Precarious Livelihoods: How the State Fails to Insure its Farmers

In the the 2020 Union Budget, Finance Minister Nirmala Sitharaman announced that the government had insured 6.11 crore farmers under the Pradhan Mantri Fasal Bima Yojana (PMFBY) and that the centre was committed to the goal of doubling farmer income by 2022. With the budget setting the agricultural credit target at Rs 15 lakh crore going forward, crop insurance now holds the third-largest portfolio in the non-life insurance industry.

However, over the years, its premium outgo has increased from a gross level of  ₹22,015 crore (2016–17) to ₹29,065 crore (2018–19). Correspondingly, its gross loss ratio has gone up from 78% to 100% for the same time period. These numbers suggest that the crop insurance industry in India is in a dismal state. Ajay Vir Jakhar, chairman of the Bharat Krishak Samaj commented on the PMFBY, saying, “The government needs to do away with the Pradhan Mantri Fasal Bima Yojana in the budget as it’s been a waste of money, no one seems to be benefiting.” Moreover, he pointed out that the PMFBY does not take into account landless farm workers. The loss-making enterprise, according to Jakhar, is largely ineffective on-ground and distant from the requirements of all farmers. 

The importance of an instrument like crop insurance is underscored in a report by the Federation of Indian Chambers of Commerce and Industry. Examining the agriculture insurance market, the report points to the importance of crop insurance in light of the increasingly “erratic and unpredictable behaviour of monsoon, accentuated by climate change.” The changing climate scenario, till now, has not only resulted in extensive financial loss in terms of crop failures and damage to agriculture infrastructure, but also loss of lives due to the numbers dependent on it for livelihood.

Thus, crop insurance is bound to play a significant role in combating any future food insecurity. However, from its inception in 1985 to 2019, crop insurance schemes such as the Comprehensive Crop Insurance Scheme (CCIS) (1985), the National Agricultural Insurance Scheme (NAIS) (1999) and the Modified National Agriculture Insurance Scheme (MNAIS) (2010–11), the Weather Based Crop Insurance (2007) and the Pradhan Mantri Fasal Bima Yojana (2016) have had very limited success. Primary inhibitors of these schemes have been the lack of awareness and access. 

Caught between the future importance of crop insurance, and the systemic inefficiencies it is currently entangled in, we explore the EPW archives to get a bird’s-eye view of crop insurance in India, why it has not been effective so far, and the fate of the alternatives the government has thus far executed.

Why Is Crop Insurance Required and Why Has It Not Been Effective So Far?

Reshmy Nair notes that the basic risk faced by agriculturalists is that of weather variability and the uncertainty of crop yield. The magnitude and intensity of the same is especially high in India, considering that the overwhelming majority of farmers who excessively depend on the farming sector have extremely limited means and resources to cope with the disastrous consequences of crop failure. Thus, given the significant contribution of the agricultural sector in the Indian economy, coupled with looming “climatic aberrations,” crop insurance becomes a necessity to mitigate the risks associated with a majority of the country’s farmers. In light of this, pilot projects carried out in the country between 1972 and 1973 gave rise to the CCIS which was implemented from 1985 to 1999. The scheme later evolved into the NAIS. However, crop insurance, particularly yield insurance, by itself, is not the solution. It suffers from drawbacks, such as complex processes, moral hazard, adverse selection, and low penetration. 

 … Less than one-third of the farming community avails of institutional credit in India and for the remaining, insurance continues to be voluntary. Insurance in Indian agriculture is more challenging than in the developed countries due to its inherent nature – a large number of small and scattered landholdings, varying climatic and soil conditions, lack of basic data, and variety of agricultural practices, making it practically impossible to implement the scheme on an ‘individual basis’ on a wide scale. Further, there is widespread lack of knowledge about the nature and functions of crop insurance amongst the farmers, a majority of whom are illiterate and poor.

