Registered with the Registrar of Newspapers for India under R.N.I 53640/91
Vol. XXIX No. 17, December 16-31, 2019
Agriculture, by its nature, is exposed to the ravages of climatic change and produce-price volatility. Growers plant crops in the face of this twin uncertainty hoping that the money and effort they put into the soil would be recovered and rewarded. These risks cannot be totally avoided but can be coped with. Crop insurance aims at compensating the risk arising out of nature’s vagaries.
Under the Prime Minister Fasal Bima Yojana (PMFBY) scheme, the cost of protection is shared predominantly by the tax-payers – Centre and State governments – and in a small proportion by growers. In that respect and also for its national coverage, the scheme is unique and ambitious. After a full year of operation in 2017-18, it is time to understand how the scheme has fared apropos the status of implementation in Tamil Nadu, farmer acceptance, hurdles and solutions, sustainability of the scheme and, finally, whether crop insurance is the solution to fueling growth in the agricultural sector.
In 2017-18, in Tamil Nadu, 14.9 lakh farmers covering 13.3 lakh hectares (ha) adopted the scheme. This is 20 per cent of the gross sown area and should be considered promising. Insurance was compulsory for those seeking loans. Therefore, the proportion of “non-loan” insured is indicative of voluntariness. For example, in 2017 ‑18 Karnataka’s coverage was about the same as Tamil Nadu’s at 14 lakh farmers. Tamil Nadu, however, was able to enroll more of the non-loan category accounting for 72 per cent of the total compared to 55 per cent in Karnataka.
In 2019-20, in Tamil Nadu, 23 lakh farmers had insured their crops covering 14 lakhs ha, crossing the previous years’ enrolments with another season still left. A marginal area increase for a much larger number of farmers shows that more of smaller farmers have enrolled this year. If the campaign focuses on rainfed areas and on pulses and millets, the quality of the coverage can be enhanced in terms of risk protection.
The PMFBY operates by Area-Based Insurance Units. This cannot but be the way to do it, as it is impractical to assess millions of farmers treating each as an insurance unit, as in medical or car insurance. Consequently, in the Unit every farmer pays the same premium and receives the same claim payment. To individual farmers in the Unit capable of coping better with an adverse climatic situation, the uniform claim amount received may be more than they have suffered and to some others with poor coping methods than the average in the Unit, the claim payment may be less than their individual loss. This explains some apparent inequity.
There is a section protesting that insurance must not be compulsory as a condition for loans. It is in the interests of farmers themselves that loss of crop does not adversely affect their loan repaying ability. There should be no relaxation on this count.
The value of the crop insured is based on cost of production. It must include imputed cost of family labour and soil upkeep costs and not go by cash costs alone. Also, in the Indian situation, it is not enough if the farmer is reimbursed only for cost, leaving nothing for his survival. This is particularly significant when there is total crop loss, especially in the case of smaller holdings and dryland farmers. For these weaker segments, the sum insured could be raised to cover “loss-of-profit” although it would increase the subsidy burden. Or, eventually, a subsidised scheme could be limited to the weaker segments that are agro-climatically identifiable.
There are positive indicators in 2017-18 compared to the earlier year. Premium collected was larger at Rs. 25,140 crores compared to Rs. 22,344 crores. Claims as a ratio of premium was as high as 72 per cent in 2016-17 and it came under control at 49 per cent in 2017-18. Claims as a ratio of sum insured likewise fell from 25 per cent in 2016-17 to as low as 7 per cent in 2017-18. The fall in ratio of claim to sum insured opens the way to reduction in premium rates which, in turn, would go to reduce the subsidy burden on the Centre and the States. Farmer rates have already been kept low at or near affordable levels. The total country coverage under PMFBY is about 20 per cent and when this increases, it might further strengthen the case for reduction of gross premium rates.
An impression is being created that Insurance companies are raking in large profits and the scheme is becoming a “scam”. This inference is based on the results of the very first year of introduction, 2016-17. The total premium in the country was Rs. 27,000 crores and claims were 62.5 per cent of the premium, leaving a “surplus” of 37.5 per cent which after administration cost left a net of 25 per cent. The “surplus” was even higher at 51 per cent in 2017-18. It is erroneous to conclude that all of this is the insuring company’s profit. The account of insurance cannot be balanced yearly as the risk can be compensated only by spreading it over not only a vast number of the insured, as also over time, covering several seasons.
A suggestion by the IIMA, in this context, is worthy of adoption. It avoids ‘surpluses’ being held by insurance companies, removing the erroneous perception that they are profiteering at the cost of the farmer. The proposal is that insurance companies bear financial responsibility for claims ranging from 80 to 120 per cent of the premium. ‘Surpluses’ derived beyond the low end, net of service charge, would be given to the Government and deficits beyond the top end would be borne by the Government. This would need a balancing fund maintained by the Government.
Is the PMFBY sustainable and is it enough for the sector’s growth? The ‘surpluses’ of 2016-17 and 2017-18 create an illusion of viability. The high gross premium rates and heavy subsidy conceal reality. Only when premium rates (without large subsidies) become low enough to be affordable to the farmer and viable to the insurer, can the scheme be declared to have become sustainable. We are far from that situation. We have not yet adequately insulated agriculture from the debilitating impact of climatic vagaries. Risk mitigation packages for marginal and dryland farmers, combined with major investment in macro level water conservation and management projects on the lines and scale of highway infrastructure projects should be of high priority. Artificially supported crop insurance is only a crutch, not an income stream. Crop insurance is no substitute for risk mitigation. Agriculture being a state subject, initiative rests with State Government for taking measures towards reducing risk in farming to spur growth.