kautilya is considered the pioneer of the field of political science and economics in
India, and his work is thought of as an important precursor to classical economics16. Arthashastra (the
science of wealth), written by Kautilya, is a treatise on statecraft, economic policy, military strategy, and
international relations.17 The book containing about 6000 hymns is a comprehensive manual on how a state
ought to be ruled and administrated by a king and his administration. It is written in Sanskrit and is divided
into 15 book titles and 150 chapters. It provides a detailed description of everything related to state
governance from the duties and responsibilities of the king to the economic administration of the state. In
Arthashastra, Kautilya links governance, polity, politics, and progress to public welfare. He provided a
political philosophy to unify previously small political units and diverse linguistic groups into a broader
cohesive identity. His ultimate goal was social cohesion18. Though some of his principles are irrelevant
today, Arthashastra still continues to provide an archetype of political and economic thought in India. It is
regarded as one of the oldest works of economics. Kautilya drew his inspiration from the ancient
philosophies of Jainism, Buddhism, and Vedas. The research paper is an endeavour to reveal the tenets of
Arthashastra in a simple form and establish their contemporary relevance, both theoretically and
practically.
The Kautilyan State

The study of economics, the art of government, and the development of science started around 650 B.C. in
India. To fully understand the economic structure of the Kautilyan state, it is imperative to understand the
social structure.
The society during ancient times was divided into two groups - Aryas and Non-Aryas - under the varna
(caste) system. The varnas (subgroups) within Aryas were Brahmins, Kshatriyas, Vaishyas, and Sudras.
Brahmins (priests, scholars, and teachers) were at the top of hierarchy followed by Kshatriyas (rulers,
administrators, and protectors of land), Vaishyas (merchants), and Sudras (agriculturists, artisans, craftsmen,
and actors). The lower three varnas constituted the most productive labor force and Kautilya preferred
giving them lands in the new settlements because of their productivity. Agriculture was the principal
economic activity in the state. Hence, most of the sudras were engaged in agriculture. {LN Rangarajan 1992:
45-53}
The wealth of the state was calculated as the sum total of wealth in the king’s treasury, income generated
from economic activities, and the monetary value of defense equipment and forest produce. All the activities
in the state depended first on the Treasury. Therefore, a king devoted his best attention to it. [2.8.1,2] 19
The aim of the three main types of economic activity – agriculture, cattle rearing, and trade – was to
generate resources in the form of grains, cattle, gold, forest produce, and labor. Using these, the king built
his treasury and expanded his army. Wealth enabled the creation of more wealth [9.4.27] and a king with a
depleted treasury will eat into the very vitality of both the country and its citizens. [2.1.16] 20
The following were the means of increasing the wealth of the State:
 ensuring the prosperity of state activities [and enterprises]
 continuing well tried [and successful] policies
 eliminating theft
 keeping strict control over government employees
 increasing agricultural production
 promoting trade
 avoiding troubles and calamities to the treasury (misappropriation by chiefs, remission of taxes,
scattered collection, false accounting and looting by enemies)
 reducing [tax] remissions
 increasing cash income. [2.8.3]
There was a tremendous disparity in wealth between rich and poor during those times. Surprisingly,
inequality in the distribution of wealth continues to date.
The state generated its wealth from the following sources of revenue - Income from Crown Property,
Income from state-controlled activities, Taxes-In Cash and In-Kind, Trade, Fees, and Service charges. 21 The
net resources available to the State was calculated by estimating revenue during the year, adding outstanding
dues of the previous year collected during the current year and subtracting from this total committed Crown
expenditure, remissions, uncollectable, and loans and advances.
There was a well-defined taxation policy that provided details of different taxes given under sources of
revenue. The tax policy distinguished between those who had to pay tax and those who were exempted.
Furthermore, taxes were imposed only when people have the capacity to pay. Another interesting feature
was the existence of transaction tax23 on the crown property during those times.24
Kautilya was well aware of the fact that people respond to incentives (one of the ten principles of
economics), therefore he introduced tax exemptions as an incentive to increase the production of public
goods. Tax exemptions were also provided to those who cultivated on the drylands and built irrigation
networks.
The state had a monopoly on the manufacture and sale of several goods like alcohol, gold, silver, etc. and
regulated gambling, betting, and prostitution. In addition to it, a monopoly tax26 was also collected.
It also followed the principles of fair trading to promote public welfare:
 Both locally produced and imported goods were sold for the benefit of the public.
 When there is an excess supply of a commodity, a buffer stock was built up by paying a price higher
than the prevailing market price.
 Surplus stocks unaccounted for in the hands of merchants were sold for the benefit of the public.
 Even a large profit was foregone if it is likely to cause harm to the public.
 No artificial scarcity was created by accumulation of commodities constantly in demand.
Also, there were several provisions to safeguard the interests of consumers, with the aim of consumer safety.
A penalty was imposed on traders who indulged in adulteration of goods namely grains, medicine, perfumes,
salt, and sugar. Black marketing and unfair trade practices were strictly condemned. The period witnessed
healthy trade practices where traders possessed a license to sell, which was given on permission. An
extensive control was exercised over merchants, artisans, craftsmen, and entertainers to prevent them from
exploiting consumers. [4.1.65]
Special courts were set up to ensure justice to consumers. The king granted a margin of profit to sellers
while fixing prices. A profit margin of 5% on domestic goods and 10% on imported goods was fixed. 22 In
addition, the rights of the traders were well protected.
Kautilya introduced the concept of price support - the minimum legal price a seller may charge, typically
placed above equilibrium - to protect the interests of farmers and laid the steps to be followed in case of
unexpected market outcomes. The state maintained a buffer stock to be used in times of shortage of goods.
“When there is an excess supply of a commodity, the Chief Controller of State Trading shall build up a
buffer stock by paying a price higher than the market price. When the market price reaches the support level,
he shall change the price, according to the situation.” [2.16.2,3]
There were no restrictions on trade. To promote imports, tax exemptions were given to importers, foreign
importers were exempted from being sued, and a higher profit margin was permissible on imported goods. 25
This policy was followed with the twin objectives of ensuring the availability of goods to people and
maintaining good relations with the neighboring countries. It implies that each country would produce goods
in which they specialize, thereby ensuring the availability of best quality goods at affordable prices to
consumers around the world.
In the current economic scenario, some of these remarkable policies are still relevant. The current economic
framework has somewhat evolved from the economic framework that Kautilya proposed. Price controls,
taxation principles, and other regulations that are exercised even today were in practice during 300-100 B.C.
Just like the evolution of humans, economics has evolved according to the needs of the ever-changing world.
Arthashastra continues to be relevant in the context of the current world economy. Who would have thought
back then that this classic masterpiece will continue to guide future generations and help them make better
decisions? It is imperative to look back to find better solutions to economic problems that the current
generation faces and continue to grow by learning lessons from our ancestors which they have left in the
form of books, monuments, tales etc. 4
Chanakya’s Integrated Approach

