In a plural society like India, how can Islamic economics qualify for consideration as a policy alternative? The objective 'Islamic' makes it look like the repository of sectarian values and aspirations and thereby lose any scientific universality associated with conventional economics and/or its Marxian version. At any rate, it may be only an appropriate topic for a fruitless academic exercise hardly relevant to our situation, where people hold not only divergent views on moral and spiritual issues but are averse to any erosion of their beliefs through sub-terranian ways.

However, we believe, that Islamic economics should not be understood as a particular version of political economy that advocates a specific economic organisation, a set of  do's  and don'ts, or a unique mechanism of production. Nor does it hark back to the glorious past of a specific culture from which it derives policy programs to be adopted irrespective of the complexity of modern economic challenges. Islamic economics is basically an attempt to bestow value perspective on the ordinary business of life, the struggle to produce, consume and distribute material goods. The moral and ethical perspective to Islamic economics is the common treasure of all religions. Where the values espoused by it seem to be an addition to the universally acceptable set, these are perceived only as a logical extension of the self-some set. It insists that these values have to be translated into the economic endeavor of mankind, both in its individual and collective aspects. It sustains itself on such universal values as equity and justice, moderation in consumption and production, care for the poor and underpriviledged, equality of opportunity for all, elimination of exploitation, an ethically desirable allocation of resources as between competing demands -values cherished by all well-wishers of mankind. But the similarity between other value systems (religion) ends here. Islam does not only exhort people to attain certain value idea's and ethical norms. It shows the way to integrate values with economic activity, lays down permissibility frontiers of economic endeavor, prescribes the irreducible minimum ingredient of material pursuits and spells out ethics, moral norms of production consumption and exchange.

 The implementation of these guidelines amount to a morally desirable structural adjustment programme that begins from the attitude and behaviour of human agent and encompasses the critical minimum elements of economic organisa­tion. In contrast conventional economics both in its free enterprise and command versions, has sought to delink the science of economics from moral/ religious values and reduce it to a positive science. However, when economic management became the prime goal of the political administration, neutrality was given a send-off. Values and norms were sought to be implemented on the basis of the  knowledge and skill provided by a professedly neutral science, Welfarism was adopted as a step-child of classical economics but the insight furnished by conventional economics ran into trouble particularly in the third world countries. Text book analysis of economic development where capital occupied the centre stage seemed to be hopelessly out of tune in a poor country. Attempts to restrict the already low level of consumption generated popular resentment, hence savings promotion was slow and tardy while investment lagged behind, both public and private  consumption  soared and prices continued to shoot up. Conventional economics still exacted awe and respect but it failed to contribute any thing worthwhile to the twin problem of equity and efficiency. For convention economics analysed symptoms, such as prices and money, demand and supply of goods, saving and investment, but failed to see the man behind it, his behaviour, his goals, his aspirations and his values. In its Marxian version, economics ceased to be a pure science. It became an aspect, a piece of the total gamut of government activities; the state arrogated to itself the evaluation of individual needs and decided his values and preferences. The objectives of equity and efficiency were sought to be attained through admin­istrative fiats and economic management. The collapse of the command economy has been the outcome of its failure on both fronts.

 In the third world countries the failure to manage and produce resources in an appropriate and efficient manner has been quite pronounced. There has been a general inadequacy of domestic resources, an almost pathetic fall back on external governmental or institutional finance, compounded by increasing balance of payment deficit, tardy production of wage  goods  accompanied by elitist bias in the economy. At the same time, equity has continuously suffered. The  overall decline    in  the   rate of growth has been the hall mark of most of third world economies in recent decades while inflation has proceeded unabated. Most of these economics have been enamoured of the Soviet model to achieve equity and efficiency, for which purpose restrictive policies were adopted to regulate production, distribution and exchange. However, the socialist prescription has only introduced regidities in the economy without any worthwhile approximation toward justice and equity.

