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Professor T. N. Srinivasan on the importance of integrating finance, management and development

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Considered alone, development, finance and management is each a vast field, albeit with substantial overlaps among them.  Let me illustrate the overlap by means of an example which has relevance from a historical and contemporary perspective, namely, the central role of finance and management in development.

At the early stages of economic development, agriculture and related activities employ almost all the resources and provide work and livelihood for the entire population.  Even today the dominance of agriculture in India and South Asia is evident. The dominant asset and non-labour factor of production, historically for millennia until the emergence of large scale manufacturing and industry, was land.  Agriculture, broadly defined to include animal husbandry, with land and labour as primary inputs was the production activity around which all other services, trade, arts and petty manufacturing were organized at early stages of development, if not always. Economy was the idealized self-sufficient village community or small areas reachable with the relatively primitive transport and communications technologies.

Two features of agriculture illustrate the significance of finance, credit and management in development. First, the inputs and their allocation—of land across various crops and of labour across land preparation, irrigation and application of fertilizers prior to sowing—must be committed at the beginning of the crop cycle.  Farmer has very limited flexibility to adjust the allocations during the crop cycle in response to weather and demand shocks. Other inputs such as fertilizer, labour for irrigation and weeding, etc., can be adjusted to realised shocks. Second, while most inputs are committed during the crop cycle, the output being subject to additional weather shocks is not known until the harvest is processed and securely stored. Further, the value of the output depends on post-harvest spot prices. Since at best only the joint probability distribution of shocks, prices, etc., and not their actual realisations can be known, the environment of agricultural production is highly uncertain.

The uncertainty and risk of committing land and other inputs in advance of realization of value generates demand for credit to finance the inputs and to sustain the farmer’s consumption during the crop cycle. The length of this cycle varies from a few months for seasonal crops to a year or more for annual and tree crops. Moreover in areas where there is ample rainfall or assured irrigation more than one crop can be raised on the same plot of land. This allows the possibility that the loss of crop in one season could be offset by a bountiful crop in the next. Indeed, in parts of India where Kharif crops could be lost because of floods, the retained moisture and silt from floods could enable more extensive cultivation and higher yields of crops in the following Rabi season. Thus the agricultural risk—ex ante and realized—could could change from year to year due to natural disasters of floods and droughts.

Historically, in addition to credit, risk taking, and risk sharing arrangements have evolved, first in agriculture and then elsewhere as development proceeded, eventually to a specialized and complex financial sector. On the supply side, only those who had enough accumulated resources, social and legal instruments for collecting the principal and interest, and a capacity and taste to bear the default risk, could extend credit.  It is no surprise that only landlords with large landholdings and traders in agricultural inputs and outputs had the capacity, desire and ability in adequate combinations to become large players in providing credit. And the demand for credit arose not only for financing the crop cycle but also for covering households in general for variations in cash flows subject to health shocks, demographic events (e.g. births and deaths), social and religious expenditures (marriages, funerals) whose timing and costs are uncertain. Credit is necessary for household consumption smoothing, i.e., to shield their consumption stream from large variations in their income stream.  The virtual absence of means of insurance against various risks across families or communities meant that credit was a joint mechanism for inter-temporal resource allocation through borrowing and lending as well as means of insurance against risks. Serving two related but different objectives through the single instrument of credit forced inevitable compromises in the service of each. In other words, a single instrument will almost never achieve two objectives as well as two instruments—one for each objective—could.

Various forms of tenancy developed early on such as share-cropping, fixed produce rent, fixed cash rent to provide a range of arrangements for risk-sharing, each with its own risk and expected return patterns for the landlord and tenant.  The attractiveness of each arrangement to individual landlords and potential tenants depended in large part on the sources of risk and covariations (in physical yields per hectare, in spot price per unit of output at harvest, cost and capacity to store harvested output to gain flexibility in the time of its sale, and so on) and the capacity to bear risk and risk preferences.  The fact that a landlord (or trader) is often a provider of credit to his/her tenant meant that the landlord and tenant have a bilateral relation with respect to land and credit (whose supplier is the landlord and the tenant is the demander), and labour (whose supplier is the tenant and demander is the landlord). Such simultaneity of bilateral relations across three markets (land, labour and credit) might confer more market power on one of the two parties (usually the landlord or trader) relative to independent pairing in the three markets.

