Insights into Issues: Pradhan Mantri Fasal Bima Yojana – How Different is it from Earlier Agri Insurance Schemes?
Problems with the current Insurance Schemes:
- There is low awareness about the current schemes. Only 19% farmers have heard of such schemes
- Low penetration of Financial Institutions also adds to the cause of poor insurance coverage
- Currently the infrastructure to measure crop loss accurately is outdated which makes it difficult to make loss assessments uniformly
- The existing insurance schemes are unable to protect the farmers against price fluctuations
- Getting data on reliable yield and price is difficult because it keeps on fluctuating from season to season
- The time taken to fulfill claims is quite high. This is despite the rules stating settlement within 45 days
- Compulsory deduction of premium from loans hedge the banks and not farmers
- Modified NAIS and WBCIS have very high premium rates to the tune of 10% of sums insured based on 3 years average data collected for Kharif and Rabi season. This is a major reason behind the NSSO’s data that only 5% of farmers who go for institutional credit opt for insurance
- Financial Stability Report by RBI highlights that linkage of loans with insurance doesn’t meet good response from banks as the burden of Priority Sector Lending is already there on banks
Reasons for High Premium:
- It is primarily due to lack of scale. Less than 15 mn ha out of total 140 mn ha cropped area is covered under some form of insurance scheme
- This is also due to low penetration of institutional credit which hinders economies of scale from coming into operation
The US and China experience:
- US is the world’s biggest crop insurers where state provides support for 70% of the premium paid by farmers. In China as well, state coverage of premiums is to the tune of 70-80%. This shows that Indian state will have to pitch in heavily in covering premiums
- If we increase the coverage area to at least 100 mn ha, premium rates, owing to economies of scale, would fall from 10% to 5%. Centre and states under the rubric of cooperative federalism can jointly share the burden
Features of PMFBY:
- Premium rate fixed @2% for kharif, 1.5% for rabi, 5% for horticultural crops and vegetables. Remaining burden of premiums to fall on Central and state government
- Paymentto be transmitted directly to account to reduce leakages
- Aim is to Increase insurance coverage from 23% currently to 50%
- Use of technology being encouraged. Smart phones used to upload crop yield data to facilitate quick settlement of claims. Remote sensing satellites used for field surveillance in place of manual surveillance to quicken the process.
- Tech can be used to ascertain that farmers/tenants have a stake in the crop being insured
- Capture and upload data of crop cutting to reduce delays in claim payment to farmers
- Remote sensing will be used to reduce the number of crop cutting experiments. Larger use of such technology will reduce dependence upon role of Patwari and junior district level officers
- Long standing demand of farm level assessment fulfilled
- Post harvest losses will also be covered
- Earlier there was capping on amount insured for which subsidy burden was borne by the govt. That has been removed under the scheme
- TheCentre currently has a bill of Rs 3,100 crore on account of its share of the premium for the 23 per cent crops that are currently insured in the country. Once 30 per cent of the crop comes under insurance cover, the Centre’s financial liability is estimated to go up to Rs 5,700 crore. This financial liability is expected to touch a whopping Rs 8,800 crore once the target of bringing 50 per cent crop under insurance is achieved in three years. However as the no of farmers under insurance schemes increase, the subsidy burden will decrease courtesy economies of scale
Issues in previous schemes
- In PMFBY insurance unit is a village as against the revenue administrative unit of a block in previous schemes. A block covers a large area with sub regional weather variations, risk of exclusion in previous scheme was higher
- Without adequate use of technology in previous schemes, burden fell on state governments to conduct crop cutting experiments to estimate the actual yield and thereby calculate losses. Such experiments were often poorly done and do not give real value of the produce. Also the assessment process done manually by Patwari and chances of corruption at the lowest rung of revenue administration very high depriving the farmers of the benefit
- The scheme is in sync with the stated objective of the government to double farmer income by 2022
- With back-to-back droughts, and unseasonal rain and hail in certain pockets, it became clear that the risks in farming are on the rise, and the existing system of crop insurance was nowhere near meeting the needs of the peasantry. In this context, the new scheme is surely a step in the right direction and very timely — which will help in saving Indian agriculture from the increasing risks of nature
- The premium rates to be paid by farmers are very low and balance premium will be paid by the
Government to provide full insured amount to the farmers against crop loss on account of natural calamities. The low premium will drive penetration and enrolment and make the insurance scheme viable for insurers.
- Post-Harvest losses are also included, so it will provide safety and confidence to the farmers.
- Post harvest losses does not include storage losses
- 83% of farmers are small and marginal farmers , use of technology is difficult for them
- Not income insurance but only revenue loss coverage
- Only insures against weather risk and not crop loss risk. Risks such as destruction by wild animals not covered under the scheme
- Problems related to insurance run far deeper than premium rates. For e.g. In many states where premium rates are low in MNAIS still have very low subscription
- One key problem of crop loss or damage compensation, the unit of assessment, remains unaddressed in the new scheme
- There does not seem to be anything in this scheme to address the problem of tenant farmers who bear the risk of crop failure but are not entitled for compensation and insurance payments
De-risking agriculture does not begin or end with insurance. The assessment of risk should begin much before sowing and proceed beyond harvest. The decision of what to sow and reap is currently not a well informed choice based on a sound assessment of soil, yield and prices. If insured, small and marginal farmers show an increasing tendency to sow cash crops reliant on the monsoon—a classic case of moral hazard. It is here that better risk assessment, contract design and cooperatives prove handy. Mixed farming and inter-cropping also helps in diversifying the risks generally associated with monocropping. Commodity futures are yet another solution to achieve price risk management and price discovery. Unfortunately in India, no significant price discovery has occurred in agricultural commodity markets which started their operation a decade ago. This is primarily because of the lack of integration between the futures and spot markets.
These loopholes are to be addressed along with making steps to improve the insurance coverage.