India’s governance has failed in two key aspects. Its policies are based on the failed economic system of socialism and we follow the British imperial administrative system of district magistrates and the IAS, which was designed to control, suppress and exploit India.

We can gain valuable insights into both these aspects by reviewing Kautilya’s Arthashastra. Without doubt, this work must rank alongside the great works of all time, particularly in the field of economics and administration. Many insights embedded long ago in Kautilya’s work were discovered by economists only over the last century.

Western economists don’t know much about Kautilya’s work but Balbir Sihag, an academic of Indian origin in the USA has dramatically improved our knowledge about the economic insights that informed ancient Indian governance through his 2014 book, Kautilya, the True Founder of Economics in 2014.

I had acquired a copy of Rangarajan’s 1992 translation of Arthashastra years ago but it was Sihag’s work that inspired me to examine the book critically as an economist. And it is clear to me that Kautilya was indeed the true founder of economics even though his work is not well known even to the people of India.

Kautilya’s economic system is best described as well-regulated capitalism, although it had a few elements of state intervention in the economy and trade which are probably inconsistent with modern understandings of economics. However, it is very clear that his was a profit-oriented system, completely distinct from socialism. Kautilya would have chastised Indian leaders who, till today, follow a largely socialist model of economy. He would have opposed any attempt to bring about forced economic equality amongst people.

He favoured an open economy and particularly focused on imports. He wanted imported goods to be sold in as many places as possible {2.16.4 – Rangarajan’s translation}. To encourage imports of foreign goods he provided such merchants exemption from taxes and allowed them to make high profits. He recommended a regulatory system, not prohibition, for “vices” like alcohol and prostitution. And the meat of male calves, bulls and barren cows or those that died naturally was included in the many types of meats available in the Kautilyan economy.

Kautilya was a pastmaster in his understanding of governance and incentives. As Sihag notes, “Kautilya realized that the same type of material incentive might not work for the Chief of Defence and for an ordinary soldier. Accordingly, he considered many kinds of material incentives, such as efficiency wages, promotion and job tenure to match the specific needs and position of an individual employee”.

Accordingly, “he was, perhaps, the first economist who suggested payment of efficiency wages” (Sihag), the first being Robert Solow in 1979. The king paid a wage higher than the market wage to key ministers and executives so they would work honestly in order not to be removed from that job. “The highest salary paid in cash, excluding perquisites, was 48,000 panas a year and the lowest 60 panas a year. The ratio of the highest salary to the lowest, was eight hundred to one” (from Rangarajan’s translation). Kautilya made it clear that this sum was high because it would be “enough to prevent them from succumbing to the temptations of the enemy or rising up in revolt”.

“Kautilya suggested that material incentives be matched to the specific rank of the employee to elicit maximum possible effort. He suggested that the king should rely more on payment of efficiency wages to upper grade employees, such as Chief of Defence, Councilors, Chancellor, Treasurer, Auditor and Ministers. On the other hand, the king should rely more on granting promotion and job tenure to the middle and lower grades employees, awarding prizes to soldiers and giving gifts to piece-rate workers” (Sihag).

While a very high wage was paid in the high positions, these roles were subject to close monitoring by the king and termination, even death, for breach of trust. Kautilya discusses the active surveillance of his officials and the treatment to be meted to errant officials. This ranges from confiscation of property and dismissal, all the way to death.

Thus was India’s system of administration legendarily honest and incorruptible, as reported by many travellers into India over the past two thousand years before British rule.

Many aspects of this system are followed in some way or other in the best administrations of the world today, such as Australia and Singapore. In both cases top positions are very highly paid but held to account for results. In Australia, the positions are contractual and lower positions have greater tenure. In Singapore, the civil service stringently weeds out the poor performers.

Sadly, we continue to follow the British imperial governance system in India today. It is a uniquely unaccountable system, made worse by Part 14 of the Indian Constitution which gives the public services a special status. No other major democracy has incorporated so many protections for its public services.

When I go to the villages across India, I talk about the need to understand Kautilya’s Arthashastra. Although not everything in Arthashastra needs to be implemented exactly the way it is prescribed, there is enormous value in following the broad principles he articulates, which are very similar to those followed in the successful Western capitalist societies.