Subhankar Mukherjee and Parthapratim Pal recount that crop insurance in India dates back to 1920, with the first crop insurance scheme launched in 1972. Observing the difficulty of calculating, and, thus, the paucity of crop insurance data, Mukheree and Pal undertake the responsibility to calculate the same using Agriculture Insurance Company of India’s (AICI) Business Profile Data and National Sample Survey Office’s (NSSO) Situation Assessment Survey of Agricultural Households. They note that the proportion of farmers that buy prescribed crop insurance without taking any loan is only 15%. This hints at the inability of the farmers to pay the premium for insurance. Low penetration of crop insurance is also due to the fact that demand for crop insurance is highly price-sensitive and depends on prior experience. This is exacerbated by the fact that the crop insurance system is riddled with payment delays due to lengthy and tedious procedures in the calculation of the extent of crop loss. In a 12-year period (that is, 2001 to 2013), average growth rate of crop insurance in terms of farmers has only been 6.5% annually.

... Coverage of crop insurance in India is abysmally low both by number of farmers and units of cultivation. Annually, just over 7% farmers subscribe to crop insurance, and only 4% of the units cultivated are insured. These figures are particularly striking because crop insurance in India is mandatory for all farmers taking short-term crop loans. Banks are supposed to deduct the premium amount while advancing crop loans to farmers. Given the disparity between crop loan penetration and crop insurance penetration, it is apparent that this rule is not strictly followed in many states. Crop insurance is also available on [a] voluntary basis for non-loanee farmers. But ... voluntary purchase of crop insurance in India is also extremely low.

Shubhashis Gangopadhyay argues that the major obstacle to commercialisation for a small farmer is the increased uncertainty of the marketplace and the inability to absorb the risk of loss. In such a case, buying insurance does not work, considering that the premium rates to cover the risks are too high. He notes

The poverty line in rural India for the year 1999-2000 was Rs 328 per person per month. For a family of 5, this implies an annual expenditure of Rs (328*5*12) = Rs 19,680. Now consider a 5-member household with a small plot of land that can yield an annual income of Rs 23,153 if it is a good year (with probability 0.8) and Rs 5,788 if it is a bad year (with probability 0.2). In a bad year, the household will be impoverished, while in a good year it will be above the poverty level […] Applying the solution demonstrated by the example, this hypothetical household can buy insurance coverage of Rs (23,153 – 5,788) = Rs 17,365 at a premium of Rs 3,473. In a good year, it will have Rs (23,153 – 3,473) = Rs 19,680. In a bad year, similarly, it will have Rs (5,788 – 3,473 + 17,365) = Rs 19,680. With this insurance scheme, the household will no longer be impoverished, even if the crop fails. What makes this seemingly workable solution infeasible is the ability of the farmer that makes Rs 23,153 in a good year to come up with an initial amount of Rs 3,473 to pay the premium.

Thus, with poverty levels themselves so high, farmers’ obligation to pay the high premium upfront, without resorting to taking a loan, would be a difficult task. 

What Are Some Steps Taken by the Government to Encourage Adoption of Crop Insurance?

An alternative to the traditional yield-based crop insurance system is a weather-based crop insurance. Weather-based crop insurance, Reshmy Nair elaborates, pays out indemnities based not on actual losses experienced by the insured, but on the realisation of a weather index, which is, in fact, highly correlated with actual losses. The index itself measures a specific weather variable (such as rainfall, temperature, relative humidity, wind speed, etc.) rather than the extent of loss (in crop yield). Thus, the crop insurance product uses proxies for the loss that farmers face due to adverse weather conditions. Not only is the weather-insurance product easier to administer and significantly reduces cost by eliminating the need for yield estimation and field visits, a weather index product is also transparent, given that weather data can uploaded immediately so the insured is aware of weather performance vis-à-vis the given trigger. Nair provides a brief history of weather-based insurance products in India, 

In India, weather-based insurance was first introduced in 2003 by ICICI Lombard for groundnut and castor farmers of Mahboobnagar district in Andhra Pradesh, followed by the pilot rainfall insurance scheme by IFFCO-Tokio General Insurance (ITGI) in 2004-05 in Andhra Pradesh, Karnataka and Gujarat. The Agricultural Insurance Company of India (AIC), the public sector insurer, also introduced rainfall insurance (Varsha Bima) in 20 rain gauge areas spread over Andhra Pradesh, Karnataka, Rajasthan and Uttar Pradesh in 2004-05, providing five different options suiting varied requirements of the farming community– seasonal rainfall insurance based on aggregate rainfall from June to September, sowing failure insurance, rainfall distribution insurance with the weight assigned to different weeks, agronomic index based on the water requirement of crops at different phenophases, and a catastrophic option, covering extremely adverse deviations in rainfall during the season.

