KAUTILYAN ECONOMICS: AN ANALYSIS AND INTERPRETATION

SAM SARKAR
(Saginaw Valley State University)
The work of Kautilya is known to a very few economists in the western world. Hence, an
introduction of Kautilya, the time of his work, and the circumstances that prevailed at the time
might be helpful in appreciating his economic ideas.
Kautilya, also known as Vishnugupta and Chanakya, was a Brahmin from India and a
contemporary of Aristotle. While there is some controversy about the exact date of his work,
most scholars place him in the fourth century B.C., during the time of Chandragupta Maurya,
the great Indian emperor who ruled India for a long time. In fact, it is said that Kautilya
established Chandragupta as the king of India and liberated India from the misrule of
King Nanda.1 A review of relevant literature further indicates that Kautilya may have actually
served as the minister in the kingdom of Chandragupta and exercised a dominant role in the
governance of the state.
Kautilya’s book Arthashastra is essentially a book on statecraft and is a guide to the means
of acquisition and preservation of the “Artha” or wealth. His ideas were primarily designed to
maintain and increase the strength and control of a monarchy. Kautilya was a realist. His ideas
about governing a state were quite practical. In his time, he would be considered a radical,
because he rejected many of the established values and ideas of the Hindus, and many of
the teachings of “Dharmashastra”.2 For example, he did not consider religion to be above the
interest of the state. In fact, he would not hesitate to exploit religious sentiments of people to
accomplish his goal of strengthening the state.3 Although he was Brahmin,4 he did not think
Brahmin should be immune from paying taxes and from other responsibilities to the state. On
the other hand, he increased the role and recognition of the low cast people and was generally
opposed to slavery.”5
The word arthashastra literally translated means principles of money or wealth.
Kautilya, however, used the word in much broader context to include many of the activities
of a stateeconomic, political, social, military and others that may affect its wealth. His ultimate
objective, however, was not to benefit the king but to benefit the people. He thought a strong
and wealthy monarchy would be in a position to protect the interest of the people against the
invasion of other kings. He has repeatedly mentioned that the king must keep his subjects
happy and should not impose any oppressive rule except during emergency.
Kautilya’s Arthashastra is a masterpiece work particularly in the context of the time when
the book was written. He seems to have encyclopaedic knowledge about different aspects of
governing a monarchy such as: administration, revenue, taxation, law, diplomacy, business
and trade, coinage, agriculture and land tenure, labour, people and the society, etc. The
economic ideas presented here are only a very small proportion of Kautilya’s total work. Often
his economic theories are implicit rather than explicit, which is understandable because he did
not write a book on economics as we know it today.
In this paper, I have tried to interpret the underlying economic ideas in Kautilya’s economic
recommendations. I do not claim to be exhaustive and complete. I have taken only those that I
think could be understood in the modern context. The economic ideas expressed here are not
new to the modern economists, but what is surprising is that Kautilya had these thoughts some
2400 years ago. Many of the same ideas have been rediscovered and restated since his time.
The following are some of Kautilya’s economic ideas that are quite familiar to us today.
 Volume 47, No. 4 63

Demand and Supply

Kautilya knew the concepts of demand and supply and their combined influence on
price He even writes about the estimation of demand and control of supply According to him,
a king should not arbitrarily fix the price of a product without regard to its supply and demand
situations.
incentive He advocated the concept of a ‘just price’. The ‘just price’ was designed to
maintain the on the part of the business people by allowing them five to ten per cent profit in
this operations. As the state owned businesses competed with the private businesses, the
conflict private sector is not choked off. He indicated that an arbitrary price cannot be dictated
from of interest was clear Kautilya suggested some parity in price be maintained such that the
above without regard to the cost of production, the ratio of supply to demand, a reasonable
level of profit etc. When there was a glut of any commodity, the State (designated state
official panyadhyaska) was expected to intervene and centralise the sale of that commodity
so that ne price did not slump.6 Apparently, the entire supply was purchased and its sale
carried out through the agency of the state at a fixed price. All in all the text reveals a definite
attempt to Strike a reasonable balance between the interests of the state, the traders and the
consumers, often however, the interests of the consumers are regarded as supreme.7
The state business was assigned to a designated state official (Panyadhyaksa) who was
expected to be an expert in determining the values of various commodities and must always
be thoroughly posted with the demand and supply situations of the commodities involved.
Any kind of price collusion by the groups and associations of merchants were discouraged by
heavy fines on the offenders.