Modern economic concepts based on materialistic paradigms fail to bring economic development that is
peaceful and free from strife. The thoughts of most of the modern economists are based on paradigms that
spring from stark materialism. Spirituality, ethics, and moral values are shelved aside.
Kautilya, on one hand, accepted that the king (the state) should ensure the happiness and well-being of his
subjects and on the other hand, defined the individual’s responsibility towards the state. He simultaneously
emphasized on moral duties and rights of various segments of the society. In discussing a great range of
practical problems in the Arthashastra, varying from building of village, land classification, collection of
revenue, maintenance of accounts, tariff regulations to diplomatic manoeuvres, employment of spies,
controlling embezzlement by officers, Kautilya paid attention to 'engineering' problems as well which
integrates economic problems with engineering practice. {Refer Sen, 1987: 5-6}
Public administration, economic prosperity, social welfare, diplomacy and military readiness were
considered the essential ingredients of a successful state. In the modern-day context, the concept of welfare
state mentioned in the Arthashastra becomes all the more relevant as the world economy is undergoing a
transition. The world which we inhabit today (of multiple states facing inequalities, of several major powers,
of an uneven but lumpy distribution of power among those major states) is somewhat similar to the world
that Kautilya operated in. The study of Arthashastra will make us self-aware and conscious about the
strategic culture that we have. The human progress portrayed in the Arthasastra of Kautilya visualizes the
symbiotic progress of spirituality and moral values. His analysis was philosophical, religious, political, and
socio-economic in nature and therefore is more suited to handle the current economic problems.

Chanakya’s holistic and integrated approach provides a new dimension to the field of economics. The
concept of economic growth coupled with equity and social welfare as propounded by Kautilya renders
sustainability to the economic management system. Chanakya found the absence of concern for the society
and fellow human beings in the state administration. So, he designed several policies to guide the king and
his subjects on how to achieve equality in the state and maintain equilibrium in the society in coherence with
the laws of nature. In the process, the state acted as a facilitator, regulator, and protector. Kautilya
considered the welfare of the citizens, their common good, and sustained happiness as means to achieve
economic growth and prosperity. His economic principles illustrate a blend of individualism and altruism 27
to achieve the common good.
5
Kautilya’s Vision
The kingdom shall be protected by fortifying the capital and the towns at the frontiers. The land should not
only be capable of sustaining the [native] population but also outsiders [when they come into the kingdom]
in times of calamities. It should have productive land (free from swamps, rocky ground, saline land, uneven
terrain, and deserts as well as wild and [unruly] groups of people). It should be beautiful, being endowed
with arable land, mines, timber forests, elephant forests, and good pastures rich in cattle. It should not
depend [only on] rain for water. It should have good roads and waterways. It should have a productive
economy, with a wide variety of commodities and the capacity to sustain a high level of taxation as well as a
[large] army. The people shall be predominantly agriculturists [artisans and craftsman], devoted to work,
honest, loyal and with intelligent masters and servants. [6.1.8]
Duty of the state-
A king shall augment his power by promoting the welfare of his people; for power comes from the
countryside which is the source of all economic activity: He shall build waterworks since reservoirs make
water continuously available for agriculture; trade routes since they are useful for sending and receiving
clandestine agents and war materials; and mines for they are a source of war materials; productive forest,
elephant forest and animal herds provide various useful products and animals. He shall protect agriculture
from being harassed by fines, taxes and demands for labour.
Kautilya’s ideal economy-
According to Kautilya, infrastructure plays a very crucial role in the development of the state and for
promotion of commercial activities. So, the state should invest in construction of roads and other
transportation networks so as to increase its trade revenue.
To Kautilya, economic growth is a multi-dimensional phenomenon that results in increased economic
activity, with productivity being the ultimate source.28 He outlined the importance of development of mines
and forests, agriculture and livestock, and trade and commerce because the treasury’s fortunes depend on the
economic productivity of various industries. The King was advised to regulate mining and manufacturing
operations, exploit timber forests, offer facilities for cattle-breeding, construct roads and build reservoirs to
promote trade, and set up market towns.29 Not only this, he considered national security, maintenance of law
and order, protection of private property rights, and provision of public facilities as prerequisites for
economic development.
Kautilya had a grand objective for building an empire that was prosperous, secure, stable, and fair.
Kautilya realized that there was a large gap between his ideal economy and that prevailing in 4th century
B.C.E. His genius lies in identifying the possible problems that may arise in eliminating such a gap and
devising policies to resolve them. According to Kautilya, it was the moral duty of a king to increase
prosperity, judicial fairness, and national security; and he proposed a complete conceptual framework and
suggested practical measures to achieve these objectives.30
Theory of Taxation

Kautilyan tax system consisted of a set of "principles of taxation" similar to the modern-day criteria first
formulated by Adam Smith in his book “The Wealth of Nations’’. Kautilya proposed a well-developed tax
system for a prosperous and stable kingdom. As presented in the Arthashastra, Kautilya's advice to his
monarch on the ideal tax system is based on achieving the following objectives:
• gaining as much tax revenue as possible;

• promoting economic growth and development within the kingdom;
• ensuring that resources are used efficiently; and
• applying taxes that are "fair" and "just".32
Kautilya's discussion of taxation and expenditure, apparently in keeping with traditional doctrine, gave
expression to three Indian principles:
• taxing power is limited;

• taxation should not be felt to be heavy or exclusive;
• tax increases should be graduated.31
"All undertakings depend on finance. Hence, foremost attention must be paid to the treasury...Thus, when
both the receipts and expenditures are property earned for, the king will never find himself in financial or
military difficulties." {M.H. Gopal 1935: 19}
"...the army is sometimes the means of securing the wealth acquired, but wealth is always the means of
securing both the treasury and the army. Since all activities depend on finance, financial troubles are more
serious." {Idib., 20}
Finance was so important to the success and well-being of the sovereign that it, along with the army, was
under the direct control of the king.33 It is necessary to undertake any state endeavor and is the chief means
for both dharma [righteous duty] and kama [enjoyment] {8.1}. Kautilya has given utmost importance to
public finance, which has been divided into two parts-public finance during peace and public finance during
the war. But the basic principle was the same. The foremost duty of the king was to keep the treasury full
and prosperous. The king should collect taxes and fill the treasury. According to Kautilya, the treasury
should be collected and maintained honestly and religiously as it is a financial hub of the state. Furthermore,
an emergency fund was also maintained by the state to be used in times of emergencies.
Kautilyan Taxation System-
Kautilya’s method of taxation involved the element of sacrifice by the taxpayers, direct benefits to them,
redistribution of income34, and tax incentives. To encourage capital formation, he recommended tax
holidays.
"Anyone who brings new land under cultivation shall be granted exemption from payment of
agricultural taxes for a period of two years. For building or improving irrigation facilities exemption
from water rates shall be granted." [3.9.33]
According to Kautilya, the "ideal" tax system should embody the following principles: it would be
convenient to pay, easy to calculate, inexpensive to administer, fair (equitable) in its burden, non-distortive
of economic behavior in its impact (neutral), and in general not inhibit economic growth and development.
{M.H. Gopal 1935: 23-26}
In order to promote convenience, equity, neutrality, and economic growth, Mauryan taxes could be paid in
gold, coins (usually silver or copper), livestock (mostly cattle), agricultural products, minerals and timber,
and personal services (e.g., constructing the roads, canals and forts, working in the king's mines or logging
in the king's forests, or serving as a soldier).

