Will the new crop insurance scheme succeed?

Posted by: nt January 27, 2016in Business

D M DESHPANDE

The Government has announced a new crop Insurance Plan. It certainly seems like a flagship programme in agriculture. Yet it is too early to predict whether this scheme would succeed. Since 1970 various governments have tried at least ten different variants of crop insurance plans in India. Sadly, none of them have succeeded. High premiums and low coverage have acted like a vicious circle, one feeding on the other, in the end resulting in no relief to the grower. Cost of insurance was high notwithstanding the subsidy amount paid by the Government. In addition, procedural hassles have plagued the performance of crop insurance in the country. Barely 23% of the farmers have taken insurance on their crops.

Actually, there couldn’t be a better market for crop Insurance than India. According to Commission for Agricultural Costs and Prices (CACP), every three years, there are major output dips. 68% of all the cultivated area is rain fed in the country. Monsoon rains plays truant from time to time. Last two years have been droughts and if the new crop Insurance in that sense is better placed to evince the interest of large numbers of farmers. Some of the anomalies of the past schemes have been removed in the new plan. One, the cost burden of insurance has been significantly reduced; farmers need to pay only 2% for khairf crops and 1.5% for rabi and 5% of the value in respect of horticulture. Under the present Modified National Agriculture Insurance Scheme (MNAIS), farmers are required to pay 8 to 10% as Premium for sum insured after subsidy, which is quite high.

Second, sum insured presently is capped to Rs.18,000 per hectare. According to CACP the average output per hectare is Rs.41,000. As a result, farmers are not getting insurance cover for the full value of their output. The new scheme, by removing the cap, has addressed this concern of the farmers. The sum insured shall be calculated as the amount of loan or 150% of the threshold  yield which is the average of last seven years less two calamity years, whichever is higher.

Third, the scope of insurance is extended to possible post harvest damage to the crop; similarly, delayed sowing is also now sought be covered by insurance. However, the details of the scheme need to worked out properly. The threshold yield has to be calculated to the smallest possible unit so that deviations could be corrected. In order to circumvent the implementation problems, the plan proposes use of technology-smart phones and even drones for satellite imaging so that assessment of loss is made quickly and accurately.

Under the proposed plan, the government subsidy is to go directly to the bank account of the farmer. Presently, the subsidy amount being smaller than the bank loan, is being used to pay the bank loan. The subsidy is to be shared equally by the Central and State governments. Realising that some state governments may falter, the Centre has come forward to meet 90% of the subsidy cost. Even if half the farmers are covered under the scheme, it would cost the Centre/States Rs.8,800 Crores.

Lot depends upon how the insurance companies run the scheme. What the Government has announced is a plain vanilla scheme. Insurance companies could offer innovative products to cover price risk, even if it comes at a higher premium. The scheme requires constant monitoring and supervision; a robust no claim bonus is suggested to discourage false and bogus claims. The state of land records in several states leave much to be desired. Many a farmers are held a hostage to flawed records and officialdom which in some cases is corrupt to the core; money has to be paid even in respect of unquestioned property title.

It is not so much about the cost of subsidy to the Governments-Central and states. China, US and Japan all run subsidised crop insurance schemes. If it can mitigate the risk and provide relief to distressed farming community, it will indeed be public money well spent.