The unnecessary GDP - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The unnecessary GDP A  A  A
19 MAY 2008

The GDP (gross domestic product) of any economy is the sum of all economic activity that occurs in every household, in every company, at all levels across the economy. So, if you buy a pair of jeans at the store there is a lot of GDP involved.

The farmer grew cotton, some trucking company delivered that cotton to the textile mill, the textile mill converted the raw cotton to denim, the denim was sent to some garment company which then made the jeans - and the jeans found their way to the mall where you bought them. At each step of the way there is an involvement of "economic activity". And there are many "linkages". Someone needs to make the trucks to move all the cotton and the denim clothes. Someone needs to build the roads so that the trucks can move on them. And then you need cement to make the roads and machinery for making cement. You also need machines to convert cotton to denim and then the buttons and zips to make the jeans.

GDP is clearly a complex event. Imagine all the people who need to be involved in some economic activity just to get you your one pair of jeans. And that pair of jeans does a few things: it clothes you and covers you; it represents a fashion statement; or it is just another "thing" you bought for the sake of buying something.

But not every bit of GDP is necessarily "good" GDP. Take the case of gambling. It is an industry and is counted in GDP. Someone needs to build the casinos, manufacture the cards, manufacture the tokens, manufacture the liquor that is consumed (another not so "good" GDP), manufacture the cigarettes (yet another not so "good" GDP), and then all the linkages that come from there - the cement to build everything and the trucks to transport everything. So a country that builds many casinos may be adding to GDP but, chances are, its society will not be that "happy". If parents are busy gambling all day long, then who is with their children? Or if people smoke and drink a lot (which could happen in a casino environment) what happens to the health of the "healthy" people and the cost inflicted to society over time? Looking after sick people in hospitals is not "good" GDP - there is an economic activity that adds up to GDP but no one is really "happy".

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And I see a large contribution to GDP from the fund management industry. There are 33 of us fund managers registered as Asset Management Companies with SEBI. And we have hundreds of mutual funds that we have created to cater to your every imagined financial need (uh, not Quantum). We (except Quantum) have deployed an army of distributors and sub-brokers and sales agents and wealth advisors to look after every conceivable need for any financial product you may have. All these new fund launches, recommendations to move from one fund to another fund every week or every month - all of this generates economic activity and adds to GDP.

Most of it is useless for you, the investor, but tends to make the middle men rich. That is why Quantum Asset Management Company and the Quantum Mutual Funds have no distributors to "sell" you anything. That is why we launch a few products: most mutual funds are useless and will give you little benefit in the long run - though they will add to the GDP of the middle men a lot in the short term.

Another example of "useless" GDP comes from the statistics of foreign buying in India. Over Rs 4,000 crores of buying and selling by foreign "investors" occurs every day in the Indian stock market. At the end of the day, they have actually bought or sold only Rs 150 crores of stocks. The other trades of Rs. 3,850 crores - which they "squared up" and offset in the course of one trading day - added to the GDP of the brokers, the custodians, the banks, the stock exchanges, and the government's income from a trading tax. But it did little to anything real about India, about India's GDP, and neither did it give anyone a more accurate picture of the "true" level of stock prices. In fact, I can make a strong case that this "casino" activity hurts India's standing as a serious contender for long term capital that is required to build India's future GDP.

So GDP is not an indicator that should make you feel proud or sad. When you read that India's GDP growth was 9% per annum that is a useless statistic. Particularly if most of it was from selling you mutual funds you don't really need; or from building casinos; or selling more alcohol; or manufacturing guns. That is all "bad" GDP.

As India's GDP growth slows down to a more sustainable rate of 6.5% per annum, I hope that it is the "bad" GDP that gets hit more than the "good" GDP. For example, if you spend less time buying and selling mutual funds, it will have a dramatic impact on your distributor's GDP but not on your GDP. Invest wisely, invest long term, and your GDP will chug along quite happily.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

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