Moreover, in the Kautilyan system of taxation, taxes were levied on income and wealth in the form of both
real (immovable assets) and personal property (movable assets), and market transactions (sales) including
both export and import duties, as well as poll taxes on all adult males. {Idib., 1935: 22)
Types of taxes-
In order to generate revenue and build the treasury of the state, the following types of taxes were proposed in
the Arthashastra:
• Customs duty (sulka) consisting of import duty (pravesya), export duty (nishkramya), octroi, and
other gate tolls (dwarabahirikadeya)
• Transaction tax (vyaji) including manavyaji (transaction tax for Crown goods)
• Share of production (bhaga)
• Tax (kara), in cash
• Taxes in kind (pratikara) including Labour (vishti) and Supply of soldiers (ayudhiya)
• Countervailing duties or taxes (vaidharana)
• Road cess (vartani)
• Monopoly tax (parigha)
• Royalty (prakriya)
• Taxes paid in kind by villages (pindakara)
• Army maintenance tax (senabhaktham)
• Surcharges (parsvam) 35
•
• Kautilya’s Principles of Taxation-
 Collection of taxes-
"Just as fruits are gathered from a garden as often as they became ripe, so revenue shall be collected as often
as it becomes ripe. Collection of revenue or of fruits, when unripe, shall never be carried on, lest their source
may be injured, causing immense trouble." {M.H. Gopal 1935: 23}
According to Kautilya, it makes no sense in collecting taxes before the crops are harvested. Since taxes
become due only after the harvest, it becomes useless to collect the raw grains and annoy the farmers.
Therefore, taxes should be collected only when they become due.
“Ideally, governments should collect taxes like a honeybee, which sucks just the right amount of honey from
the flower so that both can survive. Taxes should be collected in small and not in large proportions.” 36
According to Kautilya, taxation should not be a painful process for people. Taxation should not be raised to
such a high degree that it destroys people's economic incentives to engage in productive undertakings,
thereby lowering the level of economic activity and the material wealth of the kingdom. High tax rates
prevent people from entering into mutually advantageous transactions, thereby leading to deadweight loss 40
and decrease in government tax revenue. There should be leniency and caution while deciding the tax
structure.37
 Ability-to-pay Taxation-
Ability-to-pay Taxation is a tax principle in which taxes are levied according to the taxpayer’s ability to pay.
"...the policy is to make the richer section of the peasantry or those who hold lands in fertile areas of high
productive calibre to contribute more [have higher tax rates apply], and to grant exemptions from this
liability where the cause of production and development may suffer through high taxation.” 38
During ancient times, high taxes were imposed on rich whereas lower income groups were exempted from
paying taxes. Tax exemptions were even applicable to sectors where high tax rates may adversely affect
production and development activities. Higher rates of sales taxation applied to the most expensive
commodities traded (e.g., gold, silver, diamonds, pearls, etc.) and lower rates of sales taxation applied to the
less expensive commodities (e.g., cloths and threads, grains and dairy products, and finally firewood/earthen
vessels/bamboo).
“A heavy taxation was imposed on imported foreign goods of luxury. On the articles of common
consumption, light duties were imposed." {Radhakrishna Choudhary 1971: 124-125}
Kautilya counselled that taxes should be collected only when people have the capacity to pay. In Kautilya's
view, the tax system should be fair, and tax rates should reflect people's ability to pay in terms of wealth or
income or sales revenue.39

 Economic Security-
“The King shall maintain, at state expense, children, the old, the destitute, those suffering from adversity,
childless women and the children of the destitute women.” [2.1]
“If a government servant dies while on duty, his sons and wives shall be entitled to his salary and food
allowance. Minor children and old or sick relatives shall be suitably assisted. On occasions such as funerals,
births or illnesses, the families of the deceased government servants shall be given presents of money and
shown honor as a mark of gratitude to one who died in the king’s service.” [5.3]
Kautilya emphasized on providing
1. a safety net to those suffering from adversity

2. social security to the old
3. supplemental security income41 to the children
4. welfare payments to the poor.
 Tax Compliance and Evasion-
“The tax shall be recovered, in cash, from those skilled in their work. Their offences shall not be forgiven,
for they are apt to [evade the tax and] pretend that the sales made by them were on behalf of someone else.”
[5.2]
Enforcement of rules was an important part of Kautilyan Taxation System.
There were record keepers in each and every village who were responsible for collecting the taxes and
maintaining proper records of collection and there were magistrates to
inspect their work and ensure proper collection of taxes. [2.35]
Also, there were spies, who were directly responsible to the Chancellor for reporting cases of honesty or
dishonesty of farmers, cowherds, merchants and Heads of Departments.
Thus, Kautilya’s discussion on taxation may fall under the domain of “Optimal Tax Systems.” 42 Kautilya
did not favour lump-sum tax43 as it may lead to political instability in the state by creating a perception of
inequity and lowering the overall economic efficiency.
Moreover, tax evasion in the Arthashastra is treated as a criminal offense and the penalty is related to the
magnitude of tax evasion rather than the magnitude of the income concealed.44
Kautilya and the Laffer Curve-