 The challenges confronting most of the third world countries including India have been ably analysed by economists and the experts associated with IMF and World Bank. But most of these analyses have adopted a common denominator without question, namely, the price as the major determinant of allocation of resources, rate of growth, savings and investment and eventually distribution. The perennial question of what, how and for whom to produce should be decided in a free market where price is the final arbiter. On the basis of this understanding the Fund supported structural adjustment programme which contains three main features, namely; (1) minimization of the role of the government in the economy, (2) withdrawal of restriction on the market and (3) liberalization of foreign trade. In their calculation these measure will boost investment, encourage flow of capital, both foreign and demestic ones, into economically feasible avenues, reduce persistent balance of payments difficul­ties, promote efficiency and competition and lead the economy to the path of continuous growth. As far as equity is concerned this approach is essentially the revival of the discredited percolation theory. The fund supported structural programme does not discuss the question of equity and justice and leaves it as matters of domestic concern. It has been admitted, by no less a person than the former president of IMF Mr. Barber Canable that the programme is likely to be harsh on the poor. The truth of this statement has been vindicated by our Finance Minister slashing appropriations on health, education and proposed gradual withdrawal of subsidies on essential items of consumption.

 In their quest for distributive justice the socialist economies also ignored the human factor, the values cherished by man and the cultural mileu in which he operates. They harboured the view that distributive justice could be enforced by a wholesale transfer of means of production to the state which shall then decide in its wisdom what, how and for whom to produce, price shall -be administered according to the states perception of needs. In this dispensation, the party and the bureaucrat arrogated to themselves all economic decisions and efficiency was a casualty. They thought that human greed could be repressed by government action. Thus neither efficiency nor equity could be pursued effectively, as has been amply demonstrated by the collapse of the command economies.

 Many third world countries including India adopted a policy mix, in which state capitalism played the dominant role. The failure of the socialist economies coincided with the failure of domestic economic policies. Hence a U-turn toward a free economy actively supported by the IMF, World Bank combine. The major problems of these economies are huge international debt, decline in capital imports, domestic inflation, distortion in resource allocation, short fall in domestic savings and investment, and hence a low rate of growth. The problem is further compounded by increasing disparity of incomes and elitist bias in the production of goods and services.

 Islamic economics rejects the basic paradigm common to capitalist and socialist economic system which professes to be value neutral. Islamic econom­ics has its own paradigm that integrates moral and ethical values with econom­ics. It perceives development firstly as a human endeavour to preserve the 'measure' in which the world has been created and designed. Any violation of this balance of natural resources has been termed as 'fasad' (mischief). This rules out overuse, wastage and depletion of natural as well human produced wealth, restrains consumption and fosters growth in harmony with "Nature." The conservation of the ecological balance thus becomes the directive principle of, overall development. In the second place, Islamic economics views economic development as a segment of the multi-dimensional development of man and his society. An unduly pronounced emphasis on any one aspect of this process is harmful and eventually counter productive. Economic development must be an integral constituent of spiritual/moral development. The impact of this view is the transformation of the character of economic development, its content and direction. Instead of measuring quantity of goods produced, it measures its quality, its ethical desirability, its effects on other dimensions of human development. It may appear restrictive on unlimited growth of consumption, but may actually promote a more humane and reasonably prosperous society.

 The three perennial questions are resolved in the market economy through the market price. The choice of goods/services to be produced, the quantity of production, the rate of increase in production are all left to market demand and supply reflected through price. Hence all goods/services that ensure profitability are produced. The order of preference, the choice of investment is also decided by profitability. It is true that profitability is not a simple concept; its base is monetary gains but sometime it extends to acquisition of power and prestige as well. Its time range may cover future expectations also. But price overwhelms the choice, so that the moral/social desirability of the production mix is sidelined, and social concerns are ignored in this choice. In recent years the production and consumption of alcohol has increased seven/eight fold in India, trafficking in drugs, has overwhelmed metropolitan cities, such as Bombay and Delhi, electronic gadgets and toilet goods have registered unprecedented growth in production while wage goods production has been sluggish, Jhuggi and Jhomperi are profile rating, clean water supply is still a dream, public hospitals are in a pathetic state for private producer uses profitability as the only criterion of investment. The rich have far greater ability to offer rupee value for necessities as well as for goods that are treated as status symbols. Hence the sovereignty of the consumer turns into the rule of elites. In the eighties most of such industrial units were given license to produce whose clients were the rich and whose import contents were fairly high. This policy led, inter-alia, to the balance of payments crisis of alarming proportions, and forced the Indian government to fall in the trap of the structural adjustment programme of the IMF/World Bank Combine.

