Kautilya was a professor at Takshashila university (in Taxila now in Pakistan) and the intellectual guardian of Emperor Chandragupta Maurya. Chandragupta came to the throne in 321 BC, the date of composition of this work is assumed to be the end of the fourth century BC (McClish 2014).
Kautilya in his Arthashastra (means Economics in Sanskrit) suggested an economy, which is mainly a public sector based system. Although he had to work with the monarch, he suggested that a king’s duty is to uphold the welfare of the subjects and if he fails, the subjects had the right to disregard the monarch as the ruler (Weber 1919; Weiner 1967). He was the Prime Minister of Chandra Gupta, who created a vast empire spanning from Afghanistan to Assam and defeated Seleucus, the General of Alexander, in charge of Babylon, and married his daughter. The success of Chandra Gupta was attributed to Kautilya, who advised the king to have a mixed economy with extensive control on every aspect of the economy with the objective to maximize the welfare of the subjects. Perhaps that was the first example of a socialist economy of Yugoslav type in the ancient world. This chapter analysed the detail of that type of an economy.
The Arthashastra is the main book written by Kautilya is an ancient Indian treatise on statecraft, economic policy and military strategy, written in Sanskrit. Kautilya also completed two other works: Chanakya-Sutras(Rules of Science) and Chanakya-Rajanitisastra (Science of Government Policies).
The Arthashastra was influential until the twelfth century, when it disappeared due to the occupation of India by the Muslims. It includes books on the nature of government, law, civil and criminal court systems, ethics, economics, markets and trade, the methods for screening ministers, diplomacy, theories on war, nature of peace, and the duties and obligations of a king. The text incorporates Hindu philosophy, includes ancient economic and cultural details on agriculture, mineralogy, mining and metals, animal husbandry, medicine, forests and wildlife (Basu and Sen 2008).
Kautilya said in Arthashastra:
In the happiness of his subjects lies King’s happiness; in their welfare his welfare. The king shall not consider as good only that which pleases him but treat as beneficial to him whatever pleases his subjects. (Rangarajan 1987)
He advanced the hypothesis that the pursuit of productive activities was the key to stabilization of the current income and its rapid growth in the future. The substitution of the state with the corporation, the king with the CEO or the board of a corporation, and the subjects with the shareholders, bring out the quintessence of corporate governance, because central to the concept of corporate governance is the belief that public good should be ahead of private good and that the corporation’s resources cannot be used for personal benefit (Sihag 2004).
Social welfare is the main focal point of Kautilya’s economic notions. The State was required to help the poor and helpless and to be proactive in contributing to the welfare of its citizens. Kautilya gave more emphasis to human capital formation that is relevant in current times because development is not possible without human capital growth. Besides these ideas, there are a number of things in Arthashastra which is very significant such as conservation of natural resources (Trautmann 2012).
Kautilya’s Arthashastra maintains that for good governance, all administrators, including the king are considered servants of the people. Good governance and stability are completely linked. If rulers are responsive, accountable, removable, recallable, there is stability. If not, there will be instability(Thanawala 2014).
Kautilya on the Factors Relevant to Creating Wealth. Kautilya stated in Arthashastra, 2.8.3: The following are the means of increasing the wealth of the State: ensuring the prosperity of state activities; continuing well-tried policies; eliminating theft; keeping strict control over government employees; increasing agricultural production; promoting trade; avoiding troubles and calamities; reducing exemptions and remissions; and increasing cash income (Rangarajan 1987; Kangle 2010).
In Arthashastra, 2.8.4, he wrote: obstruction, misuse of government property and false accounting by government servants lead to a reduction of wealth (Spengler 1971). With no distraction, the people will be fully involved in the work in the fields and there will be an increase in the supply of labour, money, commodities, grain and liquids to the treasury (in Arthashastra, 2.1.33-35; Patrick 2013).