In economics, the Laffer curve (developed by supply-side economist Arthur Laffer) illustrates a theoretical
relationship between rates of taxation and the resulting levels of government revenue45. It suggests that
reducing or increasing tax rates beyond a certain point may be counter-productive for raising further tax
revenue.
According to the theory, lower tax rates would give people the proper incentive to work, which would raise
economic well-being and perhaps tax revenue. On the other side, if tax rates are increased beyond a certain
level, then tax revenues can actually decrease as a high tax rate provides a substantial disincentive to work.
There is a threshold rate for every type of tax above which the incentive to produce more diminishes,
thereby reducing the amount of government revenue. However, there are some fundamental problems
associated with the Laffer curve. The Laffer curve can be discontinuous, creating problems in devising a
revenue-maximizing tax rate model. Also, it depends on certain assumptions that are too simplistic in nature.
11
Kautilya’s views on optimal tax rate-
Kautilya provides a rare insight into the relationship between tax rate and tax revenues. His observations are
congruent with the approach suggested by Laffer. According to him, tax rate should be low enough to lead a
growth in tax revenue. A tax rate lower than 1/6th (tax rate prescribed by kautilya / optimal tax rate) would
reduce tax revenue and consequently reduce the provision of infrastructure and public goods – national
defense, and law and order.46 Whereas, a tax rate higher than 1/6th would anger the taxpayers and might
result in a decrease in total tax revenue by hampering the private production.47
Initially, with an increase in tax rate, tax revenue increases, which results in an increase in the provision of
public goods, thereby raising the productivity of factors of production. Increase in Govt. spending
(Infrastructure) opens up new markets for the existing products leading to a rise in economic activity. So,
initially as the tax rate increases, there is a steep rise in revenue.
He further asserts (regarding the behavior of the tax collectors),
he who produces double the [anticipated] revenue eats up the janapada [the countryside and its people, by
leaving them inadequate resources for survival and future production]. [2.9]
Any tax rate higher than 1/6th would lead to a decrease in tax revenue as the production will decline. The
revenue starts declining rapidly due to the following reasons-
1. A reduction in the productive capacity of the private sector as the farmers would be left with very
little money to maintain the productive capacity.
2. Some individuals may move out of the state.
3. Others may work less or revolt against the king or evade taxes48.
Kautilya does present the concept of Laffer curve in an elementary form and consider the distortionary effects
of heavy taxation. He maintains
‘‘A wise Chancellor is one who collects revenue so as to increase income and reduce expenditure. He shall
take remedial measures if income diminishes and expenditure increases.” [2.6.28]
‘‘Those officials who do not eat up the king’s wealth but increase it in just ways and are loyally devoted to
him shall be made permanent in service.” [2.9.36] 12
“He who causes the loss of revenue eats the King’s wealth, [but] he who produces double the [anticipated]
revenue eats up the country.” [2.9.13]
Theory of Good Governance
“In the happiness of his subjects lies his happiness; in their welfare his welfare, whatever pleases him he
shall not consider as good, but whatever makes his subject happy, he shall consider good.” 49
Kautilya placed a lot of importance on virtuous and active leadership values. According to him, to ensure
good governance, there must be a properly guided public administration, where the ruler should surrender
his likes and dislikes in the interests of his subjects. 50 He should do things that make his subjects happy and
improve the welfare system of the state.
Arthashastra prescribes the duty of the king to chasten the conduct of the people, to be the promulgator of
the right law and duty, and to coordinate the laws of various orders and sections of society. King was an
instrument to achieve ends related to promoting general human well-being, such as peace, order, prosperity,
justice, and human dignity.52 A king was bound to ensure that the common good (dharma) is preserved. His
duty was to protect the wealth of the state and its subjects to enhance, maintain, and safeguard such wealth
as well as the interests of the subjects.
Kautilya further emphasized that there should be uniformity in the administrative practices and the state
ministers and officials should display qualities of leadership, accountability, intellect, energy, good moral
conduct, and physical fitness too. He presented justice, ethics, and anti-autocratic tendencies as key pillars of
good governance.
According to him, good governance and stability go hand in hand. There is stability if ruler and his officials
are responsive, responsible, and accountable otherwise, there would be instability.51 For good governance,
all administrators, including the King, were considered servants of the people. They were paid for the
services rendered and not for their ownership of anything. To promote the interests of the administrators and
boost their morale, the King shall not only maintain his servants but also increase their subsistence and
wages in consideration of their learning and work.
He highlighted several areas critical to the operation of a country, which dealt with the issues of National
Security and Foreign Policy, Administration of Justice, Strategies related to Economic Development,
Taxation, Labour Management, and Financial Management. According to him, attainment of good
governance requires that the objectives of the state are realized and fulfilled. Also, the state should avoid
extreme decisions and actions and decisions should be taken according to the situation.
Thus, in the Arthashastra, peaceful enjoyment of prosperity, i.e., the welfare of the people, is given as much
importance as knowledge, self-control and observance of dharma - righteousness. Kautilya’s Yogakshema
{theory of good governance} talked about the holistic development (material as well as spiritual growth) of
the society as well as of the individual. It involved the wellbeing of the poorest of the poor. The Kautilyan
state worked towards ensuring freedom, happiness, prosperity and overall development of humans.53
Yogakshema demanded higher moral consciousness both at the elites’ and common people’s levels.54
13
“The end is economic governance while political governance is the means.” 55

According to the Arthashastra, there is a strong connection between good governance and the economy of a
nation. Proper management of financial resources and good governance have an effect on the economic
growth. As political governance is the means for economic governance, there is a need for good political
governance. For good political governance, Kautilya expatiated on a strong political center and
administration. The king, for the benefit of his kingdom, had to be righteous and just, otherwise, his subjects
would become impoverished, which may lead to economic and political instability in the state.
He further elaborated on the importance of training and selection to improve the public administration. The
Ministers had to go through a grueling examination process before being recruited. Applicants had to qualify
four tests: Wealth, Virtue, Fear, and Pleasure. Those who qualified the wealth test were recruited in the
revenue department. Those who passed the Virtue test were recruited in the judicial administration.
Qualification in the pleasure test enabled them to receive the post of guarding the royal household. Finally,
qualifying the Fear test enabled a person to be recruited as the King’s security personnel or as an officer in
the royal army. Furthermore, recruited personnel who failed to fulfil their duties were immediately expelled.
This extensive recruitment process facilitated the establishment of a welfare state and a corruption-free
administration system.
Kautilya’s Economics of Corruption-
Kautilya lists forty kinds of embezzlements in his treatise Arthashastra to address the problem of corruption:
1. What is collected earlier is accounted later
2. What is collected later is accounted earlier
3. What ought to be collected is not collected
4. What is hard to collect is shown as collected
5. What is collected is shown as not collected
6. What is not collected is shown as collected
7. What is collected in part is shown as collected in full
8. What is collected in full is shown as collected in part
9. What is collected is of one sort, when what is entered is of another sort, e.g. rice in place of pulses
10. What is realized from one source, is shown as realized from another source
11. What is payable is not paid
12. What is not payable is paid
13. What is payable is not paid in time e.g. delaying payments with a view to receiving a bribe
14. What is payable is paid earlier e.g. payment before the due date for a consideration
15. Small gifts are accounted as large gifts when giving gifts
16. Large gifts are accounted as small gifts when receiving gifts
17. What is gifted is of one sort, when what is entered is of another sort
18. Beneficiary entered in the register is different from the one who received the gift
19. Materials received in treasury is removed or materials not received is accounted as received
20. Raw materials paid for are not accounted in the stores, while those that are not paid for are entered as
received in stores
21. An aggregate amount received is entered as parts, e.g. tax received from a village is shown as tax
received from individuals
22. Parts received are entered as an aggregate, e.g. tax received from individuals is shown as tax received
from a village
23. Commodities of greater value exchanged for those of smaller value

