Having succeeded in guiding Chandragupta in the establishment of an empire, Kautilya retired from active life in order to record what he considered to be the fundamentals of a sound policy for building enduring institutions. The result of his meditations is the "Arthashastra".
"In the happiness of the subjects lies the happiness of the King, in their welfare lies his own welfare; the welfare of the state is not what pleases the king, but his happiness is the welfare of the subjects".
This verse was written by Kautilya, the author of "Arthashastra" or the science of statecraft. He was born at a time when India was divided into innumerable small states, each one more or less sufficient to itself. Kautilya realised that this was the root cause of many of the problems facing this vast country. A small state was incapable of facing the onslaught of a larger enemy. Moreover large scale prosperity is not possible unless the unit attains a certain size. Kautilya attempted to create a large empire which would bring under its control all the different small kingdoms of the vast Indian subcontinent. It implied that all these units had to be centralised, brought under a common administration. Sometimes the small units themselves would like to attach themselves to the big empire as that would provide them with a security. Otherwise, according to Chanakya, if required force had to be used in order to bring all the small units under one control. But once brought under a centralised government, unless a clear, wise and just policy is adopted by the rulers, the small groupings would have a tendency to break away and reassert their small independence.
The Arthashastra contains a series of instructions and advices which the ruler should follow, so that the central authority remains preserved for a long time.
The Arthashastra enjoins that life should be lived according to the Dharma, the law of Truth and Righteousness. Kautilya, however, being also a very practical man realised that a Dharmic life is not possible in a condition of general want and poverty. Accordingly he formulated that the purpose of life is Dharma, but the basis of Dharma is Artha or widespread prosperity and the basis of Artha is sound government. Hence the importance of good administration.