Ajay Shah runs a very popular blog that has drawn a very loyal set of readers in the cyberspace. What, I think has endeared him to them is his any time ready spirit to debate the wide range of issues he serves up on his site. That willingness to make the issues easy to understand and shorn of the technical baggage, which is so typical of the literature on capital markets, has refreshingly invaded this book also.
Of course neither Shah nor Thomas display any inhibitions in smashing shibboleths about the financial sector in India. Shah does that regularly through his columns in The Financial Express where he is always ready to dissect a topic from ab initio principles that so often makes for a sparkling debate.
The list of good books on the Indian capital markets is not very large. This is surprising if one just counts off the number of universities and institutes that churn out financial specialists every year, downturn notwithstanding. Among those which are there on the shelves, compared with the set of must reads on the financial sector generally, books on the Indian markets suffer from two problems.
They often go into too much of details developing the structure of each market and skip over the trinity of interaction — the RBI, finance ministry and the Securities and Exchange Board of India which are a must to understand the dynamics of the Indian capital markets. In the absence of such understanding, the readers always miss out the reasons for the way the capital markets in the country behave differently from the text book cases.
This is where Shah, Thomas and Gorman have filled in with neat details. For instance, describing the details of the fund management scenario in India in chapter 10, they describe why investors in mutual funds are unable to decide whether a fund manager has added any value to her portfolio.
Checking them off, they include two very specific India centric problems. “Until a sound framework of monetary policy and fiscal policy falls into place, macroeconomic risk in India will be higher than that seen in mature market economies. This means that it is harder to pick up the signal of fund manager performance above the noise of market fluctuations” The other is the institutional environment, which, “is particularly hostile to performance measurement.”
As an example, the behaviour of foreign institutional investors has been continually reshaped by the rapidly evolving situation on capital controls and the characteristic of local investee firms. These insights of course derive a lot from the fact that Shah has had a long innings with the finance ministry as a consultant.
While he was technically with the omnibus Economic Division, he was pretty much involved in one of the most scary episode in the Indian stock markets, when the bottom literally dropped out of the market and left in its wake the ruin of UTI. The reshaped entity of UTIAMC and many of the new instruments that came of the episode draw upon the work done during this period. While it would have been interesting if the book had dwelt on some of those, the book is quite complete otherwise.
Of course the financial storm had not blown up in gale speed when the book was published but in the very first chapter, it describes what it calls a “Perfect Storm”. The scenario that it draws up includes the inevitable general elections of 2009, the impact of the government not meeting the fiscal deficit targets, a global business downturn in 2009-10 and very presciently, a global retreat of capital from emerging markets.
Comparing it with the combination of factors that was present in 2000, the authors conclude the Indian rate of growth could hover anywhere between 4 and 10%, the former getting too close for dismissing away the possibility.