24. Commodities of smaller value exchanged for those of greater value
25. Value of goods inflated, by increasing the price
26. Value of goods deflated, by decreasing the price
27. Number of days increased, e.g. with a view of misappropriating wages
28. The number of days decreased, e.g. with a view to collecting lower taxes
29. The discrepancy in the number of months in a year, e.g. not accounting for transactions in all the months
30. The discrepancy in the number of days in a month, e.g. not accounting for transactions in all the days
31. Inconsistency in the transaction carried on under the personal supervision
32. Misrepresentation of the source of income
33. Inconsistency in accounting for charities
34. Incongruity in representing work done, e.g. superintendent of boats misappropriating ferry dues, under
the false plea that only Brahmins crossed the river
35. Inconsistently in dealing with fixed [regular] items
36. Misrepresentation of the standard of fineness of gold and silver
37. Misrepresentation of the price of commodities
38. Using false weights and measures
39. Deception in counting articles
40. Use of false cubic measures 56
In all these cases, the concerned functionaries such as the treasurer, the prescriber, the receiver, the payer,
the person who caused the payment, and the ministerial servants were to be separately interrogated and if
they lie, their punishment was to be enhanced. After the inquiry, a public proclamation was to be made
asking the common people to claim compensation in case they were aggrieved and suffered from the
embezzlement. 57
Thus, Kautilya was concerned about carrying the cases of fraud to their logical conclusion.
14
Prevention of Corruption-
The Arthashastra states that an increase in expenditure and lower revenue collection were indications of
embezzlement of funds by corrupt officials.58
Kautilya addressed the problem of corruption in the judicial administration and prescribed the imposition of
varying degrees of fines on judges trying to proceed with a trial without evidence, or unjustly maintaining
silence, or threatening, defaming or abusing the complainants, arbitrarily dismissing responses,
unnecessarily delaying the trial, and giving unjust punishments. To deter state officials from resorting to
corrupt practices, Kautilya prescribed reliance on an elaborate espionage network for detecting financial
misappropriation and judicial impropriety. Spies were recruited for their honesty and good conduct. They
were to keep a watch even over the activities of accountants and clerks for reporting cases of fabrication of
accounts. On successful detection of embezzlement cases, hefty fines were imposed and they were “in
proportion to the value of work done, the number of days taken, the amount of capital spent and the amount
of daily wages paid”.
Interestingly, Kautilya also dealt with the concept of whistle blowers 60. Any informant who provided details
about financial wrongdoing was entitled an award of one-sixth of the amount in question. If the informant
happened to be a government servant, he was to be given only one-twelfth of the total amount. The former’s
share was more because exposing corruption while being outside the system was more challenging.
“In an atmosphere of corruption, honesty becomes a virtue and not a desired duty.”
Kautilya argued for advertising the cases of increase in revenue due to the honest and dedicated efforts of
the superintendents by giving rewards and promotions. According to him, bestowing public honor creates a
sense of pride and boosts the motivation and morale of honest officials. He proposed a number of other
measures to avoid cases of corruption. He favored the periodic transfer of government servants from one
place to another. This was done with the intention of not giving them enough time to pick holes in the
system and manipulate it to their advantage.
According to Kautilya, dispensing with the service of too many government servants is conducive to
financial prosperity. 59
Rightsizing the bureaucracy not only leads to a reduction in expenditure on salary but also results in faster
decision making, thereby eliminating red tape. This effectively reduces the scope for bribery in particular
and corruption in general.
“It is possible to mark the movements of birds flying high up in the sky, but not so is it possible to ascertain
the movement of government servants of hidden purpose.” 61
“Just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out
when government servants in charge of undertakings misappropriate money.” [2.9.33]
“Just as it is impossible not to taste the honey or the poison that finds itself at the tip of the tongue, so it is
impossible for a government servant not to eat up, at least, a bit of the king ‘s revenue.” [2.9.32]
Kautilya although admitted that corruption cannot be completely eliminated and some degree of corruption
would always exist, which cannot be scrutinized perfectly.
15
Labour Theory
There prevailed logical procedures and principles in respect of labour organizations such as guild system and
co-operative sector during 4th century B.C. The Government used to take an active interest in the operation
of both public and private sector enterprises and provided well-enunciated procedures to regulate the
employer- employee relationship. Arthashastra provides a detailed insight into the process of staffing,
personnel management, and performance evaluation.
Chanakya quotes
1) Srutavantam upadh-suddham mantrinam kurvita
(Make him a minister who is learned and who haspassedintegrity tests)
2) Prakti-kopah sarva-kopebhy gariyan

(People’s anger is the greatest of all
anger)
3) Na ekam cakram bhramayati

(One wheel can’t make a cart
roll)
4) Dande praniyate vrttih

(Employment is sustained through enforcement of rule)
5) Pratyaksa-paroksa-anumanaih karyani parikseta

(Work should be examinedthroughself-observation, others’ observations, andlogical inferences)

Chanakya prescribes very clear tests for selection of employees in his treatise Arthashastra. According to
him, teamwork and proper enforcement of rules and regulations were crucial for the development of an
organisation.
Kautilya’s State-
In the Kautilyan state, the total labour force was divided on the basis of increasing degree of freedom –
slaves, bonded labour, unpaid labour, casual labour working for wages, piece-rate workers, and the self-
employed. The relationship between wages, productivity, and incentives for increasing production was
noticeable in different sectors particularly in the spinning sector of the textile industry. A large part of those
working for a regular wage or salary was employed by the state, particularly in the civil service, the secret
service, and the army. A ceiling was placed on the salaries of state servants at one-quarter of the revenue and
the employees and craftsmen in a village were paid either a regular wage out of the village revenue or given
a share of the village produce. 62
 Textile Sector-
“He, (the Superintendent of Yarns) should fix the wage after ascertaining the fineness, coarseness or
medium quality of the yarn, and the largeness or smallness of quantity. Wages for the labourers in the textile
industry were thus closely monitored and fixed according to the amount of output that workers could
produce (productivity level). Incentives were provided for the workers, if good results in the production
process were achieved. After finding out the amount of yarn, he should favour them with oil and myrobalan
unguents. And on festive days, they should be made to work by honouring them and by making gifts. In case
of diminution in yarn, and according to the value of the staff, it will come to a diminution of wage.” {R.P.
Kangle 2003: 147}
Various incentives and bonuses were provided to the workers to reward them for the work done and to boost
their morale. Wages were paid to women workers either on piece or time basis. No wages were paid to
workers unless the work was completed. Mere presence in the factory was not enough to earn the daily
wages. Deductions were also made if the work was left incomplete or materials were wasted. 16
Division of work and Specialisation-
“Spinning shall be carried out by women and weaving should be carried out by men (ropes, protective wear
straps and similar articles shall be made by specialists in their manufacture). The Chief Commissioner shall
come beforehand to an agreement with artisans regarding the amount of weaving required to be done in a
given period, and regarding corresponding wages needed to be paid. Incentives shall be given to weavers of
special types of fabrics, such as those made from silk, fine yarn, wool from deer, etc.” {LN Rangarajan
1992: 333}
Wage Payment-
According to Kautilya,
"A uniform and flat rate of wages for laborers of all sorts are impracticable in an advanced economic
condition where commodities of various gradations of value representing different kinds and degrees of
manufacturing skill are produced and used by consumers. The wages of a laborer cannot but be dependent
on the market value of the article produced. The latter again depends on the cost of its production, including
the cost of material used. Thus, the settlement of just wages is a complicated matter depending not only on
the skill of the worker employed but also on the total out-turn of his work; i.e., both the quality and quantity
of the job completed by him."
The concept of piece-rate wage system is mentioned in the Arthashastra where wages were given according
to the quality and quantity of work and punishment was imposed for unnecessarily delaying the work.
Rights of Labourers-
Kautilya in Arthashastra wrote about labourer’s rights and occupational safety as well. To prevent deception
by employers, Kautilya laid down that cultivators or merchants shall either at the end or in the middle of
their cultivation or manufacture pay the labourers proportionate wages. Payment to labour is not contingent
on the marketing of goods. According to him, production should not be hampered by the irresponsible
conduct of the workers. If a labourer is incapable, falls ill, or is in calamity, he can get an annulment of his
work agreement or get the work done by another. If a labourer is hired through a union, he/she could not be
removed or replaced without informing the employer, else penalties were stipulated. Moreover, one could
not take a minor below the age of 8 as a bonded-labor. Dishonoring women (bonded) labour, giving corporal
punishment, forcing workers to do menial jobs such as picking urine and dung was punishable. [Refer
3.14.2,5-9,11]
Women’s employment-
During the ancient times, women used to work in fields and pastures along with men. A sector of
employment reserved for women, particularly those who had no other means of livelihood, was spinning.
The sector reserved employed widows, crippled women, unmarried girls, women living independently,
women working off fines, mothers of prostitutes, old women, servants of the King, and temple dancers
whose services to a temple had ceased. Kautilya's concern for protecting the modesty of women was
balanced by his concern for ensuring control over the decentralized spinning sector, with the work being
done by women at home unsupervised by the officials. The prescribed punishment for cheating (taking the
wages but not doing the work, misappropriating the raw material) was drastic. Women were also employed
in collecting and preparing the ingredients for making alcoholic liquor. Another area where women were
protected by law was when they were bonded labour or slaves. A female bonded labourer was not to be
beaten or harassed. {Refer LN Rangarajan 1992: 69-70}
Principles of salary fixation-

