In this week’s newsletter we talk about green GDP, why Indians are chasing gold exchange traded funds, Spotify & more. 

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Quote of the day  📜: 

"Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver." - Ayn Rand

The truth about modified Green GDP

In 1929, the US stock market collapsed, triggering a global economic meltdown or what we now call the Great Depression.

The stage for this was set years earlier during a decade known as the “Roaring Twenties”. After World War I, US factories buzzed with activity. People splurged and businesses thrived.

But beneath the glittering surface, trouble was brewing. The economic optimism meant that many bought stocks with borrowed money, paying only a small upfront margin. So, when stock prices dipped temporarily, these borrowers couldn’t repay their loans. Panic spread, desperate selling followed, and banks collapsed. This spiral devastated economies until recovery slowly began after World War II.

It was during this time that US policymakers struggled to figure out how to put numbers to what was happening in the economy. That’s when Russian economist Simon Kuznets stepped in. He said, “Hey, I’ve created a way to measure how much goods and services are produced by American companies, whether at home or abroad. It’s called Gross National Product or GNP. But if we tweak it a bit to exclude what American companies produce abroad, we’ll get a better sense of how the US economy is doing.”

And just like that, we got Gross Domestic Product (GDP).

Simply put, GDP is the annual value of all goods and services produced within a country. By 1944, at the Bretton Woods conference, it became the global standard for measuring economies.

But there’s one thing we haven’t told you yet. Kuznets didn’t just create GDP, he also cautioned against relying on it entirely. “The welfare of a nation can scarcely be inferred from a measure of national income”, he said.

Simply put, GDP captures production and consumption but ignores critical aspects like environmental damage, resource depletion or even a country’s overall well-being. Or as economist Diane Coyle put it; GDP is a “war-time metric”. It’s useful during crises but says little about creating happiness in peacetime. It tells you how valuable the furniture from the cut tree is, but not what that tree is worth when it stands tall and provides shade.

That’s why some countries are experimenting with ways to improve GDP.

Enter Green GDP, a concept that subtracts environmental costs, like pollution and deforestation, from traditional GDP. Factoring these in gives governments more reason to protect the environment, knowing it directly impacts their economic output.

In fact, just a few days ago, Chhattisgarh further modified this concept by becoming the first state to include the economic value of forests in its Green GDP calculation. By doing this, the state is now considering not just the environmental costs but also the benefits that forests offer. In fact, it’s addressing one of the main flaws that has long haunted the concept of Green GDP itself.

If you’re wondering how, well, you see, Green GDP isn’t a new idea. Over three decades ago, the UN (United Nations) proposed a methodology for its calculation. And countries like the US, China, and Norway tried Green GDP by subtracting the suggested environmental costs from the traditional GDP.

But the idea didn’t take off. For instance, Norway found the valuation techniques for environmental depletion inconsistent. The US abandoned the idea when environmental costs made its GDP figures look weaker. China, too, discontinued it by 2005 after resistance from local governments. 

So, to address these challenges, the UN revised the concept, introducing ways to factor in environmental services like clean air, water and biodiversity. It meant that policymakers could now highlight not just negatives like resource depletion but also positives, such as nature’s contributions. And that’s precisely what Chhattisgarh is doing today.

But does this truly make sense?

See, Chhattisgarh is a state where 44% of the land is covered in forests, providing livelihoods for millions of people. Its rich natural resources are a lifeline for the region. And recently, the India State of Forest Report (ISFR) nudged it to adopt the concept of modified GDP. Thanks to its findings, which highlight a remarkable rise in forest and tree cover in the state driven by biodiversity protection and conservation efforts.

Here’s the problem, though. The ISFR defines forest cover as any area of at least one hectare with a tree canopy density of 10% or more. Now, one hectare is about 10,000 square metres or 1,07,600 square feet. In other words, if 10% or 10,760 square feet of ground is shaded by tree branches, it’s labelled a forest — no matter who owns it or how it’s used. But let’s be real. Can you honestly call that a forest?

Hardly.