 Maximum consumption has been undeclared Weltan-Schauung of the Market oriented economics. Thus one of the crucial measures of economic development has been the per capita consumption of electricity, foods of high nutritive value, per capita space for residence, and other amenities that account for status. In this rat-race for maximum consumption, modern technology helps the repletion of non-producible resources, such as water, greenery, forest wealth and soil recklessly. Rare plant species are being destroyed, rivers polluted and air made risky to wealth. It also ignores the fate of the poor and underprivileged for the simple reason that money demand is the only filter through which the investment is passed. The global pollution of environment and the fast depletion of resources that threaten the conversion of culturable land into deserts are only the long term implications of this pursuit of economic prosperity.

 This objective of higher standard of consumption has put a premium on dishonesty and devious means of getting rich fast. Spurious and duplicate goods have flooded the Indian markets, public utility services are available largely after palm greasing, real estate business is run with underpricing and fraudulent documents in consort with officials, justice is obtained at a price, violence is available in plenty on hire. In this panorama, we arc told that some reputed Indian hospitals .ire involved in the sale racket of human organs, recently a patient was sent to Mortuary because he could not pay the bills, criminals hold a town like Bombay to ransom. When 'get rich quick' becomes the norm and where monetary demand-price become the sole criterion of production this panorama becomes a logical outcome.

 Islamic economics has its own 'Weltan Schauung' its own paradigm. This world has been created in 'measure' and man is a trustee thereof. This is not intended for plunder and loot. The maintenance of its balanced proportion is the duty of the trustee. There is an omniscient transcendental authority that oversees his activities before Whom man is accountable. This world is sweet and green and He has made man a trustee and oversees his doings, With this view of life even the worldly pursuit of wealth and power acquires a moral dimension.

 In Islamic economics free market is very much in shape but the worth of market transaction is judged not only with reference to price. All sale and purchase of goods is subject also to a moral and social criterion. A good that passes the price criterion may fail on moral and social criteria. The consumer is still guided by the utility of goods/services. But the concept of utility is transformed into something entirely new, in so far as it includes the moral and social desirability of the 'buy' and its use in the world hereafter. A consumer cannot be indifferent between alternative baskets of goods, that fetch the same utility in the above sense, his assessment is a function of material and as well as moral happiness and the measure in which social usefulness is promoted.

 The two layers of price and moral filter through which the consumer preference passes has been assigned a crucial role in the operation of market demand. Bui Islamic teachings do not leave the moral utility/disutility undefined and vague. In the first place Islamic teachings bar the consumption and production of certain specified goods, such as alcoholic beverages some practices such as gambling, unrestricted sex, drug and etc. It further prohibits profligacy, wastage of resources, destruction of natural wealth and recommends strongly, moderation in consumption. The Islamic jurists have worked out a detailed schema based on the fountain heads of Islamic economics, the Quran and Sunnah, whereby conservation of existing stock of material resources for future generation has been made mandatory. An important aspect of the consumption behavior is the one that imposes obligation to feed and clothe, within the economic ability limits of the person concerned, his relatives, the neighbours and the poor in general. Thus  while  consuming, immediate concern is not only his own, but incorporates needs of other the unfortunate ones.