The [total] salary [bill] of the State shall be determined in accordance with the capacity [to pay] of the city
and the countryside and shall be [about] one-quarter of the revenue of the State. The salary scales shall be
such as to enable the accomplishment of state activities [by attracting the right type of people], shall be
adequate for meeting the bodily needs of state servants and shall not be in contradiction to the principles of
dharma (righteousness) and artha (purpose and desires). [5.3.1,2]
If the amount of actual cash in the Treasury is inadequate, salaries may be paid [partly] in forest produce,
cattle or land, supplemented by a little money. However, in the case of settlement of virgin lands, all salaries
shall be paid in cash; no land shall be allotted [as a part of the salary] until the affairs of the [new] village are
fully stabilized. [5.3.31,32]
Salaries and wages of any individual employee, permanent or temporary, shall be fixed taking into account
each one's level of knowledge and expertise in the work allotted. [5.4.33]
Consistent with the modern bureaucratic practices, Kautilya said that the king should look to the bodily
comforts of his servants by providing adequate emoluments to them in order to promote the spirit of work.
Thus, Kautilya agreed in principle that a low salary may lead to the low motivational level among
employees, which may hamper the growth of the organization. He provided a detailed description of
different types of salary structures suiting the functional and hierarchical authority of various officers in the
state. The highest salary was reserved for the king, his ministers, the commander of the army, and other
high-ranked officers whereas the lowest salary was paid to workmen doing miscellaneous tasks. Kautilya
prescribes salaries and wages both in cash and in-kind, which were to be paid taking into account the skills
and expertise of the workers and also the work done by them.
Kautilya’s Accounting Methods

Kautilya’s contributions to accounting can be grouped under five heads-
 The development of principles of accounting
 The scope and methodology of accounting
 The creation of organizational structure

 The enactment of financial rules and regulations
 The role of ethics in maintenance of law and order
The research paper identifies elements of modern principles of accounting in Kautilya's Arthashastra and
offers glimpses into Kautilya’s grand vision and his impeccable logic. Recognizing that the concept of ethics
was already well developed in the Vedas and Hindu religious scriptures, Kautilya focused primarily on the
action-oriented principles of ethics, such as the golden rule, fairness, and 'servant leadership' and undertook
various measures to improve the ethical climate.
Accounting System:
In the accounts book, every entry shall have the date of the transaction. {2.6.12}
On the receipt side, the revenue shall be classified according to the major Heads of Account:
Actual income is to be calculated under the headings –
 Current income
 Transferred income – income accrued and income earned by one dept. transferred to another
 Miscellaneous revenue (profit on sale, recovery of debts and dues which were earlier written off,
fines paid by government servants, additional income from surcharges and unanticipated revenue
etc.)
Expenditure included
 budgeted and unbudgeted day-to-day expenditure
 anticipated expenditure (fortnightly, monthly or annually)
List of Expenses-
 Costs of worship and charitable expenses.
 Expenditure of the King, Queens, Princes etc. and palace costs
 Administration expenses
 Foreign Affairs.
 Maintenance expenses of granary, ordnance depots and warehouses
 Manufacturing expenses
 Labour charges
 Defence costs
 Cattle and Forest maintenance expenses
 Other expenses {2.6.11}
Scope of Accounting:
Kautilya did not see the need for separating accounting from economics and believed that any demarcation
of the boundary between them would be arbitrary. He considered accounting an integral part of economics.
By contrast, he explicitly treated Political Science and Philosophy as separate disciplines. This view is
supported by the fact that the role of accounting was considered to be embedded in economic policy.
Kautilya perceived 'explanation and prediction' as the true objectives of a scientific inquiry and applied these
to analyse the impact of various policies on the creation of wealth. He applied these objectives, both
explicitly and implicitly, to inquiries relating to accounting.
Kautilya used fractions, percentages, summation and subtraction operations, and even permutations and
combinations quite extensively, displaying a deep knowledge of arithmetic. He developed not only
bookkeeping rules but also the procedures for preparing periodic income statements and budgets and
performing independent audits.
According to Kautilya, the methodology of accounting is scientific and its scope is very broad. It is therefore
apparent that the scientific methodology was used in accounting long before the paradigm of double-entry
bookkeeping was popularized by Pacioli.
Accounting errors:
“All accounts shall be maintained in the proper form and legibly written without corrections. Failure to do so
shall be a punishable offence.” [2.7.35]
“Day-to-day accounts [to be submitted once a month] shall be presented before the end of the following
month and late submission shall be penalized.” [2.7.26, 27]
He instructed the accountants to not lie about the accounts and not try to interpolate an entry as if it was
forgotten. [2.7]
“High officials shall be responsible for rendering the accounts in full for their sphere of activity without any
contradiction in them. Those who tell lies or make contradictory statements shall pay the standard penalty.”
[2.7.25]
He identified the potential sources of losses like inadvertent recording errors, deliberately deceptive
accounting, collusion among employees to misappropriate revenue, loss in productivity due to in-fighting
among employees. He suggested methods to improve the ethical climate of the state.
Kautilya suggested three measures to deal with the problem of fraud. First, people have to be informed of
the existing laws, since it is not possible to obey them in the absence of proper information. He codified
(along with modifications and extensions) all the rules and regulations. The laws must be unambiguous.
Second, he proposed an organizational structure, which reduced the scope for conflicts of interest. Third, he
suggested long lists of punishments for cheating the government63 and rewards for commendable service.
Kautilya on Ethics:
“Righteousness is the root of happiness. Greed clouds the intellect. Another's wealth, even if it be husk,
should not be stolen.” {V.K. Subramaniam 1980: 20,46}
According to Kautilya, ethical conduct helps in the maintenance of law and order and the creation of wealth,
thereby promoting economic prosperity and happiness in the state. The ruler should avoid appointing
persons who are fraudulent, dishonest, cruel, without enthusiasm, incompetent and coward.
He strongly condemned unethical behaviour. He believed that people who practice accounting not only need
to adhere to its principles but they also need to behave in an ethical manner. They should display
righteousness in personal and social conduct. He held that instilling ethical values in a child kept him ethical
later in life. The grounding in ethics, such as, the capacity to follow one's conscience, look beyond self-
interest and show benevolence toward others, was as important as learning professional skills.
Kautilya’s Foreign Policy

Mandala Theory:

“Your neighbor is your natural enemy and the neighbor’s neighbor is your friend”
This was the basic assumption behind Kautilya’s Mandala Theory. The word “mandala” means circle in
Sanskrit. The Mandala theory was “perhaps the first theoretical work on an ancient system of kings,
kingdoms, and empires in the intellectual history of mankind that can be analogous to a model of
international relations.”
For Kautilya, the ultimate goal of the potential conqueror king is the attainment of happiness and welfare of
the kingdom. He envisaged that the state could achieve this objective by following the Mandala theory.
Thus, Kautilya devised the mandala system for his king to realize the twin objectives of foreign policy:
security and interest.
Main constituents of the Mandala theory:

1. The potential conqueror or the central king. The border of the kingdom of the King is divided into
two parts, the front and the rear.
2. The immediate neighbor in the front, or the Enemy. In this case, every neighbouring state is an enemy.
3. The next neighbour, or the enemy of the enemy.
“The enemy of the enemy is my (the king) friend”.
4. The next state adjacent to the ally’s front border is the enemy of the king.
5. The next state adjacent to his arch enemy will be the king’s ally.
6. Ally with the King’s neighbouring state and enemy of the king.
In this case, 1, 3, 5 are allies and 2, 4, 6 are allies, which means Kingdoms 1, 3, and 5 are enemies with
2, 4 and 6. The same pattern of mandalas apply to the King’s rear border as well.
There are two more kingdoms in the Kautilyan mandala.