This definition of forest includes plantations like oil palm and rubber — a major issue since these often replace natural forests. Unlike thriving ecosystems, these harm biodiversity and disrupt the environment. For example, in India, palm oil plantations have caused deforestation, soil erosion and water cycle disruptions, all while emitting greenhouse gases. Because palm oil plantations, for instance, are often linked to aggressive industrial practices like clearing natural forests, exploiting land and prioritising profit over sustainability. And rubber plantations face more or less similar criticisms. 

But the paradox here? Such activities that destroy forests can still count as “forest cover” under these definitions, painting a misleading picture of conservation.

MD Madhusudan, an ecologist, sums it up perfectly: “If what replaces a forest after it is cut down is also termed a 'forest,' can there ever be forest loss?”

Adding to the complexity, planting trees isn’t always beneficial. For example, introducing trees into grasslands or wetlands can harm native species, disrupt ecosystems and wreck biodiversity. Even the type of trees matter. Native, mature trees are excellent at absorbing carbon and supporting wildlife, while young or non-native trees often fall short. So, if Chhattisgarh focuses only on increasing forest quantity without considering quality, it risks oversimplifying the story.

Then there’s the issue of flawed data collection. Environmental degradation is often tracked using satellite imagery taken at specific times. And governments can manipulate this by choosing when to monitor forests, conveniently hiding issues like stubble burning. It’s like sweeping dirt under the rug and calling the room clean.

And here’s a thought to chew on ― governments could often tout Green GDP to serve their own agendas; be it to secure international funding or polish their eco-friendly image. In India, states have used these metrics to justify industrial projects that may harm the environment in the name of development. A case in point are industrial corridors, often branded as ‘green’ initiatives, despite valid concerns about their ecological fallout.

Now, we’re not saying this applies to Chhattisgarh. But without clear methodology, other states could quickly use this strategy and use modified Green GDP as a convenient mask — balancing industrial ambitions with green narratives. It’s a slippery slope, and that’s why scrutinising these metrics is crucial.

So yeah, maybe it’s time for governments to revisit the drawing board and agree on a standard framework. One that clearly defines what to include and exclude when crunching ecological services into numbers. Plus, they’ll need to ensure transparency so analysts and critics can scrutinise the data and trust calculations.

Else the concept risks becoming another empty buzzword.

After all, green GDP should be a mirror, revealing both progress and loss, and not a tool to tell comforting tales, eh?

What’s cooking with Gold ETFs in India?

You got your salary recently and are looking to invest part of it to earn good returns. The stock market however feels a little too risky right now. So, you turn to gold. It’s shiny, it’s stable and it’s been a symbol of wealth for centuries. And you soon realise there are just so many ways to invest in gold. Physical gold, Sovereign Gold Bonds (SGBs), gold funds… and then there are Gold ETFs.

ETFs, you ask?

Imagine owning gold without needing a vault at home. Gold ETFs (Exchange Traded Funds) make it possible by slicing gold bars into tiny digital units that you can buy and sell like shares on stock exchanges. Each unit represents a fraction of a gram of gold, stored securely in your demat account. It’s hassle-free gold ownership — simple, convenient and accessible. Fund houses in India purchase physical gold (99.5% purity), store it in empanelled bullion vaults, and create ETFs by dividing it into units. These units’ prices trade on exchanges like BSE and NSE and move with market gold rates, making them a smart way to track the metal’s value. And you get to invest in these units just as you do for your mutual funds.

And Indians are loving it.

To put things in perspective, in just four years, the physical gold held by these funds has almost doubled from 27 tonnes to a whopping 55 tonnes by October 2024. And it’s not just the weight that’s grown, the money pouring into these ETFs has skyrocketed too.

Take the past 21 months, for instance. Domestic Gold ETFs attracted a whopping ₹12,450 crores in net inflows. To top it off, the period from November 2023 to November 2024 saw investments jump nearly fourfold from nearly ₹330 crores to ₹1,250 crores.

Trading volumes tell a similar story too. In 2024, Gold ETF volumes on Indian markets soared to about ₹26,500 crores, more than doubling from 2023.

This simply means that with gold delivering a solid 13 to 14% compounded annual returns (CAGR) in rupee terms over the last five years, even a ₹100 investment five years ago would have grown to around ₹185, making it a rewarding investment.

And this begs the question ― what’s driving this gilded migration?

