A Generous Dose Of Judgement

The title of this beautifully produced book may raise expectations that one could walk into financial markets with it and start making millions without further ado. That is not quite its purpose; the title is presumably meant to convey that the authors are people who have helped design stock exchanges, sat on their boards, traded shares, made and lost money, and are not only academics. Their background and aspirations are reflected in the book; it has much description, with a generous dose of judgement thrown in. The authors do not bother too much about analysis; they are warriors engaged in the controversies that abound on Indian financial markets, not boring fence-sitters. They have a breathless, racy style; the average section is less than four pages long, and there are roughly half as many tables and graphs as pages. For those who prefer a personal touch, the authors have thrown in colour photographs of their financial heroes. In sum, India's Financial Markets is extremely reader-friendly.

The book begins with a chapter on the economy. It portrays an economy doing well in many fields — growth, age distribution, openness, infrastructure,  etc. — and ends with some caveats: the general elections of 2009, the fiscal deficit, a global meltdown and capital flight from underdeveloped countries. All these threats have passed now. The book next covers nonfinancial firms. The description is good, but is confined to those covered by Centre for Monitoring Indian Economy. Whilst the sample is the most comprehensive set of data available, its coverage of unquoted firms is negligible. Little is known about these thousands of firms that are the backbone of India's non-agricultural economy; but their neglect is unjustified.

It then goes on to cover private and public equity markets as well as markets for government bonds, corporate bonds, commodity futures, real estate and foreign exchange. Its coverage of private equity markets is particularly welcome since these have largely grown outside the surveillance of the regulators — partly because of their bureaucratic habits — and are not so publicly visible. The authors' view of the public equity market is somewhat biased. Although they are technically extremely well run, the stock exchanges together with Securities and Exchange Board of India (Sebi) ensure that the proportion of capital raised on the stockmarket is a fraction of national savings and investment. In other words, financial mediation in India is of world standard, but is not of much economic significance. The authors also overestimate the importance of the equity market. They measure it by market capitalisation. But what the equity issuing companies receive is the book value of the equity; market gyrations are irrelevant to their balance sheets. Still, the authors' coverage of the world they are familiar with — the financial markets — is knowledgeable.

The chapter on policy issues is in some ways the best. It focuses on the Indian style of regulation, and does not get stuck in detail. It concentrates on a few crucial shortcomings, and does not go overboard on criticism. It is just what the highest policymaker would need to know — if he were inclined to reform financial regulation. The last chapter is on what global financial firms can do with India. It is a kind of restrained sales pitch for India; rather, it brings into open the sales pitch that underlies this entire book. It covers much of what foreign financial institutions would need to know if they plan to enter the Indian market.

The only thing I found lacking, or inadequately discussed, is the regulatory hurdles they would face — the frustrations they would face in dealing with Sebi, for example. If they then get caught in appeals, they would be taken through a wringer. But perhaps that sort of depressing detail is unnecessary in what is meant to be an introduction. The other material that is inadequately covered is regulation by the Reserve Bank. The authors' distaste for it is understandable; but however much one may hate the style of a regulator, it is not a cause for ignoring the enormous reach of what it does. Besides, however wrong its philosophy may be, the RBI does its job efficiently. It documents and publishes information and data on an enormous scale; it is a pity that its deeds and misdeeds get such short shrift in this book. Despite that, this is the best book available on India's financial sector.

Ajay Shah is senior fellow at the National Institute of Public Finance and Policy in Mumbai. Susan Thomas is assistant professor at Indira Gandhi Institute of Development Research in Mumbai. Michael Gorham is director at IIT Stuart Center for Financial Markets, Illinois Institute of Technology in Chicago.

(This story was published in Businessworld Issue Dated 18-10-2010)

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