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Saturday, September 25, 2021

For the farmer

The new crop insurance scheme may entail a cost that’s worth paying.

By: Express News Service |
Updated: January 16, 2016 12:02:43 am

The Narendra Modi government’s new Pradhan Mantri Fasal Bima Yojana (PMFBY) is worth commending for bringing crop insurance centrestage. Farmers, unlike most other economic agents, are exposed to production (weather) as well as price (market) risks. Given the extent of risk involved in growing any crop — ranging from prolonged dry spells and pest attacks to price crash at the time of harvesting — no insurer would normally want to enter this segment. Even if they do, most farmers cannot afford to fork out the huge premiums based on actuarial or statistical risk assessment. There is a case, therefore, for the government to subsidise crop insurance premiums that will ultimately also encourage farmers to invest in productivity improvements and new technologies. Such subsidy is any day preferable to those on fertiliser, electricity or water, which only promote inefficient resource use. The fact that even farmers in a country like the US pay just 35 per cent of the average premium on crop insurance policies — entailing annual federal subsidies of $10 billion — only proves the point.

Under the PMFBY, farmers would pay only 2 per cent premium for all kharif crops, while it would be 1.5 per cent for rabi and 5 per cent for horticultural crops. The gap between the premiums they would pay and actuarial rates will be met by the government without any upward limit on this subsidy. From a farmer’s perspective, this represents significant improvement over the existing Modified National Agricultural Insurance Scheme. Under the latter, the government subsidised a maximum of 75 per cent of the actuarial premium. Moreover, the premium rate on which the sum insured was calculated was itself capped, so as to limit both the farmer’s claim and the government’s outgo. But now, there will be no such indirect capping of the sum insured.

The question that naturally arises is, what would be the fiscal implications of the new scheme? The Modi government is planning to launch it from the coming kharif season, which, going by statistical probability, should be relatively better for agriculture, following two back-to-back monsoon failures. But in a drought year like the current one, the outgo from the PMFBY — assuming it is implemented in the manner proposed — may not be small. That price may still be worth paying for a country where only a fifth of farmers have crop insurance coverage. Subsidised premiums and prompt claims settlement enabled by remote sensing and GPS technology — as opposed to patwaris and crop-cutting experiments — should help substantially expand coverage. An increase in the area insured should also bring down premium rates, through spreading of risks across more farmers. That would also help contain the government’s subsidy burden.

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