Foreign Trade
Kautilya clearly understood the advantages of foreign trade. Foreign trade was strongly
encouraged. In fact, he recommended that experts be sent to study foreign markets and
determine which commodities could be imported and exported profitably. He encouraged
imports but understood that it could not be a one way trade; hence, for the long term, he
suggested a balance between import and export be maintained. He does not display any of
the fears of foreign trade that the mercantilists after him had displayed. He stated that before
a successful trade contract can be established, it must be beneficial to all countries involved.
There must be a price advantage and profit to be made. Hence, greater consumption
possibility and profit motives seem to be dominant factors in encouraging foreign trade.
Foreign trade, however, was regulated – not everything could be imported or exported.
Kautilya laid down general and specific policies regarding all aspects of trade which seems
all too complex and strangely modern. However, the policies are primarily administrative in
nature and outside the focus of this paper; hence, not discussed here.
Risk and Uncertainty
Kautilya related the levels of risk and uncertainty to levels of profits and interests. He had
indicated that the higher levels of risk and uncertainty must be compensated by the probability
of receiving higher profits and interests. For example, he recommends the allowable profit on
imports to be twice as high as on domestic goods. The associated risk was considered to be
an important reason for allowing 10% of profits on imports and only five percent on domestic
products. In those days, the importer of foreign goods faced great danger of being robbed
and looted while transporting their products. Further, a large amount of capital investment was
needed for foreign trade.8 The potential risk and the expected high profits were the reasons
why the overseas traders were paid an extremely high interest of 20 per cent per month on
borrowed money.
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Interest
Unlike Aristotle, who considered charging interest on loans as unjust, Kautilya outlined a
structure based upon the type of loans, factors affecting interest rate, methods of calculating
interest, and the circumstances when interest may not be collected by the lenders.
Interest rate in his time varied from 1.25 to 2 per cent per month, primarily, depending
upon two factors; the risk involved and the potential productivity of the money borrowed. The
interest rate on secured loan for personal need such as to meet marriage expense was only
1.25 per cent per month. The rate was higher for trade purposes. In the case of ordinary local
trade the rate was five per cent per month, but the rate doubled for those trading in forest
products. The traders who travelled to forest areas were subjected to greater risk from animals
and robbers; further, the business in forest products was more profitable. The highest rate of
20 per cent per month was charged to those who engaged in overseas trade considered to
be the most risky but also the most profitable business. Further, the rate of interest was also
high on loans taken by a group of people rather than by an individual. It was felt, as the group
would share the burden of interest, it would not fall heavy on any one individual. Moreover,
the group was generally in the better position to pay high interest because it was involved in
large projects with greater profit potential such as foreign trade.
The creditors could not charge an interest not approved by the state. Further, certain
groups of people due to their inability to pay (sick, bankrupt), or due to the nature of their work
(student) may be exempt from paying interest - the privilege, however, had to be earned by
the process of law. Six different kind of interests were distinguished by Kautilya:9 compound
interest, periodical interest, stipulated interest, daily interest, and the use of a pledged article.
Indeed the idea of expressing interest as a percent, or so many units per hundred originated
in India. The overall Kautilyan system of interest seems quite elaborate, complex and even
modern.
Law of Diminishing Return
Kautilya neither set forth a systematic population policy nor provided an explicit statement
on the Law of Diminishing Return, but his planning and recommendations on settlement of
people on land, land classification and utilization, and other comments on social aspects,
indicate that he was concerned about excessive population growth and the Law of Diminishing
Return.
He encouraged the State to build new villages either on new sites or on old reins; a
measure he recommended to avoid congestion in existing villages by transferring the excess
population to the new settlements.
Each newly created village was designed to have between 100 to 500 families (500-
2500 people).10 The distance between neighbouring villages to be between two to four miles.
It seems that the policy was to create a uniform pattern of comparatively small interdependent
villages. The congestion to be avoided by limiting the number of people living in it. He did not
think that large congested but self-sufficient villages were as efficient as small villages which
depended on each other to fulfil their wants.
Kautilya differentiated land according to its productivity. The share of the crop that the
state may receive from land depended upon the expected return from such land. He also
outlined the conditions of remarriage and its effects on population, diseases and famine.
