Bad Advice Is Driving India’s Irrepressible Bulls

India’s economy is not doing as well as many had hoped. Growth has been slowing for several quarters, and even if there’s a slight recovery in coming quarters, the signs for the medium term aren’t propitious. There appears to be no end in sight to a slow-moving banking crisis. And private investment has crashed, reflecting pessimism at Indian businesses about the future and possible returns. India’s government looks less and less likely to carry out the kind of deep reform that the country’s economy needs, while its inexplicable decision to withdraw 86 percent of the country’s cash overnight — a decision that was as badly implemented as it was poorly conceived — has gravely damaged Prime Minister Narendra Modi’s reputation as a manager of the economy.

So the question is: Why aren’t these facts, which are easy to ascertain, reflected in the giddy statements regularly made about the Indian economy, especially by analysts and advisers to global investors?

The answer goes to a problem at the heart of how global finance is organized. Economic theory tells us that advice is only as good as the incentives of the adviser; if he or she will do better by insisting things are good than they would by saying they are bad, then there’s a strong bias toward the construction of a narrative that all is well.

That’s part of what’s going on in India and emerging markets in general. A friend of mine a long time ago gave me a useful piece of advice: When asking questions about India or any other emerging market, never go to a sell-side analyst. Always ask the buy-side person — the one who actually has to make choices, not the person offering them. I’d actually go further and suggest a simple rule: When Indian businessmen and investors are acting cautious, it’s that caution I would heed.

QuickTake India’s Aspirations

Consider how odd and illogical our general approach to investing in a strange market is. We rely for advice on those who…

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