The Finance Minister wants Indians to save more. The press release from the fin ministry says:

The Finance Minister said that in last few years due to slower rate of economic growth, the rate of domestic savings had come below 30 % while it had once touched the peak of 36.8%. He stressed the urgent need for raising the domestic rate of savings.

This has led them to relaunch the “Kisan Vikas Patra” (translates to “Farmer Benefit Bond”). These will be issued by the Postal department. The product is simple, and the gazette notification states:

You buy them for Rs. 1000 (minimum), and no maximum exists (each certificate has a max value of Rs. 50,000)

Your money doubles in 100 months (8 years, 4 months) – the annualized rate of return is 8.7%. (this is the maturity of the KVP)

You can pledge the certificates for a loan

You can exit partially after 2.5 years, rates of return will vary slightly.

Low “KYC” – proof of ID and residence only. There is no need of a PAN card at application, even if the amount is more than Rs. 50,000.

The interest is not tax-free.

As a taxable 8 year bond, the yield is more attractive than government securities (where the current 10 year yield is 8.15%).

However, given the complexities and the fact that it’s paper based (lose it and it’s going to be very tough to get your money back) it might not be that much better than, say, a bank fixed deposit, where many banks offer better rates as well.

But we see a potential issue: The low KYC and the fact that you can give ANY amount in cash leads it to be a conduit for black money. A black money earner – in cash – has two big problems.

The money doesn’t earn interest, so storing it means losing money to inflation.

The cash is difficult to hide, since your denominations max out at Rs. 1000, storing large sums of money is a pain.

Something like the KVP might be a boon; you can put as much cash as you want in it and buy in denominations as large as Rs. 50,000 per certificate. These don’t need a KYC, and can be encashed after 2.5 years, again in cash!

This was one of the reasons the KVP was discontinued earlier, says Business Standard. But it promotes the creation of even more black money – if you can have “black” and get interest on it, then deal only in cash, no? With the KVP, it’ll be nearly impossible to detect (just as it already is with NSCs, another such savings instrument).

It would be wise to demand a PAN card for all holders that own more than Rs. 50,000 worth of certificates, and identify them in some way (using an aadhaar id or such). Otherwise, this scheme is likely to generate the wrong kind of incentive – it’s telling people that the government is happy for you to create more black money, because now, there’s a better way to store it and earn interest too.

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