Wages
Kautilya used three criteria in prescribing wages for the state employees. He indicated
that the wage should be high enough to maintain loyalty of high echelon officials, to evoke
the needed efficiency and effort, and to reflect the relative standing of an occupation. He
 Volume 47, No. 4 65

recommended that the aggregate wage bill of the state should not exceed one fourth of its
revenue
In determining wage in the private industries, Kautilya uses a variety of factors the quality
and quantity of work, market value of the final product, the market value of the inputs, etc
The wage differed between the industries based upon the skill and technology required.
and ivithin the industry based upon the quality and quantity of work done. Higher wages were
paid for overtime work done during holidays.
The labour market was quite competitive. Those who could not compete joined the
ranks of the unemployed and the unskilled labours with their wages appreciably reduced
The concept of contractual wages also existed. The quality and the quantity of work to
be performed were specified for a certain sum of wages.
A general review of the industries, described by Kautilya indicates a trend toward
specialization and use of mechanical devices to improve the quality and quantity of output.
in Arthashastra, there is a definite effort to formulate a wage policy based on the realistic
understanding of the economics, social and political factors. The emerging policy must be
just, and must be consistent with the interest of the state as a capitalist in Kautilya, the state is
a party to any labour or wage legislation11 together with farmers, merchants and industrialists
The policy suggested in Arthashastra attempts to strike a balance between the delicate
interests of the parties involved. Kautilya indicates that although the state is in a privileged
position of a monopolist, it should co-operate with the private sector for proper utilization of
resources. Further, a strong private sector is a source of strength to the state,
Money.
In Kautilya’s economy, there is no restriction on the supply of money. The supply and
demand for money seem to take care of themselves without any interference from the state.
It seems the restriction on the supply of money comes from the availability of gold and silver -
the two important metals used in the manufacture of coins. In manufacturing coins, both gold
(for gold coins) and silver (for silver coins) had to be mixed with definite proportions of other
alloys. Any individual could have his gold or silver converted into coins at the state mint for a
fee. Different denominations of coins were used for transaction purposes. It seems the supply
of money was not used for controlling economic activities.
The Tax System
Kautilya’s discussion of taxation has several underlying principles:12 The taxing power
of the state should be limited, tax should not be felt to be heavy or excessive, tax increases
should be graduated,13 tax should be levied in proper place, time and form, and tax level
should be equitable and reasonable.
Kautilya noted that a ruler should not tax at his pleasure. He took extreme care in
avoiding fiscal tyranny and consequent public discontent. He thought that “Disloyal and
indifferent subjects will endeavour to destroy even strong kings”.14
He stressed that subjects should be taxed in such a way that it maintains their ability to
bear future burden, and, if necessary, a heavier one. If the tax is raised it should be raised little
by little during the time of prosperity.
He did advocate proportionately higher income tax on the rich and higher sales tax on
the luxury goods. However, to Kautilya, it was essential that a ruler supply sufficient overhead
capital and developmental assistance, or encourage it through tax exemptions. Further, a king
should direct expenditure to profitable projects and have in hand sufficient reserved of money,
66 THE INDIAN ECONOMIC JOURNAL

food, clothing, and ammunition to meet the need imposed by calamities, war or other
emergencies. Many groups were exempt from tax either due to their inability to pay
(handicapped conditions), or the service they were engaged in (priest).
The land tax was collected only if there was a profit above the normal level. The schedule
of taxes on production and sales was prepared after carefully calculating the cost of production
and the normal profits, the length of time needed to sell the product, the level of unsold
inventory, the fluctuations of the market, etc., the taxation by the state took into consideration
the conditions necessary for ensuring the stability and welfare of the tax payer.
Different kinds of taxes existed such as: direct and indirect taxes, sales and excise
taxes, income and value added taxes. It seems Kautilya’s scheme of taxation involved the
elements of sacrifice on the part of the tax payer, direct benefit to the taxpayers, redistribution
of income (the state took care of its poor), and tax incentive for desired investments. One of
the unique features of his tax policy was to allow for a normal amount of profit for businesses
before the tax was collected. Kautilya’s tax system seems quite comprehensive, particularly,
in light of the antiquity of his writing. However, some of his ideas on taxation existed in Indian
literature even before Kautilya.
Economic Planning
The most important underlying goal in Kautilya’s economic planning is the creation of
wealth to strengthen the state; hence, to protect and benefit the people. In his scheme of
economic planning, the following seem to be the most important aspects of his statecraft: 1)
conservation of resources for sustenance of rural and urban areas; 2) allocation and utilization
of resources for economic growth; 3) defense of the state and 4) consolidation of its potential
for emergencies and against invasion.
