The system of creating and managing wealth in India has changed far less than we often imagine. While the instruments have evolved, the underlying principles, trust, credibility, and institutions, have remained remarkably consistent from ancient times to the present.
Then
In ancient and medieval India, temples were not weekend prayer halls. They were economic, social and financial institutions, all rolled into one.
The safest place to deposit wealth was not under a mattress, but under the deity’s watchful eye. Faith ensured trust; trust ensured liquidity.
Temples held gold, land, grain, and records. They lent money to traders, financed caravans, underwrote maritime trade, and supported guilds. Interest rates were known, contracts honoured, and defaults were not discouraged by recovery agents, but by social and moral pressure. Try cheating when your credibility collapses not just in society, but before God.
Kings borrowed from temples. Merchants deposited surplus there. Farmers mortgaged land. Artisans received advances. Long before the word bank reached our shores, temples functioned as clearing houses of capital. When trade flourished, temples prospered. When temples prospered, society stabilised.
It was a circular economy espousing organic, decentralised, and remarkably resilient resolve in execution.
Colonial rule disrupted this quietly but decisively. Wealth was extracted, indigenous institutions delegitimised, and local financial systems dismissed as primitive. What survived did so in fragments.
Now
Macroeconomics is fundamentally about money, government, and the relationship between the two. Most unresolved questions in macroeconomic policy arise from deep disagreements over the role money plays in economic life more crucially, over how money is created.
Money is anything but unimportant. It occupies our dreams, our songs, and our anxieties. Across the world, money lies at the heart of today’s most pressing public policy debates; the cost of living, intergenerational equity, fiscal “austerity,” and the financing of the global transition to a low-carbon economy.
Money is also indispensable to governance itself. In a democracy, money is required even before a government is formed, importantly to contest and win elections. From time immemorial, money has been integral to every ruling dispensation, whether under monarchy, empire, dictatorship, or democracy.
Much of the confusion in macroeconomics stems from misunderstandings about how money is created, by whom, and in what form, as well as about related concepts such as bank reserves. These are not academic quibbles. The implications are profound as they shape monetary and fiscal policy and determine how effectively citizens can hold governments and banks to account.
The creation of bank money is surprisingly simple and deeply counter-intuitive. The overwhelming majority of money in modern economies is created through private-sector bank lending.
When a bank issues a loan, two things are created simultaneously:
- the borrower’s obligation to repay the loan, which appears as an asset on the bank’s balance sheet; and
- the loan amount itself, credited to the borrower’s account, which is a liability of the bank.
When these obligations and responsibilities are ignored or blurred, scandals follow. Mallayas and Choksis are not accidents; they are symptoms.
Over time, the ability to borrow large sums, especially in a democracy, becomes constrained by the ability to repay, or at least by the capacity to convincingly demonstrate that ability through collateral and credibility.
In India, the decades following independence saw policies that discouraged the private sector. This produced two damaging consequences. First, the appetite for entrepreneurship was never adequately nurtured. Second, private investment in research and development remained weak. As a result, entrepreneurship became concentrated in a small group of business houses in Tatas, Birlas, Ambanis, Adanis, and a few others.
Governments, by themselves, are incapable of building competitive businesses or sustaining innovation ecosystems. Entrepreneurship does not fail for lack of talent; it fails when systems are designed to distrust it.
Even communist China recognised this reality. Its wealth creation began only after opening up to the private sector in the early 1980s. The model was bottom-up. Private firms were initially allowed to operate with no more than ten employees. Over time, these constraints were relaxed, scale was permitted, and the private sector flourished. Today, China boasts one of the largest populations of millionaires in the world.
Let us hope that India’s current influx of entrepreneurs thankfully driven by a similar bottom-up momentum, will produce many more nationally scaled business houses, spreading wealth creation wider, deeper, and more sustainably.
Col KL Viswanathan
(The author is an Indian Army veteran and a contemporary affairs commentator. The views are personal. He can be reached at kl.viswanathan@gmail.com )
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