IT is generally accepted that lasting value in art accrues in the course of generations. It is also true that modern and contemporary Indian art has presented unrivalled investment opportunities over the past decade. A recent report by Fortune claims that the Indian art market has risen over 485 per cent in the last ten years, making it is the fourth most buoyant art market in the world.

Half a dozen art investment funds are now trying to raise money from those looking to cash in on the current boom in Indian art. In May this year an Atul Dodiya painting, which first sold five years ago for $11,500 made almost $400,000 at auction. Next to such numbers, traditional investments begin to look rather tame. After all, you cannot show off your latest share certificate by hanging it on the wall!

Art is no longer the domain of wealthy individuals in search or rewards that are beyond the purely financial. The new vogue of investing in art allows for ordinary people to participate in the art market with as little as ten lakh rupees. The money raised is pooled together by fund managers in order to play the market. Art, like gold, is now considered an ‘alternative asset class’.

But can art really create wealth? Should we be swapping our shares for Souzas? Can art be part of a portfolio and will art ever operate according to the rules that govern other asset classes? Not quite say the purists and the subject is hotly debated. With no conclusive answers to the question, it is important to examine the history and mechanics of the market before following the legions of new buyers intent on working art for a profit.

Awareness that there could exist a market in twentieth century Indian art came about as recently as 2000. The initial impetus came from Christie’s and Sotheby’s who held auctions of Indian art in the mid 1990s in the art capitals of London and New York. The sales created a buzz among the Indian diaspora. Spurred on by national pride, their enthusiastic bids established early public benchmarks for many modern Indian artists.

The celebrated Herwitz collection, dispersed by Sotheby’s, New York between 1995-2000, set an example in collecting. The Herwitzes amassed over 5000 works by Indian artists over two decades of travel to India. Many of the artists whose works were either sold at auction or gifted to the Peabody Essex Museum in Massachusetts remain at the forefront of collecting today. The Herwitz collection also forms the basis of the only significant public collection of modern and contemporary art outside India.

 

With the realisation that there were wealthy Indian buyers who had not hitherto been courted as clients, the auction houses began making more concerted efforts by organising regular biannual auctions of modern and contemporary Indian art in New York. Simultaneously, the gallery network in India was growing with new galleries cropping up in smaller cities such as Bangalore and Kochi. The publication of The Flamed Mosaic: Indian Contemporary Painting by Neville Tuli was a milestone in research and promotion.

During these years there was little discussion of markets, investments, funds or returns. However, there was a realisation among buyers that modern Indian art was worthy of being collected and that it was ‘undervalued’ when compared with postwar international art. In 2000, Francis Bacon’s portrait of George Dyer sold for $6.6 million whereas ‘A Falling Figure’ by Tyeb Mehta, who is heavily influenced by Bacon, sold for a mere $72,625, a record for the artist.

Spotting an opportunity, in 2000 Saffronart.com burst onto the scene with an ambitious programme of online auctions and exhibitions. The same year Osians Auction House and Archive was set up, giving resident Indians a taste of live auctions. All the activity surrounding these public auctions stimulated a secondary market in Indian art. A regular calendar of sales inspired confidence that art could be traded and prices for modern Indian art began rising rapidly.

Between 2000 and 2005, prices leapt from peak to peak. In 2002, Tyeb Mehta’s ‘Celebration’, a triptych commissioned by The Times of India, sold for $317,500 to a collector in Japan. Another, smaller painting by Mehta, first sold in 2001 by Saffronart.com for $36,000, was reoffered by Christie’s in 2004 when it made $101,000. The following year his iconic ‘Mahishasura’ raced past its estimate to $1.58 million, five times his previous best. It remains the most expensive Indian painting to be sold at auction.

 

While the initial spurt in prices had come from the non-resident Indians, a new demand emerged between 2003-5 from the newly wealthy Indians living in India. A rapidly growing economy, booming bourses and rampant real estate prices meant surplus cash for luxuries like art. In 2005, The Guardian newspaper reported that ‘After the Porsches and the Chanel handbag, the latest must-have for Delhi’s new millionaires is a piece of contemporary Indian art.’

So sharp was the rise in prices that all critical debate was eclipsed by media fanfare. Reports of record sales, investment opportunities, internationalisation of Indian art and comparisons to Chinese art proliferated. Art stories were moved from the culture section of the dailies to the business pages, illustrated by financial data instead of paintings or sculpture. The Economic Times, in association with Osian’s, even began to carry an art index aggregating prices for the top 51 artists.

