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LATEST NEWS UPDATES | Hedging farming

Hedging farming

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published Published on May 15, 2014   modified Modified on May 15, 2014
-The Business Standard
 

Badly structured insurance leaves Indian farmers exposed

Ever since its inception in the early 1970s, agricultural insurance has defied all attempts to make it farmer-friendly and economically viable. Over half a dozen different models for farm risk management have been tried out, but with little success. The systems currently used - the National Agricultural Insurance Scheme (NAIS) and the Modified NAIS (MNAIS) - were objected to by the Insurance Regulatory and Development Authority (Irda) in a recent meeting with agriculture ministry officials. One big problem is the inordinate time lag in settling claims. Compensation is often delayed by a year, which defeats the whole objective of agricultural insurance. The purpose of agricultural insurance is to provide immediate succour to affected cultivators. It is also supposed to enable them to invest in yield-enhancing inputs in subsequent crop to redeem some of their losses. Irda has, therefore, rightly asked the agriculture ministry and insurance agencies to speed up this process. Changes are, obviously, needed in the way the agriculture department and insurance company officials conduct crop-cutting experiments, which form the basis for determining the shortfall in output.

The premiums charged for different crops also need to be reviewed. These are often out of reach of small and marginal farmers. Yet it is these cultivators who need access to risk hedging the most. For some crops, the premiums are, bizarrely, higher than expected total returns. There are other reasons, too, why farmers aren't turning to crop insurance in large enough numbers. The area treated as the unit for assessing crop damage is usually too large to serve the purpose of individual farmers. So most growers who have to compulsorily buy insurance cover along with crop loans find such coverage far from useful. It hedges against, for all practical purposes, the risks faced by banks, not by cultivators. Moreover, the yield-based approach to settling claims covers only production-related risks and does not offset losses resulting from other factors - such as the failure to sow a crop owing to drought or flood, or post-harvest loss of produce. Nor does it hedge against price-related risks associated with most crops other than rice and wheat, which are procured at the government-fixed minimum support prices at least in some areas. Yet it is precisely the growers of other crops, with volatile prices, who are most vulnerable. Such farmers, especially in distant and interior areas, usually do not get reasonable prices for their produce. A farm income insurance scheme that covered hazards related to both production and prices was launched in 2003 by the National Democratic Alliance government but, unfortunately, was discontinued after the change of government in 2004.

A recent survey by the Centre for the Study of Developing Societies revealed that hardly 30 per cent had heard about agricultural insurance. Fewer still, just seven per cent, actually bought it. Unless new, farmer-friendly products are developed, cultivators won't hedge against their risks. And the incomes and livelihood of Indian farmers will remain insecure.


The Business Standard, 14 May, 2014, http://www.business-standard.com/article/opinion/hedging-farming-114051401514_1.html


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