 The intermediary king is defined as the one “who occupies a territory close to both the conqueror and
his immediate enemy in front and who is capable of helping both kings, whether united or disunited,
or of resisting either of them individually.”
 The neutral king64 is defined as one “who is situated beyond the territory of any one of the above
kings, and who is very powerful and capable of helping the enemy, the conqueror, the intermediary
king together or individually or of resisting any of them individually.”
The conqueror shall think of the circle of states as a wheel - himself at the hub and his allies, drawn to him.
The enemy, however strong he may be, becomes vulnerable to harassment and destruction, when he is
squeezed between the conqueror and his allies. In order to further his own interests, the conqueror shall
establish, both in the front and in the rear, a circle of kings made up of excellent allies. He shall always
station envoys and clandestine agents in all states of the circle. These shall cultivate those acting against the
interests of the conqueror and, while maintaining their own secrecy, destroy repeatedly such inimical
persons. He who cannot maintain secrecy will undoubtedly find his efforts destroyed like a broken boat in
the sea, even if [temporarily] there are some appearances of success.18
Kautilya’s Six-fold Policy – the backbone of foreign policy analysis:

 Making peace
A king shall make peace or enter into an agreement when he finds himself in relative decline
compared to his enemy. A king shall make peace with the enemy when:
(i) he and the enemy both achieve equal progress in equal time;
(ii) both decline equally in equal time;
(iii) there is no change in their respective situations during the same period of time.

The king can achieve progress by making peace with his enemy if he thinks that
(i) his gain through productive undertakings would be so great as to enable him to
destroy those of the enemy;
(ii) he can enjoy the additional gain from his own works or those accruing from the
confidence generated by the peace;
(iii) he can ruin the enemy's undertakings by using secret methods or occult practices;
(iv) he can entice away the people implementing the enemy's projects by offering them
higher remuneration, favours or remissions of taxes;
(v) the enemy, being allied with a much stronger king, will undergo a decline;
(vi) he can manage to prolong the war between the enemy and another king , because of
which the enemy had made the peace [with the conqueror];
(vii) he can harass the countryside of another of his enemies;
(viii) he can acquire [parts] of the enemy's territory attacked by another and thereby gain
the profits of the enemy's undertakings;
(ix) he can be safe from attack by the enemy who finds himself in a difficult situation due
to the destruction of his undertakings;
(x) he can expect to improve his situation to start profitable undertakings elsewhere with
another king;
(xi) he can sow dissension between the enemy and the enemy's allies and make them his
own allies;
(xii) he can, by judicious use of favours and punishments, make the enemy's own allies
turn against him and [eventually] destroy him.
 Waging war
A king can achieve progress by waging war if
(i) he is confident of repelling an enemy attack because of having superior forces
(ii) he can destroy the enemy's undertakings from the security of an impregnable fort on the
border of his kingdom;
(iii) the enemy's undertakings are on the verge of collapse, having been weakened by a calamity;
(iv) [a part of] the enemy's country can be absorbed while he is busy fighting elsewhere.
 Doing neither
A king can achieve progress without waging war or making peace if
(i) neither the king nor his enemy can ruin each other's undertakings;
 the enemy is involved in a calamity or a life and death struggle, thereby permitting the king to
concentrate on augmenting his own resources.
 Preparing for war
A king can make progress while preparing for war when he can bring about the ruin of the enemy's
undertakings after making sure that his Kingdom will be well-protected.
 Seeking protection
If a king is unable to ruin the enemy's undertakings and is also unable to protect his own from the
enemy's attacks, he shall seek the help of a stranger king.
He shall first avert his decline and then move towards progress.
 Adopting dual policy

