Mitigating Risks in Agriculture

Recent news reports indicate that the demand for crop insurance under the Pradhan Mantri Fasal Bima Yojana (PMFBY) has dropped substantially during the current rabi season. This is not surprising as the expansion of the PMFBY has been stalled for some time now with the area of crop insured and the crop value steadily declining in the recent years. But what is more alarming is that the government continues to ignore these warning signals even as the risks in agriculture increase significantly due to the growing weather uncertainties. And the recent efforts to restructure and reinvigorate the PMFBY have not been very effective. This puts a big question mark on the efficacy of the National Democratic Alliance government’s flagship scheme in the agriculture sector.

This is disappointing as the launch of the PMFBY in 2016 was expected to be a game changer after the repeated failures of a spew of crop insurance schemes launched earlier. While the first Comprehensive Crop Insurance launched in 1985 was in operation till the turn of the millennium, the second National Agricultural Insurance Scheme held sway for a decade and a half. It was replaced by the National Crop Insurance Programme with its three component schemes in 2013–14. This was again reorganised in 2016 into the PMFBY and the Restructured Weather Based Crop Insurance Scheme.

The PMFBY was an ambitious initiative that aimed to substantially increase the insurance cover to half the gross cropped area in three years. The scheme was supposed to be a game changer with a simple and low-premium structure for farmers, with the bulk of the premium costs to be shared equally by the state and union governments. The insurance premium for farmers was as low as 1.5% for rabi crops, 2% for kharif crops, and 5% for commercial and horticultural crops. Expedited and timely clearance of the crop insurance claims was also to be assured by using new technologies like remote-sensing satellites for assessing crop losses.

However, despite the ambitious targets and large budget allocations, the scheme soon faltered. The early signals of trouble were the withdrawal of many states from the scheme and the steady decline in the insured area and insured values in the recent years. Complaints also arose about unreliable crop loss assessments, claim settlement delays and the skewed distribution of insurance benefits across the states.

Trends for the last five years ending 2020–21 show that while the number of farmers taking insurance has increased by one-tenth, the crop area covered has declined by one-fifth and the overall value of the crops insured has marginally declined. The total insurance premium paid to the insurance companies, most of them privately owned, has meanwhile increased by around half. Though the premiums paid by the farmers have largely remained stable, that of the union government have gone up by half and that of states have shot up by two-thirds after the capping of the premiums paid by the union government.

To make matters worse, in the last three years, the ratio of claims redeemed in the actual realisation claims has come down to 86%, indicating growing disputes between the farmers and insurance companies. The only major gainers seem to be the insurance companies whose surplus has burgeoned with the gap between total premium collected and claims paid increasing almost eightfold to close to half. In contrast, the share of the insured farmers benefiting from the crop insurance scheme has shrunk from more than one-third to less than a quarter in the last two years.

Another major issue is that the distribution of the crop insurance scheme was highly skewed with just three states accounting for the bulk of the crop insurance. These three states, namely Maharashtra, Madhya Pradesh, and Rajasthan, accounted for around half the farmers enrolled for crop insurance, the crop area, and the total insured value. These three states also accounted for a little more than half the insurance claims made and claims paid and 57% of the farmers benefiting from the crop insurance. This means that large parts of the nation (meaning another two dozen states) had to make do with very meagre crop insurance while paying increasingly larger premiums with no commensurate share in the benefits.

The stagnant growth and decline in the extent of crop insured is a major setback that will have serious implications both on farmers livelihoods and agriculture growth. This is because, despite decades-long efforts, only around a third of the gross cropped is currently insured in the country. In contrast, agriculture output risks are insured in around two-thirds of the cropped area in China and close to nine-tenths of the cropped area in the United States.

A sharp increase in the pace of expansion of crop insurance would require a radical restructuring of the existing PMFBY. The current practice of outsourcing the insurance work to private corporates, without any meaningful government interventions in providing proper infrastructure to report damages, is very futile. Crop insurance programmes can succeed only if there is an efficient and reliable infrastructure to assess damages quickly and credibly at very short intervals at the village level.

Unfortunately, this aspect is largely ignored even as the fast-paced technological changes make farming an increasingly capital-intensive activity. Consequently, the risk level of farmers, who secure large loans for procuring costly essential inputs, has increased manifold. Only an efficient and transparent insurance programme that neutralises such risks can protect the farmers from production risks. This calls for an urgent and radical restructuring of the PMFBY to ensure an efficient and reliable crop insurance cover.