“At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.” Jawaharlal Nehru’s iconic words captured the euphoria of India’s independence on 15 August 1947. Yet, reborn from two centuries of colonial rule that stripped its economy of around USD 45 trillion, leaving an 80 per cent poverty rate and 12 per cent literacy, India faced a stark dichotomy. It was a new nation emerging from the shadow of imperialism, but also an ancient civilisation revitalised after centuries of stagnation and suppression.
The land of Bharatvarsha, as defined in the ancient Vayu Purana as “south of the Himalayas and north of the oceans,” had once pulsed with vigour—a centre of learning in astronomy, mathematics, philosophy, and economics. Angus Maddison estimates India controlled 33-35 per cent of global GDP at the dawn of the Common Era, making it the world’s largest economy from 300 BCE to around 1500 CE. At the heart of this glory was Kautilya’s Arthashastra, a seminal text on economy and statecraft from around 300 BCE, written as the Mauryan Empire ascended under unified rule.
By 1947, the country had been fragmented into over 500 princely states, and memories of this ancient glory felt distant. Independence offered a chance to reclaim the past, drawing from ancient knowledge like the Arthashastra. Our government stood at a crossroads: consult the wisdom of the ancients, or begin afresh? Our post-colonial leadership chose the latter.
Influenced by his Cambridge education and exposure to Western theories, Nehru wrote in The Discovery of India: “Our lives are encumbered with the deadwood of the past; all that is dead and has served its purpose must go.” As Pavan Varma notes, India’s past became “some kind of dark cesspool threatening to hold the country back.” We drew from USSR communism and British Fabian Socialism, bordering on radical socialism, as per Arvind Panagariya. These shaped policies emphasising socialism, self-sufficiency, and heavy-industry development.
Socialism restricted the private sector, making capitalism anathema. Centralised planning via the Second Five-Year Plan of 1956 birthed the public sector and the stifling “License Raj.” Nehru told JRD Tata, “Never speak to me of profit. It is a dirty word.” Growth settled at a notorious 3.5 per cent “Hindu rate of growth” while Pakistan hit 6.7 per cent in the 1960s. Regulations tightened with acts like the 1969 Monopolies and Restrictive Trade Practices Act, making layoffs near-impossible and unions powerful. High taxes—peaking at 97.5 per cent in 1973-74—curbed spending and business.
Heavy industry focus reduced agricultural investment, leaving India vulnerable to the 1960s droughts and dependent on 10 million tons of imported food. Nehru admitted shortly before death: “Though we all know that agriculture is essential and basic, it has been rather neglected.” This skewed approach skipped gradual import-substitution industrialisation, frontloading heavy industry when capital was scarce—the “real key to the failure,” says Panagariya. Employment stagnated; agriculture’s workforce share remained 69.7 per cent in 1971. Poverty fluctuated without decline until the mid-1970s.
Did shunning the past miss an opportunity? The Arthashastra contrasts sharply with the policies we adopted post-independence, advocating support for private enterprise, profit, trade, and growth with selective state regulations. Kautilya urged removing “all obstructions to economic activity,” warning: “In the absence of fruitful economic activity, both current prosperity and future growth are in danger of destruction.” It fostered a “fully operational market economy” with supply-demand pricing millennia before Adam Smith.
Kautilya promoted tax breaks, infrastructure like highways and canals, and efficiency wages based on productivity—e.g., in yarn factories, assessing “fineness, coarseness or medium quality of the yarn” for pay. Private property and self-interest promoted welfare, but the state’s “visible hand” tempered markets: discouraging monopolies, controlling prices, limiting profits to avoid “unfair income redistribution,” and supporting agricultural prices.
Taxation was crucial—“All undertakings depend on finance. Hence, foremost attention must be paid to the treasury,”—but moderate: “Just like a leech, calf, and bee draw only small quantities… a King should take from his subjects, very small amounts of taxes.” The 1/6 rate aligns with modern Laffer Curve principles of keeping tax rates at a level that drives maximum revenue, while providing incentive for growth. This level was far below modern India’s 42.74 per cent personal and 34.94 per cent corporate rates.
Diversification was key: “Only a diversified economy can assure stable and prosperous economic growth.” Agriculture was paramount—“cultivable land is better than mines because mines fill only the treasury while the agricultural production fills both the treasury and storehouses”—with state control for equitable allocation. Liberal trade policies encouraged imports via lower taxes (1/5 vs. 1/6 domestic) and sops for foreign merchants, while exports followed comparative advantage, avoiding unprofitable deals except for strategic allies.
Social welfare was the king’s “utmost duty,” maintaining children, the aged, and the distressed, providing free grains to the unemployed, and job support, showing a very progressive model of government support within the construct of a largely free and liberalised economy.
Could we model what would have happened if we had adopted the Arthashastra’s policies post-1947? India’s 1980s-90s reforms offer clues. An “attitudinal shift” toward private business, per Dani Rodrik and Arvind Subramanian, eased licensing and amended MRTP, boosting GDP to 5.6 per cent. Trade liberalisation reduced canalised imports, incentivised exports, and raised imports-to-GDP from 4.1 per cent to 6 per cent, with the lower barriers to trade further boosting growth. These measures echoed what Kautilya had advocated thousands of years earlier.
Agriculture’s Green Revolution, from the mid-1970s, hiked wages 37-47 per cent in 1977-88, dropping poverty from 55 per cent to 35 per cent and fuelling rural demand for durables, vital for the 1990s growth. Tax cuts from 97.5 per cent to 30 per cent brackets increased revenue and unshackled enterprise. This also showed how an earlier focus on agricultural reform and more moderate taxation, as propagated by Kautilya, could have revitalised our tattered economy.
The growth of the ‘Southeast Asian tigers’—Singapore, Hong Kong, South Korea, Taiwan, all growing 6-8 per cent while India struggled at its ‘Hindu rate of growth’ also offers clues. These economies all thrived via export-oriented industrialisation and FDI, also a testament to how a more liberal trade policy, as Kautilya recommended, would have been beneficial.
But context tempers this: Kautilya’s era was a stable empire; Nehru’s a poverty-ridden nation amid the Cold War. Self-reliance avoided imperialism’s traps—Nehru saw trade as breeding colonies. Southeast Asia’s openness led to proxy wars like Vietnam and the 1997 crisis from foreign savings masking vulnerabilities.
The Partition’s scars—two million dead, 15 million displaced—and wars with Pakistan justified an extent of state control for stability. Food deficits meant “ship-to-mouth” existence; welfare like today’s free rations for 800 million was impossible then. This preserved democracy, unlike Pakistan’s coups, and its current precarious economic state.
Economically, adopting Kautilya’s policies would have improved our fortunes and accelerated our path to growth, without being stuck in the trap of the ‘Hindu rate of growth’ for decades. Admittedly, socio-political realities urged stability and greater state control at that time. However, it seems that a progressive incorporation of the Arthashastra’s ideas could have advanced growth without risks.
This debate transcends economics. In 1947, India chose Western paths over ancient ones. Today, as the fastest-growing major economy, projected to be the third largest in three years, blending globalisation with honouring our roots—like Kautilya’s wisdom that once made India the ancient world’s biggest economy—could ensure continued success.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication. |
