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M.R. Subramani

Task force on plantations proposes cheaper insurance cover

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Chennai March 2 A task force set up by the Union Commerce Ministry to evolve a mechanism to protect the growers of tea, coffee, rubber and spices from price volatility has called for enabling small farmers, processors and exporters to hedge their risks in the derivatives market.

The task force, headed by Mr N. Rangachari, former chairman of the Insurance Regulatory and Development Authority, in its report submitted to the Government, said growers with holdings less than 10 hectares should be able to utilise derivatives and options available in various multi-commodity exchanges in the country.

(The Centre is yet to permit options trading in commodities and the proposal is pending amendment to the Forward Contracts Regulation Act, 1952. Commodity exchanges have been urging the Centre to permit options trading as they see it as a tool for greater participation by growers, who need to pay only a small margin to take a position and hedge their risks.)

Hedging Risks

The report was submitted in January, the same time when the demand, especially from political parties, for banning forward trading gathered momentum. Subsequently, the Centre de-listed forward contracts in urad and tur and froze them for wheat and rice. The task force said currently, only large growers were hedging their risks and the Centre could encourage small farmers to form co-operatives to trade in forward contracts.

Dwelling further on the subject, it said though commodity futures had been active since the 1990s, there had been no major effort to put in place a pro-active policy support for promoting participation of agricultural producers and financial institutions, providing assistance to producers, to participate.

"There is a need to attend to this issue in far greater detail. This is because the conventional instruments for price intervention are fiscally unsustainable, particularly when it is applied to commodities that have long durations of price shocks as is in the case of rubber, pepper and coffee," it said.

On the other hand, it said there was no credible facility available to growers to meet the risks of price movements and the art of price risk management was unknown to the small growers. To provide this, it has recommended provision of an insurance cover to small growers with the beneficiary and the Government or the Price Stabilisation Fund Trust sharing it on a 50:50 basis.

The Task Force said there was an urgent need to provide the personal accident cover to small growers and it could be extended to workers solely dependant on the plantations. "The premium, in this case, should be shared between the Government and the beneficiaries. We understand that such a facility is available on a pilot basis and this has to be enlarged," it said.

It said the Centre should come up with an insurance cover in which the subsidy for the growers would be paid upfront by the Government as premium.

Direct Selling

The insurance should be cheap so that it is affordable for small growers; it should provide significant and substantive risk cover; and it should involve a cap on the liability of the Government.

The Task Force also recommended the setting up of a public limited company to be promoted by commodity boards to facilitate participation of farmers and self-help groups in fair trade systems through direct selling of small grower plantation products, both in India and abroad.

Other members of the task force were Dr Vijay Kelkar, former finance secretary; Dr Subhashish Gangopadhyay, Professor, India Development Foundation, New Delhi; and Dr Bharat Ramaswami, Professor, Indian Statistical Institute, New Delhi.

More Stories on : Commodity Exchanges | General Insurance | Plantations

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`Allow small growers to hedge risks in futures market'

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