Kautilya outlined in meticulous detail the techniques of controlling practically every aspect
of economic activity. However, his prescription for control was to discipline and streamline the
various economic activities for the greatest economic welfare of the state which was viewed
to be consistent with the prosperity of its subjects.
Kautilya outlined the techniques for regulating agriculture, domestic non-agricultural
businesses, as well as foreign trade. Definite wage structure and policies were instituted
in accordance with the product produced. The employee and employer relationship was
monitored to prevent exploitation of labour or disruption of production by the workers. The
state ensured that all the contractual arrangements between them were fulfilled. It was in the
interest of the state to see that the production did not cease.
The output was not allowed to be sold at the point of origin, it was to be sold only in
designated market places to that price regulation on products could be systematically applied.
The state determined the prices of products based upon its estimate of demand and supply
The price was so regulated that it allowed a profit of five percent for local business, and about
10 per cent for foreign trade. The state often controlled the supply if the predetermined price
could not be maintained. It also provided social overhead capital and often tax incentive for
businesses to operate profitably. Further, the state did not believe in self sufficient villages -
specialization and foreign trade was emphasized.
In theory, the state had the absolute control over all aspects of economic activities in
practice, it allowed and even encouraged the growth of private businesses. It was recognized
that the wealth of a state depended upon the wealth of the people, hence, it could not stifle
individual initiatives in production and profit.
 Volume 47, No. 4 67

While the economic welfare of subject and private businesses were not in conflict with the
welfare of a state Kautilya streamlined all economic administrative political legal and social
activities to strengthen the state.
Breloer such a planned economy was necessitated by the very circumstances that
prevailed in India. And he points out that there was no trace of such a planned economy in
European theories until recent times.15
One must marvel at the depth of Kautilya’s pragmatic philosophy underlying his work in
Arthashastra. Although, he did not write a book on economics per se, he has expressed and
used many economic ideas in managing the affairs of the state as early as 4th century B.C.
Since then many of his economic thoughts have been rediscovered and restated by many
prominent economists and philosophers that we know so well Kautilya should earn his rightful
place among the stalwarts of the history of economic ideas.
NOTES
1. It is said that Kautilya was to serve as the chiet priest during religious ceremony in the court of
King Nanda. But, Nanda insuited Kautilya in public by replacing nim with someone else Enraged
by the insult Kautilya is said to have promised to dethrone King Nanda, which he successfully
accomplished
2. A religious book outlining the duties and responsibilities of people.
3. Kautilya has been compared with Machiavelli due to the former’s “crooked” prescriptions to
strengthen the state.
4. A person belonging to the highest caste, normally a priest or a religious teacher.
5. Megasthenese a Greek Philosopher in his account of India wrote that no slavery existed in India.
There are some differences of an opinion on this topic conclusion, it can be said that slaves in India,
if any, were freer than in Greece or Egypt.
6. Kangle, (1960), p. 176
7. Ibid
8. Further, the time needed to complete the related process was generally long; hence, the
recovery of the investments was slow. For this reason, a bigger return was expected to
compensate for the time value of money.
9 Some of these have been mentioned in ancient Indian literature before Kautilya Panini mentioned
all of them except daily interest.
10. Sen (1967), p. 16.
11. What is aimed at by labour legislation is that neither the employer nor the employee should lose
whatever is legally due to either side according to the current or agreed standards of the time.
12. Some of these principles existed in Indian literature before Kautilya.
13. Kane (1926), pp. 184-189 and 192-193.
14. Choudhary (1971), p. 131,
15. Broeloer. (1934). pp 360-62.
REFERENCES
1. Bandopadhay, Narayan, (1927), Kautilya. Calcutta: Chakraborty, Chatterjee and Co Ltd,
2. Bhatia, H.L (1978), History of Economic Thought, New Delhi. Vikas Publishing House Pvt Ltd
3. Broeloer, B. (1934) Kautilya Studien, Leipzig Finanzverwalting and Wirshaftsfuhrung.
4. Choudhary. Radhakrishna (1971). Kautilya Political ideas and Institutions, Varanasi: The
Chowkhamba Sanskrit Series Office
5. Kane, P.V (1926), “The Arthashastra of Kautilya”, ARBORI (2)
6. Kangle, RP. (1960), Arthashastra, Bombay. University of Bombay.
7 Sastri, R. Sharma (1909), Arthashastra of Kautilya. Mysore Government Orient Library
8. Sen, Benoy, C. (1967) Economics in Kautilya. Research Series, 53 (32). Calcutta. Sanskrit College.