India now faces two immense challenges—a slowing economy and a growing threat to national security.

Heads are rolling right now. These sackings are an essential first step, but there is a danger that they will be used to mollify public anger, then followed with the setting up of committees, creeping national amnesia and policy paralysis—till the next strike. And then this sorry cycle will start all over again.

When the terrorists hit Mumbai, I happened to be reading a commentary on Kautilya’s Arthashastra by the famous Sanskrit scholar R.P. Kangle. The ancient sage and India’s first political strategist made it clear that any state exists for yogakshema, or what can be loosely translated as the welfare of the people. Kautilya says that the first duty of a ruler is to protect the life and property of citizens, without which their welfare is impossible. A ruler is entitled to use force to maintain internal security.

Arthashastra alludes to an early version of the basic social contract between government and citizens. “People agreed to pay taxes and to be ruled…in order that they may be able to enjoy security and well-being," says Kangle. And adds: “It is also to be noted that the words referred to are put in the mouth of a secret agent…They are not the words of the author himself."

Reading these words even as Mumbai was being subjected to a murderous terrorist attack that has left behind an embittered and angry populace strengthens the view that the political class has not kept its basic deal with taxpayers. There is now dangerous talk of a tax revolt, with usually sensible people asking why they should pay taxes if they cannot be protected. This is a pernicious idea, but the very fact that it is being voiced shows how bitter and angry citizens have become.

Kautilya’s allusion to the basic contract between a tax-collecting state and tax-paying citizens raises some broader issues on how the battle with terror can be fought.

There is first the problem of how this war is to be funded. One of the most basic assumptions of economics is that individuals and organizations make their choices within a budget constraint. You cannot spend more than you earn or sustainably borrow. There are a lot of suggestions flying around right now on the modernization of India’s Armed Forces, the police and intelligence agencies. This will cost money.

The Maharashtra police has reportedly spent Rs9,000 crore to modernize itself over the past five years. And yet the terrorists, who had better firepower, mowed down its best officers. The average beat constable still moves around with lathis or outdated pistols. Multiply this sort of minimal expenditure with the number of states in India. Then add the needs of the defence forces, a new federal investigation agency and the coastal guards: The total bill will be mind-boggling.

Where will the money come from? The Manmohan Singh government made the cardinal mistake of throwing the record revenues that came its way, thanks to the economic boom, in all sorts of populist schemes. Expenditure reform was abandoned. Public finances were carelessly managed. Now, just when money will be needed to support the economy and strengthen internal security, we are struggling with a high fiscal deficit. There will be hard economic choices to be made: Given the inevitable budget constraint, what expenditure needs to be cut to release funds for more important jobs?

The other issue that any economist would raise is the lack of state capacity to deliver the goods. It is one thing to say that so much will be spent on infrastructure or on national security. But does the Indian state have the capacity to produce results? Does it have the leaders to manage the promised New Deal on internal security? I seriously doubt it. The various recommendations on administrative reforms will have to be rescued from dusty cupboards and used to change the way India is run.

Sacking a few individuals may calm public anger right now. But there are greater challenges: how public money is spent, the quality of leadership to decide on this and the freedom administrators get to implement policy.

Finally, a rewind to the early days of independent India. The first few months threw up immense challenges: partition, the unification of princely states, the war in Kashmir, police action against Junagadh and Hyderabad, the assassination of Mahatma Gandhi. India emerged out of these fires relatively unscathed because, as I wrote recently in my blog (to read the blogpost, go to, its internal security was run by Sardar Vallabhbhai Patel, India’s first and finest home minister. An elite civil service trained to run an empire and an efficient police force helped him. Public finances, too, were in better shape.

That was then. It will be a long road to get back to where we started: strong public finances, strong leadership and motivated civil servants.

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