In the case of a trader (who is the supplier of credit, agricultural inputs and marketing service for output) and his agriculturist (who is demander of credit and inputs and supplier of outputs) the situation is analogous. In addition to making a portfolio choice of allocating her land among crops, the cultivator also decides on inputs (e.g., when and how much fertilizer to use), allocates her and her family’s labour between self-employment on her land and supplying it to others, and chooses when and how much to sell her harvests of different crops net of her family consumption, etc. Responsibility for making these decisions makes her a manager of resources. Thus finance and management have been core functions in agriculture at all stages of development, increasing in complexity and specialization as development proceeded.

The post Second World War literature on development was devoted to the analysis of the efficiency and distributional implications of alternative credit, insurance, marketing and other arrangements. While these arrangements may have originated in the historical past in what were then called “underdeveloped” countries, they remain present, if not endemic, in contemporary developing countries.  The sophistication of the tools of analysis increased in step with their development in economic theory and econometrics.

It is no accident that historically the interest rate on finance or credit has been the target of attention of religious, literary and secular analysts. Apart from the Islamic prohibition of the charging of interest on loans, fulminations against “usurious” interest rates and characterization of money lenders as heartless “usurers” with no compassion for adverse shocks experienced by borrowers are ubiquitous in almost all religions.

A very early attempt to regulate interest rates is seen in Kautilya’s Arthasastra (commonly dated as a work of 4th century BCE). Kautilya’s sophisticated understanding of the link between interest rate and risk (regulated interest rate steeply rising from a ‘risk free’ 1.5% per month as the transactions financed become riskier and riskier and of legal aspects of liabilities for repayment) in loan transactions in Arthasastra is nothing short of remarkable, leaving aside the privileges to Brahmins and higher castes in rewards and punishments. Appendix I contains an extract from Arthasastra on interest rate regulations. In fact the sophisticated understanding of Kautilya of many aspects of economics and finance including the role of the state (i.e., the King) for provision of irrigation through construction of dams, standardization, weights and measures, preparation of budgets and audits with a clear understanding of income and expenditures, the possibility of corruption by public servants and incentive aspects of payment of adequate salaries for them, import and export taxes, etc., is truly amazing. Appendix II contains brief excerpts from R.P. Kangle’s (1972) translation that include, (i) Pages 90-98 on accounts, audit and definitions of revenues and expenditures, (ii) Pages 98-103 on administrative corruption, (iii) Pages 145-148 on Trade, (iv) pages 162-165 on Customs duties and tolls and (v) finally pages 350-351 on salaries of civil servants.

It is widely believed that the state described by Kautilya is a police state or at least a high centralized state. While there is some evidence in support of such a view, Kangle provides a much more nuanced view that it was a bureaucratic welfare state. Kautilya lists at least twenty departments! Indeed, one can claim that India has been a bureaucratic state for millennia, whether under Mauryas whom Kautilya helped to gain power, Mughals, the British or since independence, though the efficiency of the bureaucracy is another matter altogether. Appendix III contains Kangle’s analysis of Kautilya’s conception of the state.

More than a year ago, I was requested to chair a sub-committee of the Academic Affairs Committee for reviewing the MBA programme of the IFMR Business School and coming up with a vision for its future.  The Committee presented the Board with its future vision of the IFMR Business School and a proposal to offer a single integrated, rather than three, Post Graduate Diplomas in management which would be, if not unique, at least have few parallels in the world in its integration of development, finance and management.  The Committee’s vision had its academic rationale in the overlap among the disciplines of Finance, Management and Development. This note explains this rationale and illustrates this with the example of a major sector, Agriculture, in which risk taking, credit, finance and management are central.  The note also explains the comparative advantage of IFMR Business School in offering an integrated MBA with its proven record of excellent research on finance and development and location in a currently very dynamic developing and emerging market country, India.

Professor T.N. Srinivasan is Samuel C. Park Jr. Professor of Economics, Yale University and Member, IFMR Business School Board.