With India becoming one of the world’s pioneers in weather-based crop insurance, Kushankur Dey and Debasish Maitra point out that under weather-based crop insurance schemes (WBCIS), the number of farmers increased from 6.79 lakh during 2007–08 to 136.14 lakh during 2012–13. That said, implementation of weather-based crop insurance schemes has not been as systematic as it ought to be. For instance, there is a glaring lack of integral infrastructure, such as automatic weather stations (AWSs), which are crucial in collecting relevant data.

However, weather-based insurance product in India has not been subscribed to on a large scale as yet. Besides, the high premium costs and complex computational exercise involved in index-based weather products, low density of weather stations seems to be a pressing problem. For example, there is a shortfall of around 24,000 AWS and more than a lakh of rainfall data loggers, although a few private service providers have tried to speed up parametric weather data collection and dissemination. It is evident that since weather-based insurance product in the form of (put) option can be used to manage various on-farm risks affecting all stages of crop cycle, lack of product choice to potential farmers is a limiting factor for the penetration of weather-based product.

Examining the recently implemented PMFBY, Dey and Maitra note that it has been, so far, the most successful crop insurance scheme in India. A multi-peril crop insurance scheme, replacing the NAIS and the MNAIS since 2016, the PMFBY covers a broad set of risks spanning the various stages of crop development as well as post-harvest losses (for instance, due to natural calamities). They state,

About 309 lakh farmers in 23 states (34.5% of total farmers) had been covered under PMFBY in kharif 2015, of which 294 lakh farmers were loanee and 15 lakh were non-loanee. During kharif 2016, however, 366.64 lakh farmers (41% of total) have been covered, out of which 264.04 lakh farmers are loanee and 102.60 lakh farmers are non-loanee. PMFBY has been implemented in 21 states during kharif 2016. The achievement of 41% coverage of farmers within a couple of years after the inception of PMFBY appears impressive, particularly as compared to 28% coverage of farmers achieved under three schemes combined (WBCIS, NAIS, and MNAIS) prior to the implementation of PMFBY.

Meenakshi Rajeev and Pranav Nagendran observe that since the introduction of PMFBY, share of cultivated land under crop insurance cover improved from 22% during 2013–14 to 29% by 2016–17. However, this was subsequently followed by a decline, reaching 25.96% in 2017–18. Moreover, while most central and northern states fall under crop insurance to some extent, the same cannot be said of some of the southern states (Tamil Nadu: 21.11%; Karnataka: 19.40%; Kerala: 1.84%), or for Uttar Pradesh (only 14.91% of all crop area falls under insurance cover). Similarly, north-eastern states have barely seen any crop area under the scheme (for example, Assam: 1.06%; Tripura: 0.63%). Taking note of the hindrances met by farmers in gaining access to crop insurance, Rajeev and Nagendran state

...  there are several difficulties that farmers face while accessing credit. One of the major concerns in this regard is the lack of land records (such as the Record of Rights, Tenancy and Crop Information or RTC certificate) among farmers. Thus, documentation requirements are indirectly one of the barriers to adoption of crop insurance. Landowning farmers face issues owing to a lack of automatic mutations. Updating these records can prove to be a complex bureaucratic process that most farmers are ill-equipped to handle. Resultantly, many farmers who own land do not possess adequate land records. Non-loanee farmers need to exert extra effort to go through the process of enrolling under the insurance scheme, which often may not happen. Tenant farmers are often oral lessees who cannot prove cultivation, as landowners are reluctant to provide formal lease documentation for fear of losing land rights. As a result, these tenant farmers and sharecroppers also find it difficult to access credit and hence, crop insurance.

Read More: 

Crop-Credit Insurance: Some Disturbing Features | K Seeta Prabhu, Saroja Ramackandran

Crop Insurance in India-A Review, 1976-77 to 1984-85 | V M Dandekar

Crop Insurance-The International Experience | K Seeta Prabhu

Comprehensive Crop Insurance Scheme-in Raigad District | M M Patil, S G Borude

Crop Insurance Need for a New Approach | A K Agarwal