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All Hail the Kisan Vikas Patra

The Kisan Vikas Patra is a perfect small savings scheme, and Mr. Jaitey should ignore all criticism about it being a conduit for black money

The Kisan Vikas Patra, which post offices are now offering for sale after a hiatus of a few years, is a simple and accessible savings instrument that provides reasonable returns and absolute safety. But that's not what you'll hear from the investments and business commentariat.

The general opinion of investment advisors seems to be that the KVP is a useless savings medium because it has no tax break and thus offers poor post-tax returns. It is also said to encourage black money. In order to illustrate how poor the KVP's post tax returns are, practically every one of these analyses calculates the same for people in the highest tax bracket. One also reads how it bank fixed deposits or fixed maturity mutual funds are better alternatives. It's as if no one in this country is in the lower two tax brackets or below the tax threshold. Or that KVP is meant as a savings instrument purely for the upper middle-class and above.

I think we need to step back and consider just how difficult it is for the target audience of the KVP to access safe and convenient savings mechanisms. You go to a post office and buy a certificate worth somewhere between Rs 1,000 and 50,000 and 100 months later the post office gives you double the amount. The KVP is easy to understand and easy to access. Given that it's being sold by the post office, it's safety is also easy to understand. Each of these points is crucial.

Just the fact that it's returns are expressed in terms of double your money in 100 months' is a great thing. It's puzzling to watch analysts who try to explain' KVP by calculating the per annum returns (8.67 per cent) of the KVP so that it can be compared to fixed deposits. A far better way of actually make this comparison would be to calculate how many months it would take for money to double in the FD (99 months). If you don't appreciate that months-to-double is a better way of explaining returns to a depositor an annualised percentage, then you probably haven't understood how people actually think about money.

The other bugbear of KVP is supposed to be that it's a way of parking and transferring black money. This is probably true, but it's also irrelevant. Recently, it appears to have become fashionable to talk about black money in absolutes. Since some of the usage of KVP will undoubtedly be in black money, some commentators claim that it is unacceptable. This is, at best, a hypocritical point of view. There is no part of the formal financial system that cannot be used to handle unaccounted income with sufficient effort. To completely eliminate black money, you will pretty much have to abolish money or abolish taxation.

The question is not whether KVP will facilitate the handling of black money, but what is the balance between the legitimate and illegitimate uses of KVP. Here, I'm afraid that those who think that the KVP is nothing more than a 50,000 rupee currency note have been spending too much time in the company of those who use it as such, and not enough with those who use it as a way of investing five or ten thousand rupees safely. When I read news about crime, I find that practically every criminal uses cars and cellphones. Is that a good reason to ban motor vehicles and mobile telephony?

In fact, Mr Jaitley should resists the urge to have tight KYC (know your customer) norms for KVP. If you give the post office clerk an excuse to reject the small depositor's ration card as proof of identity, he'll do it just to reduce his workload. Given how things actually work in our country, those who want 2000 KVP certificates as a way to store Rs 10 crore will manage to get their way, but the Rs 10,000 depositor who needs financial inclusion will be driven away by this KYC nonsense. We've seen this happen in every other part of their financial system, but hopefully, schemes like KVP and JDY shouldn't suffer from the same problem.