 This attitude puts up an effective fight against over consumerism, the bane of modern economies, in which India figures prominently. That Indian society has been engaged in a mad rush for 'status symbols' in consumption is partly responsible for the economic crisis of 1990. During the eighties we strained our resources recklessly to consume and produce goods for conspicuous consumption, allowed imports of non-essential goods exhausting our precious foreign exchange resources. The mobilization and allocation of resources between competitive avenues of productive investment is also determined by price reflecting market demand, on the one hand, and the price of borrowed funds, on the other. The private producer makes future projections of market demand and assesses the profitability of his venture. In this analysis, the ethical desirability and social needs hardly figure. That is why poppies bloom in a poor country like Pakistan, Western life styles are aped by our people despite the poetic warning of such people as the British poet who laments the 'excess sugar of a diabetic culture.' This is one reason why elitist bias tilts the balance of productive investment against the poor and the underprivileged. Technology itself has been placed at the behest of the rich. In our country also, the scarcity of resources has failed to prevent its inordinate use in the production of luxury goods by the private sector. Public sector allocation of resources has been broadly on the same pattern. Even such minimal needs as clean drinking water, public hospital, roads and primary education get hopelessly inadequate resources. In Islamic econom­ics, productive investment is judged with reference to the twin criteria of economic viability and socio-moral desirability. Where and if the two conflict, the latter gets precedence. This is clearly spelt out in the analysis of the Islamic jurists. In the first place, goods and classified into necessities, those that enrich efficiency, and those that are simply status symbols and damage efficiency.*1 The first are accorded top priority in the procedure's calculus, the second class is also favoured but the third is rejected. This is not an absolute classification since the goods in each category are defined both with reference to the state of the economy and moral desirability. In the second place, the production of some goods/services that are morally reprehensible is totally prohibited. Thereby, resources are released from alcoholic beverages, sexually oriented transactions, drug trafficking, business in crime, smuggling, fraudulent sale and purchase of goods, which taken together, account for sizable volume of scarce resources. Resources thus released may be used to fulfil the dire needs of the society. Thirdly, the otherworldly utility of socially useful production adds an extremely vital dimension to the profit motive of the producer, so that while functioning as a producer he is obliged to weigh the material prosperity against its socio-moral utility. As a consequence of this metamorphosis of the profit motive the producer does not become a philanthropist alone, but his input/output matrix ceases to be a crude calculus of economic cost and gains only. The need of the society and the ethical justification of investment are integrated into his behaviour so much so that at each step he weighs carefully the benefit/disbenefit to the society in general.

 But consumerism has not been limited to the private individuals only. The governments of the middle and low income group of countries have also their share. The total external debt of these countries as reported by the World Bank Debtor Reporting System (DRS) rose at the rate of 8.3% per annum during eighties from $5 61.8 billion in 1980 to an estimated $ 1,146.7 billion in 1989. This rate was far in excess of the annual rate of growth of 3.4% in the gross national product (GNP) and 4.3% in their export of goods and services. India alone accounted for $ 70 billion. The domestic debt of our country has also been staggeringly high. This has led to persistent imbalances on the external account. As reported by the World Bank the net transfers on debt (NTD) have become negative. The NTD has moved from + $ 9.2 billion in 1980 to - $ 39.8 billion in 1989. The structural adjustment programme suggested by IMP places exclusive reliance on the price mechanism to correct this imbalance. While not denying the role of price mechanism in this situation, exclusive reliance on the mechanism will not only promote inequities but will tend to overlook the root of the problem with the possibility that it may recur. The most worrisome aspect of this is the fact that a disproportionately high part of external debt has been used in non-productive avenues, only a small percentage has been earmarked for such social services as health, education and poverty elimination.

 The most crucial question is: why do these countries get themselves in such a situation? One of the important reasons is the ease with which credit is available on interest. The creditor does not judge the productivity or end-result of the loan. His sole interest is the financial viability of the borrower. That is why, many low-income countries have been able to secure loans for prestigious projects, such as sports stadium, palatial governmental offices, superb airports & etc. The private sector has not been far behind, though its access to external credit has been severely restricted in countries like India. But this has not deterred the private producers to secure domestic loans for elitist investment in 5-star hotels, colour TV, VCRs, and air-conditioned cars. Huge public funds were spent on Asiads only recently by the Indian government.