Kautilya added, in Arthashastra, 8.4.49 that, “Calamities to the treasury can be any internal or external action which has the effect of reducing the revenue. Financial health can be affected by misappropriation by chiefs, remission of taxes, scattered collection, false accounting and looting by enemies and tribes before the revenue reaches the Treasury” (Rangarajan 1987)
Nature of the State According to Kautilya
Boesche (2002) interprets that the text is grounded more like the Soviet Union where the state envisions itself as driven by the welfare of the common good. Kautilya’s Arthashastra depicts a bureaucratic welfare state, in fact some kind of socialized monarchy, in which the central government administers the details of the economy for the common good. The Arthashastra discusses a mixed economy, where private enterprise and state enterprise frequently competed side by side, in agriculture, animal husbandry, forest produce, mining, manufacturing and trade (Boesche 2002; Waldauer 1996).
However, royal statutes and officials regulated private economic activities, some economic activity was the monopoly of the state, and a superintendent oversaw that both private and state-owned enterprises followed the same regulations. The private enterprises were taxed. Mines were state owned, but leased to private parties for operations, according to Chapter 2.12 of the text. The Arthashastra states that protecting the consumer must be an important priority for the officials of the kingdom (Sen and Basu 2006).
Arthashastra stipulates restraint on taxes imposed with fairness and how increases in taxation should be implemented. The text suggests that the tax should be “convenient to pay, easy to calculate, inexpensive to administer, equitable and non-distortive, and not inhibit growth” (Sihag 2004; Patrick 2004). Fair taxes build popular support for the king, states the text, and some manufacturers and artisans, such as those of textiles, were subject to a flat tax. The Arthashastra states that taxes should only be collected from ripened economic activity, and should not be collected from early, unripe stages of economic activity (Spengler 1971).
Kautilya’s discussion of taxation and expenditure gave expression to three Indian principles: taxing power [of state] is limited; taxation should not be felt to be heavy or exclusive [discriminatory]; tax increases should be graduated (Gautam 2016).
Agriculture on privately owned land was taxed at the rate of 16.67%, but the tax was exempted in cases of famine, epidemic and settlement into new pastures previously uncultivated and if damaged during a war. New public projects such as irrigation and waterworks were exempt from taxes for five years, and major renovations to ruined or abandoned waterworks were granted tax exemption for four years. Temple and gurukul (educational establishments) lands were exempt from taxes, fines or penalties. Trade into and outside the kingdom’s borders was subject to toll fees or duties. Taxes varied from 10 to 25% on industrialists and businessmen, and it could be paid in kind (produce), through labour, or in cash (Sihag 2004; Kumar 2005).
Fiscal Policy of Kautilya
Kautilya recommended a mixed economy and argued for a very active role by the government. He explored ethically possible avenues to maximize the level of wealth in the public sector. He was aware of the limits placed on governments to raise revenue through taxation. He said “Artha (sound economics) is the most important; for, dharma and kama are both dependent on it (Arthashastra, 1.7)”. He continued “If receipts and expenditure are properly looked after, the King will not find himself in financial difficulties (Arthashastra, 5.3.45)”. According to Kautilya, therefore, a king must carefully manage the financial affairs of the state (Rangarajan 1987; Albinski 1958). The Chief Controller of State Trading shall ascertain the profitability of a trading operation with a foreign country. He shall, in general, trade with such foreign countries as will generate a profit; he shall avoid unprofitable areas (Arthashastra, 2.16).
Kautilya prescribed that each public enterprise be required to generate a maximum amount of profit without crossing ethical bounds. Therefore, accurate measurement of the economic performance of a public enterprise and the elimination of opportunities for misappropriation of public funds by government employees were deemed absolutely critical (Sihag 2004; Trautmann 2012).
The Comptroller-Auditor, who was ultimately responsible for financial matters, was required to be knowledgeable, efficient and incorruptible. He proposed the establishment of two very important offices to monitor and manage the financial health of the state: the positions of Treasurer and Chief Comptroller-Auditor. Both were to b...