KVP is a perfect
small savings scheme,
Arun Jaitey should ignore all criticism: Expert
The Kisan Vikas Patra
(KVP), which post offices are now offering for sale after a hiatus of a few
years, is a simple and an 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 as 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 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 thresh old. Or that KVP is meant as a sav ings instrument purely for the upper middle-class and above.
It's as if no one in this country is in the lower two tax brackets or below the tax thresh old. Or that KVP is meant as a sav ings 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 KVP
to access safe and convenient sav ings mechanisms. You go to a post office and
buy a certificate worth somewhere between Rs 1,000 and Rs 50,000 and 100 months
later, the ` post office gives you double the , amount. KVP is easy to
understand and access. Given that it's being sold by the post office, its
safety is also easy to understand.
Each of these points is crucial.
Each of these points is crucial.
Just the fact that its
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
its per annum returns so x that it can be compared with fixed y deposits. A far
better way of actually making this comparison t would be to calculate how many
w months it would take for money to double in an FD. If you don't appreciate
that months-to-double is s a better way of explaining returns x 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's 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 KVP is nothing more than a Rs 50,000 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, Jaitley should resist 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 2,000 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 ( Jan Dhan Yojana) shouldn't suffer from the same problem.
In fact, Jaitley should resist 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 2,000 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 ( Jan Dhan Yojana) shouldn't suffer from the same problem.
The writer is CEO at
Value Research
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