Financial Management Lessons from Kautilya's Arthashastra


By

Chitranka Dalakoti Varkey
Assistant Professor (Finance)
Institute of Marketing & Management (IMM)
Marketing Tower, B-11, Qutab Institutional Area, New Delhi-110016
 


Kautilya's Arthashastra, a Sanskrit work of the c. 321-296 BC., is more known for its contents on economy and polity, but the book also contains information and instructions about various aspects of Financial Management and Administration, which are very relevant in contemporary business management. This is perhaps the oldest book on Management available to the world. For the Arthashastra is a work of almost universal interest and appeal, practically every phase of administrative management is captured by this book. Kautilya refers to the State in his writings but his principles are equally applicable in modern business context. The basis of Arthashastra is that one must strive to generate wealth, resources, and money, and share it equitably to create happiness for oneself and others. Such generation of wealth must be through ethical means, which alone will lead to overall happiness.  

Importance of Finance Function : The most important element of the state (business organization), according to Kautilya, is neither the Government (Administrator) nor the Army (Staff), but the Treasury (Finance). "Spiritual good and sensual pleasure" he wrote "depend on material well being" (A.1.7.7, 14).

In a sense, the success of business, the well being or yogakshema of the people (Owner, Manager and Employees) will never occur if the finances are in shambles. This is one point that Kautilya's readers cannot miss, " All undertakings are dependent first on the treasury" (A.2.8.1.85). Every good in business – peace, conquest, order, proper organization, dharma1 (social responsibility & ethics) and so on depends on the business acquiring wealth and using it wisely.

After declaring that "material well being alone is supreme" Kautilya continued by saying that, the king (Owner/Manager) will be happy only when his subjects are happy, and, "Therefore, being ever active, the king should carry out the management of material well being. The root of material well being is activity, material disaster its reverse."(A.1.19.35, 34, 47). In this statement we find the key to understanding the importance of the proper financial management actively and on routine basis. The King can rule (the manager can mange) properly – govern like a concern father, make sure that individuals are not exploited by greed, and bring about Kautilya's vision of social justice – only if there is material prosperity. Thus, Kautilya was not defending endless wealth or economic development but was saying that the calamity of poverty would defeat any good plan a manager wants to carry out, for the progress of his state (business). The goals are always "wellbeing and security" (A.8.1.23, 387) from enemies (various kinds of risk) from both within and without.

Distribution of Profits/Earnings: Kautilya explains the importance of making a balance among the various uses of profit/income simply and beautifully. As translated by Chaturvedi (2001) in his book Kautilya's Arthashastra "…..He may enjoy in equal degree the three pursuits of life, charity, wealth and desire, which are inter-dependent on each other. Any one of these when enjoyed to an excess, hurts not only the other two, but also itself." This is applicable to the management of business finance as well. The way a business organization distributes and manages its profit determines its future financial well being. Kautilya holds that wealth and wealth alone, is important, in as much as charity and desire depend upon wealth for their realization.

Profit Distribution Model: Kautilya's Arthashastra Balancing Approach


The successful companies of our contemporary world, like TATA, INFOSYS, Ford and Microsoft Corp. are virtually working by the same approach of profit distribution. They show a prudent balance in their dividend distribution, retention of funds and in philanthropic activities.

Examination and Auditing: In the Arthashastra, stress has been given both on fraud prevention as well as fraud detection. Kautilya had listed several ways by which funds are misappropriated. Some of these frauds relevant in today's corporate environment are as follows:

(a) Falsification with a motive of personal profit.

(b) Misrepresentation (of income received or expense incurred) with a motive of personal profit:

(c) Discrepancies (arising out of willful fraud) in:

- Personally supervised work

- Account heads

- Labour and overhead charges

- Work measurement

Kautilya admitted that some degree of corruption would always exist, and cannot be scrutinized perfectly, ' 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 personnel of hidden purpose.' He therefore recommends strictest punishment, both material and corporal, as a disincentive to cheat.

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1.
A Sanskrit word.
 

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Source: E-mail January 24, 2011

          

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