Indeed, genuine gains made by those who got in early fuelled the tendency to view art as an asset class comparable to stocks or real estate. But art as tool for wealth creation is unproven. For one, it does not produce income by way of dividends, relying instead on notions of scarcity. Art is illiquid – it cannot easily be cashed on any given day. Transaction costs can be extremely high – usually 25 per cent and there are other associated costs – conservation, storage and insurance. Also contemporary art is risky as it is often at the mercy of erratic public taste and short-lived trends.

One aspect of art that worries investors is the question of how to attribute value to art. How does one quantify paintings of different sizes, media or periods? How does one determine quality and account for the history or ownership or condition of a work of art? Prices for a single artist, painting the same subject on a canvas the same size can vary wildly – a Husain painting of Mother Teresa from the 1980s is more valuable than one of the same size painted more recently. If it was originally in a well-known collection it becomes even more valuable and if published would accrue still greater value.

 

Still, a financially oriented perspective prevails among dealers in India, whose experience in business is outweighed by their knowledge of art. The most successful galleries in India are owned and managed by erstwhile builders, entrepreneurs and fashion designers. While they are quick to forecast returns from purchases, one would be hard pressed to find a single gallery director with the necessary skills to assess the single most important ‘fundamental’ of art – its historical value.

The rapid expansion of the market has also drawn in a new breed of buyers – those who are seduced by the investment potential but do not have the focus or the commitment of traditional collectors. Often from a financial background, new entrants are keen to support their acquisitions with financial information. This is usually at the expense of art historical knowledge which is crucial in determining which of an artists works are or could become significant.

There have emerged art impresarios to exploit the weakness of the galleries in India who represent far too many artists to do justice to any one of them. They scour the market for artists they believe have not been well promoted, buy out their studios and market them through auctions. Another type of impresario commissions a curator to put together group shows of younger artists in public spaces with the option to acquire works at wholesale prices.

Even artists have been seduced by the spiralling prices. With no gallery contracts to honour, many play the field in search of the best financial deal. Some artists like Akbar Padamsee have sought to circumvent the gallery and deal directly with the auction houses. Others have accelerated their production to feed a voracious demand. Oftentimes this reflects on the quality of works emerging from the studios.

 

An avalanche of financial analysis has led to the proliferation of art funds. Half a dozen investment funds have launched between 2003-2006, the majority last year. According to the promoters of Crayon Capital, one of the more recent entrants, ‘In 2003, 4.5 million dollars of Indian art was auctioned. The figure has increased to $170 million in 2006.’ Among the early birds was the Art India Fund 1, which expects to pay out an annual return of 50 per cent at the end of this year, a figure the promoters proudly say is ‘embarrassingly high’.

Most of the funds are close-ended, raising money through an initial offer with which they buy artworks to hold or sell periodically. On completion of tenure, usually between 3-5 years, the fund distributes proceeds to its subscribers. They usually charge 5-10 per cent as management fees and 33.8 per cent corporate profit tax on capital gains if registered in India. Many have profit sharing arrangements whereby if they achieve a minimum rate of return they participate in the upside.

Serious investors worry about the high costs associated with art funds and the fact that they are not regulated. A more serious cause of concern is the fact that art funds are rapidly becoming market makers. With their swelling coffers, funds are under pressure to deploy capital quickly and it is no surprise that they have been buying aggressively at auction, often competing with collectors to establish new records. This has resulted in an artificial inflation of prices.

 

An unhealthy emphasis on securing returns has inevitably led to price manipulations on many fronts. The way this works is simple. Hoarding works by a desirable artist fans demand and increases the aura of scarcity. A single work is then released at auction and aggressively bid for and lo and behold the remains of the horde are sold at a premium. Even certain galleries whose main role is to responsibly disseminate works into good collections are guilty of this practice.

In fact, close examination reveals that conflict of interest is rife in the market for Indian art where the lines between artists, galleries, auction houses, collectors, consultants, dealers and funds are increasingly blurred. Is Saffronart.com an online auctioneer or a gallery? Is Arts India a gallery or a fund? Is Osian’s an archive or art advisory service?

It is one of the peculiarities of the Indian market that most of the funds have been launched and floated by galleries and auction houses. Directors of Arts India, Saffronart, Osian’s, Sakshi and Cymroza manage funds while Vadehra art gallery is the main advisor to Crayon Capital. There is no parallel for this in developed art markets. The recent purchase by Christie’s of the Haunch of Venison gallery resulted in an outcry and punitive action on the part of Art Basel who would no longer admit the gallery to the fair.

Even the international auctioneers are tainted in their involvement with modern and contemporary Indian art. Both Sotheby’s and Christie’s use as their consultants influential modern art dealers Dadiba Pundole and Arun Vadehra. This awkward arrangement serves as back door for the auctioneers to source works in India. It is no wonder then that auction house catalogues echo dealers’ inventories. Ever present at the auctions and often bidding in the room with access to privileged information, these relationships could be considered cause for scrutiny in a regulated market.

