Monday Morning Meeting on Role of Financial Regulation as an Instrument of Comprehensive National Power

Mr. Pradeep S. Gautam, Former Research Fellow, Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), spoke on “Role of Financial Regulation as an Instrument of Comprehensive National Power” at the Monday Morning Meeting held on 5 September 2022. The session was chaired by Col. (Dr.) D.P.K. Pillay, Research Fellow, Ambassador Sujan R. Chinoy, Director General, MP-IDSA, Maj. Gen. (Dr.) Bipin Bakshi (Retd.), Deputy Director General, MP-IDSA, and scholars of the institute were in attendance.

Executive Summary

Comprehensive National Power (CNP) can be understood as the ability of a country to achieve its national objectives. Viewed as such, it is a function of its economy, polity, military, etc. On the one hand, thinkers like Michael Porter define CNP as the capacity of the country to mobilise resources, including economic resources, human capital, government spending, and international resources. All the above capacities mobilise economic resources and play a pivotal role in determining the CNP of a country. On the other hand, financial regulations facilitating the protection of private property and the rule of law have historically enhanced economic prosperity and hence are crucial for long-term growth in CNP.

Detailed Report

After briefly introducing the topic, the chair invited Mr. Gautam to deliver his remarks. The speaker began by underlining the definition of CNP. Following this, he discussed the significance behind India’s Income Tax department’s logo, which says “Kosh Mulo Dandah.” Taken from Arthashastra, it means treasury or taxation is the backbone of administration or state power.

Mr. Gautam shed light on how some of the economic policies formulated in the post-independence era failed to fully align with India’s national goals of rapid capital accumulation.  Then he discussed the relationship between state power and symbols of economic prosperity by taking certain examples. He retraced the developments during the Mughal era, where he emphasised that until Aurangzeb’s reign, the dynastic rule was considered powerful due to the credibility attached to the currency – gold and silver coins. Till Aurangzeb’s time, Mughal gold coins enjoyed higher status and were accepted at par by the East India Company and kings of South India. Post that period, there was a rapid decline in the quality of Mughal gold coins and Mughal power.

Delving into this issue further, Mr. Gautam argued that autocratic and authoritative rulers are at times followed by rapid state power decline. The reason for the same is found in the autocrats’ unchecked powers to tax and wage wars. This undermined private property, led to wastage and loss of capital, and eventually, capital flight. He highlighted this by pointing out how Kautilya’s Arthashastra equated a tax collector’s role to a honeybee that extracts nectar and pollinates the flowers. Further emphasising the point, he moved to discuss the workings of pre-industrial Europe. First, strong autocratic tendencies in Spain led to capital shifting to Amsterdam and then pre-industrial England, which provided better protection to private property and where the power of the monarch was kept in check. England, being based on common law, also provided better legal protection to creditors.

According to the speaker, a financial and legal innovation also facilitated this shift in the form of limited liability joint stock companies. These limited liability companies helped mitigate risk inherently involved in international trade and exploration in that era. However, he also said that religion might also have a role in this shift as Spain being predominantly catholic, did not promote charging interest on capital. This might have further led the capital flight to Amsterdam and England and led to the growth of the banking sector in those protestant countries which do not have such strong ideological baggage.   

While addressing the audience, the speaker explained that the world is currently in an advanced stage of financialisation, and there is scope for capital accumulation to begin in relatively underdeveloped markets like India.

Financial regulations facilitating better creditor protection and private property may facilitate this capital accumulation. Under the current Indian Government, legislations like the Insolvency and Bankruptcy Act have tried to give better creditor protection and resolve disputes relatively speedily. This is a significant improvement from the era where laws and institutions like Sick Industrial Companies Act and Board for Industrial and Financial Reconstruction largely prevented the dissolution of non-profitable businesses, locking creditors in long disputes and capital in unproductive ventures.

Finally, the speaker emphasised the need for a global financial center in India to further accelerate capital accumulation. He laid out key features which may make a successful global financial centre: -

a) Whether it is a vibrant, livable city
b) Whether the tax structure is reasonable
c) Whether it is open to receiving and taking out capital and making profits
d) Whether the city is a hub of economic activities and serves a domestic market

After the speaker concluded his presentation, the chair opened the floor for a question-and-answer session.

Some crucial themes were raised by the audience, including how conflicts are also an important reason why capital moves from one place to another. The Director General highlighted Benjamin Franklin’s quote about the certainty of death and taxes. He further raised issues regarding how CNP is calculated and the subjectivity involved. Furthermore, the role of immigration, individual nation-states’ policies concerning this issue, and their collective impact on their CNP were also deliberated.

Finally, the pace of the Indian economy, stability of the existing business model, the correlation between a country’s military might and its ability to tax a multi-national corporation, the feasibility of setting up an international financial centre in India, and its perception of being an attractive centre of financial capital were some of the other critical issues discussed during the meeting.

This report was prepared by Ms. Saman Ayesha Kidwai, Research Analyst, Counter-Terrorism Centre, MP-IDSA.