It could be useful for channelling black money into investment but may not quite inspire the lower income classes
When the intention of the government is to achieve financial inclusion, any scheme, be it the Jan Dhan Yojana, introduction of payments banks and small banks or the reintroduction of the Kisan Vikas Patra (KVP) should be welcome. However, for the success of such schemes, three factors are important, i.e., design, access and cost. Prima facie, the KVP scores well on all the three, though the final investors may be from a single cluster—those who would want to avoid paying tax.
The KVP is not a new scheme but had existed earlier before being abandoned in 2011. The reason was that it tended to become a conduit for channeling black money as the certificate-holder was anonymous and it was kind of a bearer bond. It offered a good rate of interest and there was no TDS and proceeds were taxable though there was no way to check on this. It was not meant for farmers, but the money collected was to be spent on the farm sector. In 2011, when it was abandoned, the outstanding certificates were of around R1.5 lakh crore out of a total of R2 lakh crore—nearly 75%.
The new KVP, launched in November, doubles the invested money in 100 months and offers an interest rate of 8.7%. The advantage is that the interest rate is locked-in for the entire period; and hence, in a declining interest-rate regime, the KVP holds a lot of attraction. It can be transferred to others and redeemed earlier, after the expiry of the minimum lock-in period. The interest is taxable but there is no TDS.
Rudimentary KYC, in the form of photo, name and address is required. But there is no requirement of the PAN being furnished. However, if the amount invested is more than R50,000 (with this serving as the highest denomination), then the furnishing of PAN is required. It can also be redeemed at any post office in the country, offering ease of transaction. Will this work?
We need to look at the three classes of people who could be looking at this instrument. The first is the lower income group, especially in the rural areas, which will be the typical financial inclusion target. They are used to going to the post office and, hence, can be a potential customer. The design also looks good for them as the returns are good, there is no TDS (though this may not matter for this class), can be transferred and redeemed early. But today, they already have other schemes which are equally or even more attractive.
There are the National Savings Certificates (NSCs), which give a return of 8.5-8.8% depending on the tenure. Then, there are time deposits at post offices, which include recurring deposits that give the flexibility of shorter tenures, albeit with slightly lower rates. They earn between 8.4-8.5% interest and allow for premature withdrawal. Also, the monthly income scheme helps to save regular amounts periodically. Therefore, the KVP may not be adding significant value to the existing array of products, and unless it is marketed by the post office or bank (which will also be allowed to sell them), it may not catch the interest in this segment.
The second segment is the middle-income, tax-paying group. Such investors would be weighing the options between various instruments. The NSC, within the post office bouquet, scores high with the tax benefits under Section 80C thrown in. The PPF gives a return of 8.7% for 15 years with periodic withdrawals available after the minimum lock-in period with all tax benefits on the amount invested as well as the interest earned. In fact, for such savers, there are other tax-saving avenues like long-term deposits, LIC payments, home loan repayments under Section 80C. Moreover, there will be competition from the NSC which has a similar design. There is, however, a limit of R1.5 lakh on NSC savings and, in case an investor wants to save beyond this level, then the KVP offers an opportunity.
The third segment will be those who want to escape the system anonymously. The KVP, thus, is an effective tool for this category. The KYC norms don’t matter because, once transferred, the original name would cease to be of importance. Given that there is no TDS, one can eschew the full payments of taxes as it does not get recorded against any name with the PAN not being seeded for investments less than R50,000. The higher KYC relaxation, compared with, say, the NSC whose KYC relaxation is capped at R10,000, makes this attractive.
The fact that the KVP, in its earlier avatar, attracted many such savers means that the third category of people has been using this as an avenue to avoid taxes. When it was discontinued, there was a limited substitution between the NSC and the KVP. In fact, for the last 7 years, between 2005-06 and 2012-13, outstanding certificates were between R2-2.1 lakh crore, while post office deposits increased from R3-3.6 lakh crore.
It may be logical to conclude that there could be a tendency for this third category to show more interest in this product. It will be useful for those who would like to invest their gains from, say, sale of land, in these certificates, where their identity cannot be mapped and consolidated, given the non-requirement of a PAN. It would be laborious to hold, say, 200 certificates of R50,000 each to invest R1 crore. But for those who don’t intend to avoid taxes, there are other avenues like banks-deposits or debt mutual funds with the latter also throwing in some long-term capital gains tax benefits.
If we are looking at the KVP from the point of view of financial inclusion where the saver is not liable to pay tax anyway, with the NSC already existing, it would compete but may not be able to actually draw the saver away. At any rate, it would mean substitution and not really add to the overall kitty of savings.
The overall picture is, hence, one where it could be useful for channelling black money into investment but may not quite inspire the lower income and tax paying classes. Fortunately, there is not much cost attached to this scheme as it was done by the post offices and will be done again by them. As the postal department is hardly aggressive about marketing, there is really no push factor, which is good as there are no concomitant costs involved. To the extent that it brings in black money, it is good for the country as it resembles the bearer bonds concept of yesteryear. This could be the gain but we should not expect it to be a major tool in the small savings armoury of the government.
The good thing about the KVP’s re-launch is that, at the worst, it will make no difference. If we are able to mobilise additional funds, then it would be a big plus for the system. This is how we should view this scheme.
The author is chief economist, CARE Ratings. Views are personal