 Some of the 5-star hotels were still incomplete when the event took place. In Islamic economics, credit on interest is replaced by equity capital that establishes a close link between the owner of surplus funds and the entrepreneur. The fund owners do not assess just the credit worthiness of the borrower but also the productivity of the project and its social worth. This places a worthy constraint on the reckless behaviour of both the government and the private borrower. It may further restrict the disproportionate growth in money supply through the monetary and fiscal policies of the government. This restriction on funds availability and its linkage with real productivity will prove an effective cure for the persistent imbalances on external account and the domestic creation of credit by the financial system. Coupled with the general price mechanism, the elimination of interest based easy credit, will help minimize the debt burden. The elimination of interest establishes direct involvement of capital with production. This involvement has some important consequences. Firstly, it ensures greater efficiency in production since capital availability becomes a function of efficient and remunerative production. Secondly the financial system does not have any incentive to create money disproportionate to the need of real productivity, for capital docs not fetch any return out of production. Thirdly the possibility to circumvent investment in real production and earn money through financial manipulation is eliminated. In the interest based financial system money becomes a commodity that can be sold and bought irrespective of its involvement in real production. When easy means to get rich are available, there is an overwhelming tendency to prefer speculative financial investment in securities and bonds and avoid the tedious process of production. The recent securities scam has been one of the logical outcome of the desire to get rich without being involved in the unpredictable and moderate returns from real production and the rosy prospects that Financial manipulation offers.

  The desire has overtaken people of low and medium income also, with the result that large sections of middle income class has been ruined in the recent scam. Unfortunately, however, the finance minister has termed the crisis as a 'systems failure' without going to the root of the problem. Fourthly, the treatment of capital only as an installment of production leaves only one option to increase one's income and wealth, that is investment in real production and thereby ensures a better allocation of resources, and a growth in money supply corresponding to the need of the society. The financial system will promote equity in the allocation of resources, since the financier will be interested in the strength and social desirability of the project, thus even poor and competent entrepreneurs may also get money. A large number of small and medium enterprises would thus be able to get finance without collateral. The inequitious allocation of resources by interest and its insensivity to social needs has forced the Indian government to take a number of appropriate measures to encourage banks to provide credit in social priority sectors, through under writing bank credits, providing subsidy and so on. The equity based investment will promote this end almost automatically.

The stability of the economy has been one of prime objectives of our times. But the high volatility of interest has been one of the most destabilising factor, as pointed out by Milton Friedman. In total yield (interest and profit) from investment the share of interest is highly volatile and indeterminate. In this scenario, an enterpreneur may be ruined not because of his slackness or inefficiency or his speculative nature but only because of the sudden rise in interest rates. The erratic behaviour of interest rates makes it difficult to take a long term investment decision. It derives funds into short term financial investments, from equity to loans, causes gyratic shifts in financial resources between users, sectors of the economy and countries, causing erratic movements in loan based investment, commodity and stock prices and exchange rates. Business failures traceable to the volatility of interest rates, cause decline in employment, output, investment and productive capacity losses. This situation has serious implications for stability and also loan based production.

Islamic economics has a pronounced distributive orientation.*2 This arises out of the twin Quranic concept of the unity of the creator and unity of mankind. Its explicit assumption that all men have been created in the mould of the creator and hence are equally entitled to benefit from the blessings of Allah transcends all differences in faith, colour, caste or race. As far socio-economic equity is concerned, it is firmly founded on the concept of trusteeship that is, all wealth possessed by an individual is given in trust to him. Hence, others have claim on the fruits of his wealth and property. But Islamic economics does not believe only in the munificence of individual. It prescribes some specific rules of conduct. In the first place, it does not permit such business practices which tend to provide undue and fast concentration of wealth. For instance, it prohibits gambling, pure speculation, stockpiling of food articles for price increases, production and sale of goods that have deleterious effect on morals and health, such as wine, sexy literature and films. In the second place, it prohibits interest which is one of the most effective means to transfer income and wealth from the society to a group of people. Thirdly, it makes it obligatory for everyone whose income and wealth exceeds a prescribed minimum to pay a poor cess (Zakah) at a flat rate of 2.5 % to 20% depending upon the nature and source of income. Further, at certain occasions it makes obligatory for every believer whose income at that day exceeds subsistence level to pay at a prescribed rate, a part of his surplus to the poor (Fitra). Fourthly, it makes obligatory to maintain a specified group of one's relations, if they are not able to meet their expenses. Lastly, it lays down a detailed law of inheritance to minimise concentration of wealth and properly. In the particular Indian context, the distributive thrust, of Islamic economics is worthy of serious consideration. For it does not treat equity and fair distribution of wealth and income as something outside the economic system for which political decisions have to be taken to correct the inequitious impact of the 'free market.' It integrates two objectives of elimination of poverty and continuous increase in production through specific institutional adjustment and alteration of the conduct of economic agent. In the stratified Indian society poverty continues to deepen since economic activities are regulated by profit and price considerations whose harmful effects are sought to be limited through political decisions only.