A king shall adopt a dual policy if he can promote his own undertakings by having peace with one
enemy and ruin those of another by waging war.
According to Kautilya, when the degree of progress is the same in pursuing peace and waging war, peace is
to be preferred. For, in war, there are disadvantages such as losses, expenses and absence from home. For the
same reason, a policy of neither peace nor war is to be preferred to making preparations for war. As between
adopting a dual policy and seeking the protection [of a stronger king], the dual policy is to be preferred. For,
in adopting the dual policy, one gives importance to one's own undertakings and, thereby, promotes one's
own interests. One who seeks the protection of another serves only the other's interests, not his own.
Most of the aspects of Kautilya’s foreign policy are found in modern day diplomacy in some way or the
other. However, there are few loopholes in the Kautilyan model which make it somewhat irrelevant in the
contemporary context. Kautilya makes the assumption that the kingdom’s neighboring states are its natural
enemies. However, whatever the situation in his days might have been, this assumption is not always
correct. The model is unstable and in the long run, it may disturb the equilibrium as once the King embarks
upon his military venture, he is going to be embroiled in an unmitigated conflict. The whole system remains
self- destructive. Furthermore, the roles of the intermediary and neutral kings have been ambiguous.
Kautilya does mention that the intermediary king is capable of helping the potential king but he says nothing
about how or in what way does he use his capabilities. Though Kautilya’s mandala theory and six-fold
policy may not be that relevant in the contemporary environment as political divisions tended to be more
diffused in the past, but they do provide a basic framework for understanding the model of international
relations and diplomacy.
Western Perspectives
Kautilya, Physiocrats, and Mercantilists:
Kautilya’s notion of economics or the factors contributing to the wealth of nations seem to have been
superior to that of the Physiocrats67 and Mercantilists67.
Kautilya stressed the importance of the development of agriculture for the economic prosperity of the
nations, but by no means considered agriculture to be the sole basis of wealth, as some French Physiocrats
appeared to argue. He also realized the importance of developing industry, trade, and commerce for securing
the wealth of the nation. He knew that the wealth of the nation and the security of the state depended on the
development and efficient operation of several sectors of the economy. Hence, he focussed on the inter-
industry analysis.
Kautilyan economics seems to be much more advanced than the Mercantilist economic theory. Mercantilists
believed that treasures, such as gold and precious metals, were the basis of wealth. The king or prince was,
therefore, generally advised to build up his Treasury through several means. Mercantilists equated treasures
with economic wealth and did not have a clear conception of the role of the Treasury in relation to the
defense and wealth of the realm.
Kautilya, on the other hand, did not believe that national wealth consisted of money or treasures’, and while
he thought that the Treasury should be well provided for, he had a clear conception of the purposes for
which Treasury finances should be used. For Kautilya, treasures were only a means to an end, not economic
ends in themselves.
Thomas Mun68 and other mercantilists envisaged international trade as involving a strictly zero-sum 69 – a
nation obtaining a surplus in trade with an exporting country was seen as gaining at the expense of the
exporting country. This contrasted with Kautilya’s position. He saw foreign trade as advantageous and
suggested measures for its expansion. He encouraged imports but understood that it could not be a one-way
trade; hence, he suggested that the balance between imports and exports need to be maintained. According to
him, mutually advantageous trades need to be encouraged so as to realize some of the gains from trade.20
Kautilya and Adam Smith:
Kautilya and Adam Smith had similar conceptions on what constitutes the wealth of the nation and what the
economic goal of a nation should be. They both recognized the role of investments in building a nation’s
wealth. Kautilya suggested various policies to encourage capital formation in private sector in his treatise
Arthashastra.
According to Kautilya,
“The root of wealth is economic activity and lack of it brings material distress. In the absence of fruitful
economic activity, both current prosperity and future growth are in danger of destruction. A king can
achieve the desired objectives and abundance of riches by undertaking productive economic activity.”
{1.19.35,36}
He suggested to build roads, water works, “remove all obstructions to economic activity” and create an
ethical environment and formulated laws that promoted economic efficiency and ethical fabric of the
society. He identified land, labour, and capital as sources of economic growth and suggested various
incentives to increase the supply of these inputs.
Adam smith also encouraged entrepreneurial activity and believed that a nation’s wealth depends on the
goods and services it creates. While Adam Smith advocated a liberal market-based economy, Kautilya
supported a centrally planned economic system secured by the monarchy.
The four canons of taxation suggested by Adam Smith are somewhat similar to kautilya’s principles of
taxation. According to Adam Smith, a good tax system is one in which the subjects of the state pay taxes in
proportion to their respective abilities. A good taxation must be convenient for the taxpayer and the cost of
collecting the taxes must be minimum for the government. Kautilya focussed on the same thing. He
emphasized certainty of taxation, progressive income tax, convenience of payment, and economy in the
collection of taxes. Additionally, Kautilya was concerned about tax evasion.
Adam Smith appreciated the tax system in India and other countries. He wrote, “The sovereigns of China,
those of Bengal while under the Mahometan government, and those of ancient Egypt, are said accordingly to
have been extremely attentive to the making and maintaining of good roads and navigable canals, in order to
increase, as much as possible, both the quantity and value of every part of the produce of the land, by
procuring to every part of it the most extensive market which their own dominions could afford.” (Adam
Smith 1776: 36470) Kautilya also talked about the tax system in parts of India.
Furthermore, both Kautilya and Adam Smith addressed the undesirability of monopolies. Kautilya believed
that monopolies were a serious threat, not only to the functioning of the market, but also to political stability.
He essentially equated monopoly rents with theft and considered their existence not only a market failure but
also a moral one. He proposed regulation of monopolies to correct the market failure.
On the other hand, Adam Smith talked about how monopolies (market outcomes resulting from restrictions
to trade) hurt capitalism and are less efficient and unsystematic. However, he did not suggest any measures
for regulation of monopolies.
While Kautilya focussed more on creating a welfare state, Adam Smith was more concerned with individual
and self-interest71. Since both of them lived in different economic scenarios, it comes as no surprise that their
objectives and mechanisms were quite different.21
Hypothesis – Kautilya’s Welfare Economics
The Arthashastra offers insights into the welfare policy mechanism existed in the ancient Mauryan empire.
To identify the correlation between the notion of welfare state and economic growth, Kautilya has identified
three central economic pillars: agriculture and cattle breeding, productive manufacturing, and trade. He
considered all three as productive activities and the only activities responsible for creation of material
wealth. Consumer, women, and child safety, welfare of all social groups, animal welfare, labour protection
etc. constitute the making of the welfare state according to Kautilya. To provide social security and welfare
for the citizens, the state took a number of measures like price support schemes, tax incentives, income
assistance to the helpless etc.
Each household shall be allotted the land necessary for its work. They shall be allowed, if so authorised, to
grow flowers and fruits and to store grains and other commodities Each group of ten houses shall be
provided with a well. {2.4.24-26}
Appropriate quantities of the following, enough for consumption, shall be kept in storage: oils, grains, sugar,
salt, medicines, dried vegetables, fodder, firewood, metals, charcoal etc. {2.4.27}
Social security was a matter of private interest as well along with the state problem as the state engaged in
wars could not look after each and every aspect of the social life. Corruption was perceived as the main
threat to social security at that time. So, the state laid down stringent rules against the corrupt state officials.
The resolute fight against corrupted officers showed high level of social consciousness on the part of the
State to protect the interests of the public.
The head of the household has to look after the members of the household and ensure their well-being. The
State on the other hand provided job support and assistance to the head so that he could take care of his
family. The State’s welfare policy was mainly oriented towards the needs of the less privileged, so as to
enable them to enjoy a good standard of living. Accordingly, state funds were primarily allocated to these
social groups and productive economic activities. Education and health services were matters of private
interest and not state affairs.
Thus, Kautilya’s magnum opus contains some of the elements of welfare economics. Kautilya provided the
solution to economic and social problems in the form of moral market economies through the creation of
ideal state where there would be a social contract between the king and his subjects.
Conclusion
Kauṭilya's Arthashastra is an untapped reservoir of ideas and concepts that can be used to tackle larger
economic issues. That goes both for the history of political thought and for theory building with respect to
current questions and puzzles of economic policies. Given the complexity and evolved nature of his thoughts
in the Arthashastra, Chanakya is a predecessor of the long line of both Western classical and modern world
thinkers. He is one of the first builders of theoretical framework on whose ideas today’s intricate global
systems and economic models stand. He offered a complete conceptual framework and a set of concrete
policy measures to promote economic development and fairness. He put dharma (ethics) ahead of artha
(material well-being) since he believed dharma not only paved the way to bliss but also to prosperity. He
considered his Arthashastra as a manual for ensuring the socio-economic well-being of the state. His concept
of good governance is much broader and holistic and continues to be relevant in today’s contemporary
environment.
The objective of the research was to study the Indian strategic culture and reinterpret the past to tackle
contemporary economic issues. In this context, the Arthashastra and other ancient religious texts need to
be resurrected and brought into the academic mainstream as a foundational text. This compilation of
politico-economic thoughts is a priceless and an unparalleled inheritance and yet remains largely
unexplored in the Indian academic arena itself.

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Harshita Jain Indian Economic Thought 1

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The Ancient Literature

Economic thoughts in Vedas:

 disposable income and consumption,

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• to give a person a chance to utilize and develop his faculties;

The Kautilyan State

Chanakya’s Integrated Approach

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• gaining as much tax revenue as possible;

• taxing power is limited;

Kautilyan Taxation System-

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Kautilya emphasized on providing

1. a safety net to those suffering from adversity

 Tax Compliance and Evasion-

Enforcement of rules was an important part of Kautilyan Taxation System.

inspect their work and ensure proper collection of taxes. [2.35]

Kautilya and the Laffer Curve-

Kautilya’s views on optimal tax rate-

He further asserts (regarding the behavior of the tax collectors),

of heavy taxation. He maintains

“The end is economic governance while political governance is the means.” 55

23. Commodities of greater value exchanged for those of smaller value

2) Prakti-kopah sarva-kopebhy gariyan

3) Na ekam cakram bhramayati

4) Dande praniyate vrttih

5) Pratyaksa-paroksa-anumanaih karyani parikseta

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Principles of salary fixation-

Kautilya’s Accounting Methods

 The creation of organizational structure

Kautilya’s Foreign Policy

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Main constituents of the Mandala theory:

There are two more kingdoms in the Kautilyan mandala.

Kautilya’s Six-fold Policy – the backbone of foreign policy analysis:

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 Adopting dual policy

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