Crop insurance boost

The new crop insurance scheme appears to be the Modi government’s flagship agriculture initiative. It will subsidise actuarial premiums to the extent of 90 per cent, as against the present 65-70 per cent, in order to keep insurance costs low and attractive for farmers. The aim is to enhance crop insurance coverage to half the gross cropped area, against 23 per cent presently. The policy — based on the recommendations of the Commission for Agriculture Costs and Prices (CACP) in its latest rabi season report — seems directed at breaking the prevailing vicious cycle of high premiums and low coverage. There cannot be a better market for crop insurance than India — 68 per cent of the area is rainfed and, according to the CACP, there are major output dips once every three years. If this market has stayed out, one of the reasons is that the premiums under the Modified National Agriculture Insurance Scheme (MNAIS), at 8-10 per cent for the farmer after subsidy, are too high as a proportion of the sum insured (SI). The SI, according to the CACP, works out to an average of ₹18,000 per hectare against the average per hectare output of ₹41,000. Farmers would like to be compensated for the value of their output. However, the SI is low because the MNAIS has capped it. This has been discontinued in the new policy. The SI will presumably be calculated as the ‘loan amount or 150 per cent of the threshold yield (the average yield of the last seven years less two calamity years), whichever is more’, but the key here is to get the threshold yield calculation right for as small a unit area as possible, so that deviations are correctly estimated. Timely and localised crop cutting experiments (CCEs), transmitted through technologies such as smartphones and ‘drones’, are crucial. The new policy does well to extend the scope of cover to include post-harvest losses and delayed sowing. But it needs to attend to detail.

The moral hazard problem cannot be wished away. An integrated bank database (using the Jan Dhan, Aadhaar, Mobile platform) can ensure that the area insured for a crop does not exceed its gross cropped area, by preventing multiple loans being taken for the same land. The growth of weather-based insurance and the entry of more players can provide checks and balances, but the insurance regulator should prepare for fresh challenges. To reduce fraudulent claims, a robust no-claims bonus will help. As for the demand side, while the Centre has declared a plain vanilla plan, there could be takers for products that, say, insulate against price risk. The higher cost can be borne by farmers. A fixed deposit model may also find acceptance.

The US, China and Japan run highly subsidised crop insurance schemes — so that is quite the norm, given the livelihoods involved and the risks intrinsic to farming. The Centre can consider withdrawing gradually once the coverage picks up. Until then, this would be public money well spent.

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