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Drop the crop insurance plan -Ramesh Chand & Sumedha Bajar
-The Financial Express

It is clear from global experience that crop insurance is not economically viable and, in a country like India which is dominated by small landholders, it does not even seem to be feasible

The demand for crop insurance stems from two ‘risky’ situations that often erode farmers’ income and make them vulnerable to economic distress. These include unpredictable weather and volatile prices. Although vulnerability of Indian agriculture on weather-related events such as floods and draught has always been the case, in the recent past natural hazards such as hailstorm, cyclone, high-speed winds, heat waves, frosts, etc, have also started hitting agricultural production. In some pockets of the country, this has become a regular phenomenon. Such events are turning quite intense at the micro level.

Additionally, price volatility has emerged as a serious challenge causing fluctuations in farm income. In fact, the effect of fall in prices on farm income is much stronger and widespread as compared to the effect of natural hazards. With shifts in acreages towards cash crops, increased market orientation of output, and a rise in purchased inputs and hired labour, farmers find it hard to absorb both price shocks and production shocks involved in crop production. Thus emerges a demand for mechanism for safeguarding farmers against production risk and price risk, both of which are rising and spreading.

Production risk

The central government started the crop insurance scheme first time on a limited scale in the year 1972-73, and a pilot crop insurance scheme in the year 1979, as a mechanism for providing cover against decline in crop yield from a threshold level. Because of its several limitations, the crop insurance mechanism had to be modified from time to time. However, we are yet to witness a satisfactory mechanism even today, and whenever a natural calamity strikes, there is hue and cry for relief and compensation beyond what is included in existing crop insurance. Frequent weather shocks experienced in several pockets in the country in recent years have added to the urgency of putting in place effective mechanism to deal with agricultural risk at the farmer’s level. If we have learnt anything from the experience of the last 40 years, it is that crop insurance is neither workable for affected farmers nor is it viable for insurers. Even though many experts have written against the possibility of insurance as an effective tool to compensate farmers for risk, there is still a demand in India and many other countries to promote crop insurance mechanism to deal with risks involved in crop production.

It is high time to take a pragmatic view on crop insurance and put in place a mechanism which can satisfy the farmers and provide the needed assistance to counter the adverse effect of yield loss and acreage reduction at farm level.

Upon examining the status and operation of existing crop insurance schemes such as the National Agricultural Insurance Scheme, Weather Based Insurance Schemes and Modified National Insurance Scheme, it is observed that, at present (2012-13), 21% of farm holdings and 19.3% of crop acreage in the country are covered under these schemes. However, the coverage in terms of the sum insured, which is a better indicator of insurance cover, presents a dismal picture. The sum insured covers only 5.5% of the value of total crop output. Interestingly, India incurred a loss of R2,638 crore in the year 2012-13 to provide insurance cover to just 5.5% of crop output. Despite this loss to the exchequer, there is complete dissatisfaction amongst the farmers covered under these insurance schemes.

It is important to observe that this data also implies that if a reasonable level of protection against production risk is to be provided through insurance cover, the loss to the exchequer will be much larger. If the risk cover were to increase to 50% of crop output, it would translate into a loss to the exchequer to the tune of R24,033 crore, and were it to increase to 80% of sum insured, the loss will rise to R38,453 crore. The loss constitutes 3.73% of GDP of crop sector corresponding to insurance coverage for 80% value of crop output. The issue then is—is it worth spending so much of the country’s resources on crop insurance when it does not even provide reasonable satisfaction to those insured?

The supporters of crop insurance schemes presume that farmers are willing to pay a premium to get their produce insured. It is correct that farmers do want some compensatory mechanism to protect themselves against losses incurred due to natural hazards; however, their willingness to pay for the same is debatable. This is true almost everywhere in the world, and is the main reason why the US government subsidises insurance premium to the extent of more than 60%, while in China 80% of the premium is subsidised by the state.

It is clear from the long experience that crop insurance is not economically viable and, in a country like India which is dominated by small landholders, crop insurance does not even seem to be feasible. Thus, given the nature of agricultural production, we suggest that India should stop investing in crop insurance schemes and replace these with a comprehensive “Agricultural Calamity Compensation Fund”, shared between the Centre and states, for meeting a part of crop losses faced by farmers. Under this dispensation, each crop field is deemed to be insured by the state for yield loss or production loss but the premium amount remains with the state rather than being paid to insurance agencies. Thus, rather than having to pay or subsidise the insurance premium for all (13 crore farmers and 197 million hectare area), the government will be required to pay as and when the need arises only to those farmers who suffer significant crop loss due to natural calamities. This will cost much less than the cost involved in insuring at a similar level of cover and this can be proven using the cost figures for crop insurance. The amount paid as premium and loss incurred by the state in the year 2012-13 was R1,302 per hectare. The average of last 15 years (1999-2000 to 2013-14) shows that the claims paid, which reflect crop loss, constituted 8.1% of sum insured. This implies that only 8.1% of the insured value is adversely affected by natural calamities. The same amount, which was spent as cost of insurance, can be used to pay R16,074 per hectare as compensation to farmers as a relief against crop loss.

This mode of compensation is much more beneficial compared to insurance compensation for farmers affected by natural calamities.

Price risk

The second type of risk faced by farmers is from fall in prices of agricultural produce. Unlike production risk, price risk is amenable to insurance and much easier to manage. Like the minimum support price (MSP), the government should announce a market-insured price (MIP) which can act as a floor price for agricultural commodities. The basis for MIP could be either appropriate cost figures or the average price of the past 4-5 years. Under this scheme, all farmers should be given the opportunity to register their marketable surplus with a market committee or any other public agency at the time of sowing, against price falling below the insured level, by paying nominal charges. If actual market price in the designated markets falls below insured prices, then the farmers having exercised the option of price insurance should be compensated through deficiency price payment as an insurance mechanism. This mechanism is simple, pragmatic and followed in many countries.

It is ironical that despite the failures with crop insurance, the government is still in favour of promoting crop insurance as an instrument for agricultural risk management. Alternatives such as the Agricultural Calamity Compensation Fund will be a much better option than the ongoing crop insurance schemes for compensating production losses, both in terms of the cost to the exchequer and in terms of farmers’ satisfaction. Similarly, deficiency price payment for price insurance can be an effective mechanism to address price risk.

Ramesh Chand is director, National Institute of Agricultural Economics, and policy research, Pusa, New Delhi. Sumedha Bajar is assistant director, National Institute of Labour Economics Research and Development, New Delhi. Views are personal