Month: January 2016

India’s $1.3 bn crop insurance

The Guardian’s headlines this morning stated “Thousands of farmer suicides prompt India to set up $1.3 bn crop insurance scheme”. The programme is meant to be a direct response to news of farmer suicides in rural areas, with two successive years of drought. Amongst various reports is one that states that over 300,000 farmers have committed suicide since 1995. News of such deaths is indeed tragic and while it must be examined closely to address the underlying issues, the structure of the current crop insurance scheme does little in this regard.

One can understand the urgency to woo the agricultural community in the light of protests held earlier last year on a bill that made it easier to take over farm land for large projects. Second, the results of two state elections, Delhi and Bihar make the upcoming five elections; i.e. Tamil Nadu, West Bengal, Kerala and Assam in 2016 and that of Uttar Pradesh in 2017, extremely important. It is no coincidence that all of these have large farming communities. Also, data shows that all of these states have shown a high level of farmer suicides in the past decade (see chart below).


While it is right to sit up and respond to this statistic, elections notwithstanding, would the new Pradhan Mantri Fasal Bima Yojana (PMFBY) be the right solution?

What does the PMFBY entail?

The highlights of the scheme are as follows:

i) There will be a uniform premium of only 2% (of the value of the crop) to be paid by farmers for all Kharif crops and 1.5% (of the value of the crop) for all Rabi crops. In case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5% (of the value of the crop). The balance premium will be paid by the Government to provide full insured amount to the farmers against crop loss on account of natural calamities.

ii) There is no upper limit on Government subsidy. Even if balance premium is 90%, it will be borne by the Government.

iii) Earlier, there was a provision of capping the premium rate which resulted in low claims being paid to farmers. This capping was done to limit Government outgo on the premium subsidy. This cap has now been removed and farmers will get claim against full sum insured without any reduction.

iv) The use of technology will be encouraged to a great extent. Smart phones will be used to capture and upload data of crop cutting to reduce the delays in claim payment to farmers. Remote sensing will be used to reduce the number of crop cutting experiments.

The PMFBY is slated to replace the existing two schemes i.e.. National Agricultural Insurance Scheme (NAIS) as well as Modified NAIS (MNAIS). The target is to increase uptake of crop insurance from 23% to 50%.

Challenges with the current design:

Before analysing whether the crop insurance programme would actually result in a reduction in farmer suicides, it is important to state that insurance can play a role in reducing distress faced by a farmer in case of crop failure.

Variability in weather and uncertainty of crop yields has been a challenge across the world for farmers. In India, it is exacerbated due to the changing climatic conditions, combined with a set of farmers that is extremely dependent on the weather for farming. Add to this, poor economic conditions of most farmers and a lack of adequate cushion to deal with crop failures and one has a situation of agrarian distress. At the macroeconomic level, there are other issues that further contribute to this dismal situation. Revenues have been stagnant, while cost of inputs has been increasing. Most farmers do not have access to formal, institutional credit (less than 15% access institutional credit) and have land holding that are extremely small, limiting the use of technology and further impacting yield.

However, the challenges that existed with the NAIS continue to exist with the current crop insurance scheme since it is still yield based and not weather based.

  1. Yield based schemes are hard to administer since the systemic nature of agricultural risk goes against the working of insurance policies (i.e. the belief that the event would impact only a small section of the insured population), making it hard to calculate premium and indemnity
  2. There is a scope for moral hazard, especially when the proportion of subsidy borne by the Government is higher than that borne by an individual
  3. There are challenges of viability due to the uncapped subsidy offered by the State

It would be much better to have a weather based insurance product that pays indemnities based on realisation of an index which is correlated with actual losses. This would also be automatically triggered reducing the claim payout time.

If the government is truly serious about addressing agrarian distress, they should also address the challenge of access to timely, institutional credit and ensure an easy claim settlement process.

Will this reduce farmer suicides?

It is simplistic and populist to assume that the launch of a crop insurance policy would reduce the number of suicides. While insurance is an important component to reduce distress faced by a farming household, the causes that result in a suicide may be far more varied. In a study conducted by Shamika Ravi and Mudit Kapoor, less than 5% of the farmer deaths were found to be due to debt or bankruptcy. In fact, in an op-ed, the authors state that “In stark contrast,  poor health, mental and physical, accounted for 30% of all suicides..”. In fact, as a country, poor health leads to seven times more suicide than debt or bankruptcy.

Given this statistic, the current government should perhaps consider improving the health system and addressing mental health issues rather than stop at the populist measure of crop insurance schemes. That would lead to a happier farming community and perhaps a happier population.

(Picture source: The Guardian)