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From plate to plough: A Baisakhi gift for the farmer

A major overhaul of the crop insurance system is needed. This is a good time to do so

Written by Ashok Gulati | Published: April 13, 2015 12:00 am
Indian farmers The current set of insurance policies under the NAIS, Modified NAIS, and the WBIS have failed miserably to protect our farmers.

Unseasonal rains are breaking the back of Indian farmers. The prime minister has taken the first step by deciding to raise the existing norms of compensation by a hefty 50 per cent — from the existing Rs 9,000 per hectare for irrigated crop, Rs 4,500 per ha for unirrigated crop and Rs 12,000 per ha for perennial crop. Further, the compensation will be given to all those who have suffered even one-third loss, relaxing the existing criterion of minimum damage of at least 50 per cent. Also, procurement quality norms for wheat have also been relaxed. All these steps are in the right direction and the Narendra Modi government needs to be commended for that.

But the central question remains: Is this enough to bring back smiles on the faces of Indian farmers? And the short answer is “Not really”. To understand better as to why Indian farmers will not be happy with this otherwise positive decision of the government, consider the following facts.

In this rabi season, the biggest crop that has suffered is wheat. The yield of wheat on irrigated tracts is between four to five tonnes per ha. Even if one takes four tonnes as the wheat yield on irrigated area, at a minimum support price of Rs 14,500 per tonne, the gross value turns out to be Rs 58,000 per ha. His out-of-pocket expenses, generally, are half of this gross revenue. One can now see that even a 50 per cent increase in the existing compensation norms of Rs 9,000 per ha will not recover the out-of-pocket expenses he has incurred on various inputs. How he is going to survive for the next four to six months is beyond imagination. No wonder, under extreme desperation, many of them take unfortunate and extreme steps.

Obviously, compassion and slogans of “Jai Jawan, Jai Kisan” are not enough. We need better insurance policies that are rational and sustainable as business models. The current set of insurance policies under the National Agriculture Insurance Scheme (NAIS), Modified NAIS, and the Weather-Based Insurance Scheme (WBIS) have failed miserably to protect our farmers. The compulsory deduction of premiums from loans to farmers, who take institutional credit, basically protects the banks from potential bad debts, but not the farmers. The Modified NAIS and WBIS have very high premium rates, hovering around 10 per cent of the sums insured, based on three years’ average data collected for the kharif and rabi seasons. No wonder, as per the NSSO’s situation assessment survey of farmers for 2012-13, less than 5 per cent of farmers (presumably beyond loanee farmers’ accounts) opted for crop insurance. With 95 per cent farmers exposed to the risks of nature, insurance policies have a long way to go.

Why are crop insurance premiums so high in India? One key reason is the small scale of coverage, less than 15 million hectares (mha), in any typical crop season. In a country where the net sown area is around 140 mha and the gross cropped area hovers between 190-200 mha, insuring only 15 mha or so is peanuts. We need a major overhaul of our crop insurance system, and this is a good time to do so, converting a crisis into an opportunity to set a more robust and sustainable system in place. Before I suggest one, it will be good to take a quick look at how the world is insuring its crops and farmers from the vagaries of nature. Maybe we can learn something from international best practices.

The US and China are the world’s biggest crop insurers. In the US, the state supports almost 70 per cent of premiums paid by farmers. In China, the state used to support 50-65 per cent of premiums, which was raised to almost 80 per cent in 2013. So the first lesson for Indian policymakers is that the state will have to pitch in heavily. Assuming that we need to have a minimum coverage of 100 mha, insurance experts tell us that premiums will fall to less than 5 per cent of sums insured, and may stabilise around 2.5 to 3 per cent. Even assuming that premiums will fall from 10 to 5 per cent, as the scale of insured area increases from, say, 15 mha to 100 mha, and if the sum insured is, say, Rs 30,000 per ha (Rs 40,000 per ha for irrigated crop and Rs 20,000 per ha for unirrigated crop, with equal weights), the premium required will be Rs 15,000 crore for 100 mha covered (or Rs 1,500 per ha).

If the state is ready to bear, say, two-thirds of this, one-third can be charged to the farmer. On a per hectare basis, the farmer’s share will be only Rs 500 per ha as premium for an insurance cover of Rs 30,000 per ha — and this is very much a workable business model. If state governments are also taken on board under “cooperative federalism”, the Centre’s share can be reduced to 50 per cent (Rs 750 per ha); while the state government’s share can be 25 per cent (Rs 375 per ha) and the farmer’s 25 per cent (Rs 375 per ha).

From where will the state get resources of Rs 10,000 crore to insure 100 mha? Then Prime Minister Atal Bihari Vajpayee, when he was to construct national highways and introduce the Pradhan Mantri Gram Sadak Yojana, put a 2 per cent cess on fuel. A similar idea can be used for comprehensive insurance, by putting a 2 per cent cess on farm input industry (tractors and farm implements, fertilisers, pesticides, and even agri-credit) and a 3 to 5 per cent duty on exports of water-guzzling crops and produce, such as rice, sugar, buffalo meat, etc.

Private-sector insurance agencies can be invited to bid for the share of insurance at the lowest premium and fastest settlement of claims at the block level, without any plot-to-plot assessment. Farmers’ accounts can be linked to pixel-based mapping of their fields and satellites can be used, with agronomic experts to gauge the extent of damages.

If the Modi government can do this, it will be the best Baisakhi gift to Indian farmers on April 13. It can bring back smiles on their faces and insure them for all the years to come.

The writer is Infosys chair professor for agriculture at Icrier

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More From Ashok Gulati
  1. V
    Apr 28, 2015 at 6:36 pm
    Excellent analysis
    1. G
      Apr 13, 2015 at 1:31 pm
      will the finance ministry ever consider this? similarly universal health insurance can be implemented. why do they forget simple execution tactics blinded by their own marketing follies?
      1. S
        Apr 14, 2015 at 9:46 pm
        1) for someone who is well versed with the basic data of our agriculture its easy to say that when 80% of farmers with less than 2.5ha per capita control mere 20% of land no insurance model is possible. Good news in only 20% of farmers( should i say landlords? ) control a staggering 80% of land. such large holdings is easy for insurance model. Then one should ask why ain't this 80% indian agriculture covered under insurance? Because they are not the real farmers, rather migrate to urban areas and rack rent the tenants. These tenants do not have any "legal" contracts which is essential to get any govt support or for even the private sector insurance company. Those remaining 20% landed small and marginal farmers aren't able to pay the high premium. Hence landreforms is MUST. should we take that an eminent official like Ashok Gulati is unaware of this? I dont think so. Then why ain't he write about it? 2) for the model of insurance it should be better left to market innovation or be drawn up by specialists. why? eg- taking an average out of kharif and rabi crop yields is a foolish mistake given the Indian agro-climatic conditions. Different areas of india are vulnerable at different seasons and yields too vary.
        1. N
          Apr 13, 2015 at 2:11 pm
          This is a very bad idea going down the way of MNEGRA. Our farmers will find ways to show the crop is damaged due to some or the other reason, unless the insurance will kick in only when govt declares that the destruction qualifies for the insurance to be kicked in.
          1. S
            Apr 14, 2015 at 12:13 am
            Rich farmers should be taxed with premium adjustable to Insurance that way pool of insurance money can be increased.
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