For starters, the 2024 Union Budget introduced a tax-friendly nudge. It slashed the holding period from 36 months to just 12 months. This means that earlier, you had to hold onto your Gold ETFs for 3 years to qualify for long-term capital gains, which were taxed at slab rates based on your income. But now if you hold onto your Gold ETFs for over a year, your gains are taxed at a flat 12.5% instead of being tied to your income slab. This clarity and tax efficiency have made ETFs a friendlier investment option.

Add to this the scarcity of new SGB issues are channeling investors to explore alternatives. Meanwhile, multi-asset funds in India have ramped up their allocation to Gold ETFs, reaching ₹6,400 crores by November 2024.

And lastly, gold’s allure has also grown globally due to market uncertainties and expectations of lower interest rates.

So yeah, all those reasons seem to be driving India’s growing love for gold ETFs lately.

But does that make them all goody-goody?

Not entirely we’d say. Because gold ETFs have their own set of quirks.

One of their less-discussed challenges is liquidity. Imagine owning a rare, expensive book that a few collectors want to buy. But if you wanted to sell it quickly, you’d struggle without lowering the price. Similarly, some Gold ETFs don’t trade as often as popular stocks. So, selling large amounts quickly could impact your selling price in secondary markets (like the exchanges) or take longer to find buyers at your desired price. This is especially true for ETFs that aren’t widely held or as well-known in the market.

Then there’s tracking error — the gap between the ETF’s performance and gold prices. Imagine running a race with your friend timing you, but they’re always a second behind. Similarly, while Gold ETFs aim to match gold prices, they often fall short due to market inefficiencies or even delays in replicating the actual spot price of gold. For instance, if gold prices rise by 10% annually, but your ETF delivers only 9.5%, that 0.5% tracking error eats into your returns. Over five years, a ₹5,00,000 investment could grow to ₹7,71,500 instead of ₹8,05,000, losing over ₹30,000 to tracking error alone.

Speaking of costs, Gold ETFs also come with an expense ratio, brokerage fees and transaction costs. Sure, physical gold has its costs too — making charges and GST, for instance. And yes, costs associated with ETFs are usually cheaper than those of buying, storing or insuring physical gold. But then, those costs with physical gold are mostly one-time expenses. While ETF fees recur annually, quietly nibbling away at returns.

And let’s not forget, gold itself doesn’t generate income. Unlike stocks or bonds, it offers no dividends or interest (unless you’re investing in SGBs). Its value depends entirely on market perception and macroeconomic conditions. So, overloading your portfolio with Gold ETFs could mean missing out on potentially higher returns from equities or other asset classes.

So then, how do we solve this debate?

Well, think of gold ETFs as a tool — not a hero or villain – in your investment toolkit. Their value lies in how you use them. Jumping in blindly or over-allocating could expose you to risks. And dismissing them entirely means missing out on their unique benefits.

The key? Balance and strategy.

You see, gold has its cycles. It can shine bright for years but also lose its lustre in downturns, and we’ve seen this story in the past.

And that’s where diversification and allocation could help. So, pull out an excel sheet and take stock. What percentage of your investments is in gold overall? How much is in gold ETFs? And how does it all stack up against equities, bonds or other assets? If gold is tipping the scales, considering your risk tolerance and return expectations, it’s time to recalibrate. By doing this, you can decide how much you’ll allocate to gold each year — not too much, not too little, but just right.

Because while gold glitters, it’s the smart strategy that truly shines.

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Money Myth Debunked 💰: 

The idea that "investing is only for the rich" is a common myth, but it’s completely outdated! Sure, maybe years ago you needed a lot of money to get started, but now? Things have changed big time.

Here’s how: 

1/ Systematic Investment Plans (SIPs): SIPs enable you to invest fixed sums at regular intervals, building wealth over time without needing a large upfront amount. This approach works particularly well for salaried individuals or students. 

2/ It’s all about starting early and being consistent: Investing isn’t about being rich—it’s about building a habit. Starting early and staying consistent with even small amounts can lead to significant wealth over time. The earlier you begin, the longer your money has to grow, thanks to the magic of compounding.

3/ Access to Information and Education: Free online resources, blogs, YouTube tutorials have made it easier to learn about investing. You no longer need expensive financial advisors to get started.  

And that's all for today folks!

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