 

To stem the flow of cash into art, value added tax was introduced in 2005 at the height of the boom. This had little effect on the overheated market. This year, the market attracted further interest from the finance minister who in his budget declared that art could no longer be considered a personal effect and that sales of art were liable to capital gains tax. Many hailed these policies as further evidence that art was being considered as an asset class by policy-makers.

While these could be positive steps in an effort to regulate the market, word of high value transactions also brought on the scrutiny of the tax inspectors. Earlier this year a number of established galleries and funds in India were the subject of income tax surveys and raids. Such scrutiny worries the most stringent tax payers as it absorbs enormous amounts of time and resources. Explaining the casual nature of the art business to tax authorities can be a challenge.

In investigations, the burden of proof is on the individual or the business and not on the department of income tax. Private collectors who bought paintings over a decade ago for what is considered loose change, are unsettled. Often, without any bills or accompanying documents of sale or ownership, proving the taxable gain is not easy. Selling at today’s values would certainly attract a large tax bill and the unwelcome attentions of tax inspectors.

 

There is a view that art market cycles last six or seven years. If this is the case then the present upswing appears to be towards the end of a cycle. In the last quarter of 2006, the three main auctioneers raised between $14-17 million per auction, selling well over 90 per cent of their consignments. Since March, the sale total figure has fallen dramatically, in some cases to almost half. Saffronart.com which sold $15.9 million in December 2006, made a little over $9 million in May 2007.

After a period of record growth, prices seem to be settling down. Since 2005, twenty Indian paintings (mostly by Tyeb Mehta, Gaitonde or Raza) have crossed $1 million mark. The high prices have brought a lot of very good material to the market and there have been more auctions than before, contributing to ‘auction fatigue’. New buyers are satisfied and collectors are more selective. As prices stabilise, risks associated with investing become lower.

There also seems to be a shift in emphasis from the modern masters to contemporary art. Each art market cycle seems to have its favourites and the last cycle witnessed a huge rise in the value of modern Indian art, broadly defined as art created between 1947-1970. The surge in interest has carried forward the prices of some second-generation artists like Arpita Singh and Rameshwar Broota. Yet deserving artists such as Nalini Malani, anointed by the critical establishment, remain untouched by the market.

As the market for modern Indian art slows, investors have turned their attention to contemporary art – art made since the 1990s. Anticipating the change, Sotheby’s and Saffronart. com have begun holding specialised auctions in this category. However, investing in contemporary art is far riskier. Fashion, not quality, too often dictates who is hot and who is not in this fickle sector.

 

The headlong rush to invest in modern and contemporary Indian art appears to be more like a fad than a rational approach to making money. The recent, short history of the Indian art market and its rapid rise means that everyone is convinced that the only direction for the market is up. No one in the Indian art market has ever experienced a downturn or a crash, where art can lose up to 50 per cent of its value. Occasionally it is worth less than the canvas it is painted on.

While the current cycle in international contemporary art appears to be relatively secure due to the global nature of demand, the major weaknesses in Indian art is its narrow collecting base – primarily local with an undue emphasis on investment. A lesson can be learnt from the last boom, when Japanese real estate investors, a small narrowly defined community, poured money into the impressionist market. When that fell apart, the art market plummeted. Similarly, political upheavals or a downturn in the economy would have an immediate impact on the market for Indian art.

 

The only way to get wealthy with art is to become a collector and focus on building a collection over a period of time. This requires time and dedication to looking, reading and research. It also requires that one collect the very best works by an artist that one can afford, with a good provenance and in good condition. It demands that one looks after the work over a period of time. The minimum recommended time to hold works is ten years, but the longer the better.

David Rockefeller sold his painting by Mark Rothko titled ‘White Center’ in May this year for $72.8 million. He bought it in the 1960s on the advice of a curator at the Museum of Modern Art, just a year before the artist’s career was established in a retrospective at the same museum. He paid under $10,000 dollars and it hung in his office for all the years he owned it. He donated the proceeds of the sale to charity.

In the final analysis, wealth creation through buying contemporary art remains a myth for traditional collectors who shy away from viewing art as an asset class and a reality for those ‘players’ who have made genuine gains by exploiting a small, unregulated, and easily influenced market. The irony is that in the long run it is the genuine collectors and not investors who reap the greatest rewards.

 

* Amrita Jhaveri is the author of A Guide to 101 Modern and Contemporary Indian Artists. India Book House, Mumbai, 2005.