In addition to the above, Islamic economics based on the teachings of the Quran and the sayings of the Prophet spells out the minimum responsibility of the state towards its subjects. Every indigent citizen, has a fundamental claim on the government and the society, the right to being fed and clothed and educated in accordance with resources availability. Zakah incomes are earmarked for that end and if found inadequate, the state is empowered to raise additional funds for that purpose. But in general, it minimises the direct economic activity of the state. It lays down freedom of enterprises as the basis of economic organisation. The constraints on this freedom are essentially intrinsic to the individual values and social conduct. Only when and if, circumstances require the stale intervenes.

To meet social needs Islamic economics relics mainly, on voluntary and altruistic mobilization of resources whereas compulsive transfer is resorted to as a complementary public effort. History testifies to the substantial flow of resources from the rich to the poor through Awqaf, endowments & etc.

Last but not the least, Islam prescribes certain rules of behaviour in respect of labour. A fair and just compensation for labour is an integral part of the Islamic economic system. It is, perhaps, the only religion that recognises the dignity of labour, manual labour has been stated to be the occupation of the messenger of Allah (Prophet Daud in a tradition of the Prophet (PBUH). Islam recognises the legitimacy of state intervention where labour is denied its fair share. In the general framework of Islamic economic system exploitation of labour becomes a distant possibility.

To sum up: Islamic economics is based on certain well defined moral values - values that are a common property of all mankind in which all religions share. Within the framework of these value premises, it lays down general guidelines for economic activity and minimum rules of economic conduct. For the Implementation of its values, its dominant emphasis is on the individuals attitude, his character and his aspirations. Since the individual functions in a society, it recommends the creation of a congenial environment for that end. By linking capital directly with production it seeks to allocate resources more efficiently. Equity and efficiency can both be achieved only when not only the economic mechanism is suitably adjusted but the root of the problem is tackled, namely the individuals values and motivation. In harmony with its value orientation, it does not consider all development as worthwhile but only a development that is morally desirable and promotes equity.

In the above perspective, we may judge the relevance of Islamic economics to the Indian situation.

*Address delivered at the First All India (Conference of 'The Indian Association for Islamic Economies' held at Bangalore on June 26, 1993.

*1)See for example: Al-Shatibi, A.I.I, al Muafiqat Fi-al-usul al-Stiariah, Cairo: Maklabah al Tijariah and Al-Ghazzali, Abu Humid Al Mustafa fi-ilm al-usul. Cairo, Maktabah al-Tijariah al Kubra, 1937. 

*2) See for example: Ibne Taymiah, Abd-al-Salam ,Al-Syasah al-shariah  fi Islah al-Rai wa al Raiyyah (Beirut, 1961) and Al Qardhawi: Fiqh al-Zakah (Vol.1, Beirut 1969), Mustafa al-Sabai, Ishtirakiyatah Islam (Damascus, 1960) Qutub, Sayed. Al-adalah al-Ijtimaiah fi-al Islam, 1969, Chapra Umar: World Economic Challenge and Islam, al Sadra Baqar, Muhammad: Iqtisaduna (Beirut. 1968), Faridi, F.R. 'A Theory of Fiscal Policy in an Islamic State' in Fiscal Policy and Resource Allocation in Islam - Zinnddin et al (eds) Leicester, 1983.