Crop Insurance and Livelihood Security for Small-scale Farmers
Source: World Bank

Recent droughts in the Indian states of Karnataka and Maharashtra, combined with farmers committing suicide in the lean season, has stirred the Indian government to think about securing farmers against sudden, unpredictable weather events. Crop insurance is a new concept for Indian farmers, however, and they are often not willing to pay for such insurance. In October 2015, an IFPRI conference on the topic concluded that to date, agricultural insurance programs in the region have been unsuccessful and that there is a need for new product development to increase farmers’ acceptance and uptake of insurance schemes.

In 2014, only 22 percent of crops were insured by Indian farmers. Coverage varied widely across states, with some states opting for more coverage and other states, such as Punjab, having no crop insurance policy at all.  In addition to little area being covered by insurance schemes, in many cases, pay-outs received by farmers were low. The Commission for Agricultural Costs and Prices (CACP) states that the average sum insured (SI) per hectare under the existing national agricultural insurance scheme was significantly below the gross value of output (GVO) for most crops; policy claims cannot cover even half of the value of the produce when a crop suffers heavy damage.  This gives farmers little incentive to use insurance protection, even during the last decade when five full-fledged drought years threatened many rural livelihoods.

According to an article published in The Financial Express, however, a new crop insurance scheme put forth by the Centre Party could be a game changer. Under this new scheme, known as Pradhan Mantri Fasal Bima Yojana (PMFBY), farmers would benefit from lower premiums and higher insured sums. The new policy promises a departure from existing crop insurance schemes, aiming to provide insurance coverage and financial support to farmers in the event of failure of any of the notified crops as a result of natural calamities, pests, and diseases. It also broadens the definition of risk to include yield losses, preventive sowing, and post-harvest losses. It is hoped that the new scheme will stabilize farmer’s incomes, ensure continued agricultural production, encourage farmers to adopt innovative and modern agricultural practices, and ensure flow of credit to the agriculture sector.

One important innovation in the new policy is that insurance premiums will be subsidized. In addition, while the previous policy utilized actuarial rates (based on actual crop risks) when the sum insured was higher than the threshold value, premium rates under the new scheme will remain the same even with a higher threshold value. The government will have to bear higher costs during the implementation stage of the program, but in the long run, the system should become more efficient and will encourage more farmers to enroll in the program.

Only time will tell if the new policy will be successful, but for now it seems to be a step toward a much-needed change in India’s insurance policy environment.  A virtual dialogue hosted by the India FSP will discuss the opportunities and constraints for agricultural insurance in late February and more information will be available shortly.

By: Jaspreet Aulakh, IFPRI 

Photo credit:World Bank