Kisan Vikas Patra 2.0

| Updated on November 19, 2014

While the revamped scheme is attractive for small savers, checks are needed to prevent its misuse for money laundering

Desperate times call for desperate measures and the Centre’s decision to relaunch Kisan Vikas Patra, a popular small savings instrument that was discontinued three years ago, may be seen in this light. Lakhs of investors have fallen victim to illegal money-pooling and Ponzi schemes, including the Sahara and Saradha scams, in the last three years. These instances show that the current suite of financial products offered by the Government and private players have become too complex to attract small savers. The recent dip in household financial savings to a decadal low is mainly a result of the difficulty in understanding financial instruments and in keeping up with their ever-changing Know-Your-Customer (KYC) rules, apart from the uneasiness that most savers have with market-linked returns. The Kisan Vikas Patra (KVP), in its new avatar, directly addresses these pain points. It offers a fixed return (the investor’s money will double in 100 months), ease of transaction (it is a bearer instrument with no PAN requirement) and good liquidity to boot (exit is available freely after a 2.5 year lock-in). Therefore, it may well succeed in its objective of wooing the un-banked population into financial savings.

Having said this, the new KVP raises some concerns from a policymaking perspective. For one, its offer of a fixed return is a step back in the process of restructuring all small savings schemes and aligning their returns to market rates. This overhaul, initiated three years ago at the behest of the Shyamala Gopinath Committee, was undertaken to improve the performance of the national small savings fund, which generated sub-par returns. If the Centre is keen on resurrecting the concept of a fixed return, it must address the funding issue on a war footing. Two, given that the KVP is likely to entail high costs for the Centre, it is essential that the money be put to productive use. Presently, collections from small savings schemes (whatever their nomenclature) are mainly lent out to fund unproductive revenue expenditure of the States and the Centre; they don’t fulfil a specific developmental objective.

Most important of all, the Centre must take note of warnings that the reworked KVP may turn out to be a backdoor amnesty scheme for those who evade taxes. With its PAN waiver, facility for unlimited investments and bearer status, the instrument can be easily used to launder and park black money. It was precisely this concern, in fact, which had prompted the Gopinath committee to suggest its closure in 2011. To prevent rampant misuse of the KVP in its new avatar, the Centre must expedite the computerisation of India Post and use technology to track down large investments and redemptions from this scheme. It should also put in place an annual investment ceiling on individual purchases of KVP, similar to those for the public provident fund and other post office schemes. Given its other attractions, this will not materially dent the instrument’s appeal to small savers.

Published on November 19, 2014

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