How art indices are changing the narrative of the Indian art market

The democratisation of art production requires promoting all artists beyond celebrities. Image: Shutterstock

Art is meant to be consumed aesthetically. Art is also an emerging investment asset class. Connoisseurs and speculators alike have flocked to auction houses in India to buy paintings to the tune of $100 million a year. IIM-Ahmedabad and Mumbai-based Aura Art came together to jointly develop an art price index that was launched in the BSE auditorium last month titled IIMA - AuraArt Indian Art Index (IAIAI). The quarterly index is based on a hedonic pricing model and should be updated twice a year.

Does art deserve so much attention for a national-level dialogue? Yes, because academic literature is replete with evidence suggesting that art does not only help build new assets and create wealth, but it may also serve as an effective store of wealth. A direct impact of developing art markets reflects in employment creation and tourism development. Yet, some indirect positive outcomes are powerful and long-ranged: Artistic amenities draw good quality talent across industries; artists cross-fertilise creativity across industrial disciplines. In his paper, Currid (2010) shows how a large concentration of artists has made New York the brand it is.

But is it not sacrilegious to mix art—a work of creative purity—with investment? Not really. John Nici, in his book titled “Famous Works of Art” (Rowman & Littlefield, Maryland, 2015), firmly states: It would be naïve to think that artists do not care about “matters of finance”. "Michelangelo was nothing”, says Nici, "if not concerned with wealth, among other things such as fame". The “Divine Artist” was quite aware of the economic value of his paintings, so much so that he gave away his drawings to his struggling pupils as financial aid.

What makes some works of art (or art market, in general) so pricey is a question that has intrigued almost everyone like us. A by-product of the IAIAI endeavour has been a pricing model that tells us which aspects of an artwork contribute towards its price and by how much. These details are a topic for another day, but it suffices to say that we can predict painting prices with a fair degree of accuracy. They are not as random as most people perceive them.

Also read: Art as an investment: How to build an art collection from scratch

We must, however, ponder over the efficacy of art indices. Indices—much like Nifty50, or VIX—are for public consumption because they reflect the broad patterns of price movements in asset classes. IAIAI is in its early stages and may need numerous revisions before it perfects itself. Indices, however, help shape the public narrative about assets.

In his recent book “Narrative Economics” (Princeton University Press, 2019), Nobel laureate Robert Shiller highlights how public discourses on assets “vastly improve our ability to predict, prepare for, and lessen the damage of financial crises.” Van Gogh would not have gained the same fame for his works had it not been for the narratives surrounding his rather dark biography. In India, search interest in Madhubani art, which reflects narratives around it, has tripled in the recent decade. It is correlated with increased activity in different facets of the art form.

Also read: Art market pushes on with rocky crypto romance

Another more obvious outcome of IAIAI relates to the concept of market efficiency. Price transparency is required for fair competition. One cannot imagine a fair playing ground for all stakeholders of an art market in absence of a reliable price index. Buyers, sellers, valuers, insurers, financiers, and consultants use price indices for their core businesses. In the long run, it may reduce the cost of underwriting (from financing and insurance perspectives) and expand support to this market from the financial sector. The “home bias” of foreign investors has been rejected as “irrational” by economists but continues to be a reality. The high cost of research related to foreign assets is a known deterrent to investing in them. Investors’ portfolio allocation is partly driven by diversification benefits measured via statistics such as correlation and volatility. Over time, IAIAI could offer a reliable tool to attract investment; and help with portfolio allocation.

Also read: From Oprah Winfrey to Robert Pattinson, celebrities are trying their hand at curating art auctions

Yet, an index is just a series of numbers. It is not free from biases stemming from analytical errors or data artefacts. Each index method has its own set of limitations. On the one hand, with increased awareness, IAIAI could help spur demand for art and help achieve a larger policy goal. On the other hand, the index currently focuses only on 25 artists with a large number of auctioned paintings. In their 2017 study, Gourevitch et. al. show that the use (and awareness) of index-like tools is low and associated with people of “younger age, living in a higher income community.” The democratisation of art production requires promoting all artists beyond celebrities. The proliferation of art investment to the common public calls for the creation of liquid, low-ticket investible instruments. We are a long way from achieving these goals. Yet, we seem to be in the right direction.

Professor Prashant Das is faculty member (Finance and Accounting Area) at IIM-A