T.N. Srinivasan, Samuel C. Park Jr. Professor of Economics, Yale University and Member, IFMR Business School Board.

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2 Responses

  1. It is fascinating to learn that the issues that occupy our mind: property taxes are too low, interest rates are too high have exercised the minds of thinkers for hundreds of years. Another piece shared by Professor Srinivasan ( for example has this to say about Money Lending:

    Money-lending has an intriguing aspect. The Hymns and Apastamba’s rules contain no mention of money-lending or interest. Manu regards loans etc as sufficiently important and common to assign them under his first of the 18 titles of Law (VIII, 4). He ordains that a money-lender (vaardhuswi) can have 1/80 (11/4) interest per month (15% per annum) or even 2% and not become a sinner (arthakilbiswi; VIII, 140-1). In the next verse, the interest is increased to 3% for kswatriyas, 4% for vaiszyas and 5% for szuudras. Other lawgivers, including Gautama give very similar percentages.85. Now, it is obvious that no enterprise could easily survive with a charge of 48% per annum. And an unfortunate szuudra could not hope to repay a loan with 60% interest except by selling himself and his family into slavery. What is happening? Why is not usury mentioned in the early Vedic sources nor in AApastamba?

    The subject is not found in the Hymns of the R®gveda and Atharvaveda because it did not exist.86 First, there was no money as such: the medium of exchange was the golden niswka87 (an ornament worn on the chest or round the neck), and more commonly the cow. Would the charge be so many ribs per month? Second, on ethical grounds, it seems unlikely that in a society with simple needs and activities, living under a simple moral code that freely gives land to the needy, there would be lending at interest. Apastamba is not at all obtuse; he would not neglect such an important matter. In giving the vaiszya’s duties he stipulates (II, 5, 10, 7) only agriculture, herding and trade – not money lending! The late Naarada allows usury to a vaiszya in “periods of distress” but not to a braahman-a “even in extreme distress” (I, 111).

    Interest is mentioned first in Gautama who stipulates 1/80 per month in an unbroken series of suutras XII, 29-36. Both suutra 28 and previous ones, and suutra 37 and subsequent ones, deal with possession and damages (or not) to others’ property. This suggests that the batch of usury-suutras was an insertion by a later clumsy hand. The same may be said of Baudhaayana.88 Here the usurysuutras 21-25 are found among purificatory practices! Suutra 23 rules that usury is a sin greater than killing a braahman-a – which offence normally carries death-penalty. Suutra 24 expressly forbids braahmanas to practice usury. (Early christian communities also had rules against usury, but here too such rules were eventually disregarded.)

    Another significant point about Baudhaayana is that his suutra 21 gives the percentage but not the period: the “per month” is an assumption of later commentators and a bracketed insertion of the translator!89 Vasiswtttha also gives the rate 1/80th, but the period “per month” is added by commentators. In suutras 40-42 kswatriyas and brahmins are forbidden usury which is pronounced a heinous sin, as in Baudhaayana!90. We must conclude that initially there was no money-lending. Later it appeared, but was condemned by the sacred law. Then some small interest was permitted, perhaps with the return of the loan. Then greed prevailed. Brahmins gave themselves permission to practice usury and rates of interest shot high. In the modern world money-lending has become very necessary. Although early Christianity (and Judaism) prohibited lending at interest, this practice became very common in the Middle Ages (the Jews in Europe thrived on this) and certainly by Adam Smith’s time all prohibitions had evaporated. The interest rate is just as arbitrarily fixed today as it was in India. But today it is also, like taxation, an instrument of government policy to encourage borrowing and spending (low interest-rate) or saving (high rates).

  2. Kautilya’s Arthaśāstra, from the end of the fourth century BC, provides interesting insights into the problems of governance, accounting and control in the Mauryan society. A paper by Professors Manjula Shyam and Shyam Sundar of Yale University ( uses the extant English translations of Arthaśāstra to summarize the structure of the Mauryan economy, trade, accounting and control, auditing, regulation and governance processes based primarily on Chapters 6, 7, and 8 of Book 2 of Arthaśāstra.

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