Tuesday, July 5th, 2022 09:04:16

Farmers’ Mann Ki Baat

Updated: March 23, 2016 1:06 pm

India is an agrarian country with around 60 per cent of its population dependent directly or indirectly on agriculture. According to the World Bank, the agricultural sector has been contributing 17 – 19 per cent to our GDP and is responsible for 44-56 per cent of all employment nationally. It has also been providing all the food and nutritional requirements of the nation and important raw materials for major industries. Agriculture accounts for 13-18 per cent of our exports.

But risks are an integral part of agricultural production and India’s farmers are usually exposed to risks in some way or the other every agricultural season — from weather, biological events, market fluctuations and global warming. Being located in the low latitude region of South Asia, India is extremely vulnerable to the impact of climate change due to its long coastline, dependence on agriculture and reliance on its annual monsoon. The high incidence of poverty, low irrigation coverage, inadequate resources and a lack of technology usage add to its vulnerability.

According to the World Bank: “…in India, due to climate change, droughts are expected to be more frequent in some areas especially in north-western India — Jharkhand, Orissa and Chhattisgarh. Crop yields are expected to fall significantly because of extreme heat by the 2040s.”a More than 60 per cent of India’s agriculture is rain-fed, making the country highly dependent on ground water. But even without climate change, 15 per cent of India’s ground water resources are already over exploited. In our country, where two-thirds of the country’s 1.25 billion people live in the rural area, the risk of crop damage is therefore enormous.

The direct victims of these disasters are small farmers – the most neglected ones, even though they provide us our daily bread. In India, 70 per cent of the farming community is of small and marginal farmers.

Historically, farmers have adopted various methods to deal with such risks by sharing them through tenancy arrangements or reducing them by greater diversification through their cultivation innovativeness. But these methods are limited in their ability to offer genuine relief — so farmers feel they have no way out and get desperate enough to commit suicide.

According to the National Crime Records Bureau of India, farmers’ suicides account for 11.2 per cent of all suicides in India. Various reasons have been given to explain why farmers commit suicide in India but over and above everything is the fact that crop insurance schemes so far have also failed the farmers miserably when they needed it the most.

Therefore, it does not matter what is causing agricultural damage, but something’s definitely not right, and investing in protection from that uncertainty now seems to be the priority more than ever before. Crop insurance serves as an important tool which protects farmers against risks arising from anticipated but uncertain events. Till today, there has been no effective crop insurance in India. Consecutive governments have been implementing various crop insurance schemes from time to time.

Generally, the rural insurance providers have always been apprehensive on account of information asymmetry and enforcement problems and therefore unwilling to extend adequate credit to small farmers.

Since the small farmers do not own adequate land or other assets that can be used as collateral, the insurance companies become even more apprehensive.


In 1985, a credit-linked Comprehensive Crop Insurance Scheme (CCIS) was introduced. This scheme was a homogeneous area-yield based and the farmers were entitled to an indemnity on compensation to the extent of the shortfall in yield. There were several drawbacks in this scheme and therefore it was scrapped in 1997.

In 1999 National Agricultural Insurance Scheme (NAIS), another homogeneous area and yield-based scheme was introduced. Under NAIS the claims were automatically calculated based on current season yield as compared to the predetermined threshold yield. The compensation of damage was usually settled through the rural banking network. The performance of NAIS was not satisfactory due to low coverage, poor financial performance and delays in indemnity payment.

In 2007, the Weather Based Crop Insurance Scheme (WBCIS) was launched.

Although considered to be an improved alternative to NAIS due to its lower administrative costs, more transparency and faster compensation payment, it has not been good enough largely due to its method of risk-based compensation.

According to this technique, there is a frequent mismatch between the actual crop loss suffered by the insurance buyer and the indemnity received on the basis of the weather index.


This scheme is constrained by limited location of weather stations. In order to acquire accurate data and minimise basis risk, it is estimated that India would need an additional 10,000 weather stations.

In 2009, during the Cyclone Aila, in eastern India, the WBCIS scheme failed miserably. Those who had taken this scheme were not compensated since this was only based on a certain volume of rainfall whereas the major causes of damage were by the storm. In order to find a better solution, a modified version of NAIS, MNAIS, was introduced in 2010-2011. One of the salient features of this scheme has been private participation to a greater extent along with the Agricultural Insurance Company of India. However, one of the major shortcomings of this scheme has been that the farmers are eligible to compensation only in the event of total crop failure. At present farmers can get either a MNAIS or WBCIS as per the implementation policy of the state government.

As a matter of fact, none of the schemes have become popular due to various factors.

According to the Economic Times, there are two major reasons for this –firstly, even the extremely poor farmers are expected to pay the premium. The majority of the farmers in India have small land holdings and they are charged insurance premium at par with the rich farmers.

Secondly, it indicates that if the farmers get trapped in a cycle of debt and defaults on their agricultural loan, their policies become automatically inoperative. This is because mostly the crop insurances are linked with their loans. As a result, thousands of farmers who had opened insurance plans through the Kisan Credit Card scheme could not claim insurance because of the unpaid dues on their bank loan.

There were several other disadvantages in these schemes as well. The sums insured were very low (based on the cost of inputs rather than prospective income), the premiums were high and the assessment of crop damage lacked transparency and did not use the latest technologies. The compensation used to take an unduly long time — even beyond a year — and mostly because of corruption.


This has been the scenario with the present situation having been considerably worsened by two successive cycles of poor monsoons and unseasonal rains in several states in India. Apart from that, due to a drop in overall demand and weak exports of agricultural products, farmers’ incomes have reduced drastically.

In today’s context therefore, crop insurance has become an absolute and immediate necessity. An effective crop insurance scheme which would provide economic support to farmers, stabilise their income and reduce indebtedness in the event of crop failure.

Crop insurance is the mechanism by which losses suffered by a few farmers are met from funds accumulated through small contributions made by many who are exposed to similar risks. The insurance policy has become an essential component of agricultural policy in both developed and developing countries.

As the farmers of several states in India battle drought, crop losses and mounting debt, the government has approved a new simplified crop insurance scheme to ensure that the farmers pay fewer premiums and can put in claims for the full sum insured. The NDA government’s crop insurance scheme – the Pradhan Mantri Fasal Bima Yojna – is a leap forward and is aimed to be a major policy outreach towards farmers. This scheme will subsume all other existing insurance schemes that anyway have hardly been effective.

“Farmer brothers and sisters, at a time when you are celebrating festivals like Lohri, Pongal and Bihu, the government has given you a gift in the form of the Prime Minister’s crop insurance scheme”, Mr. Modi tweeted soon after the cabinet cleared the scheme. For the poor farmers this is certainly a very precious gift.The new insurance scheme will be implemented from April, the beginning of the Kharif season.

There are two major types of crop insurance schemes: individual approach and homogeneous area based approach.

The individual approach seeks to indemnify the farmer to the full extent of the losses and the premium to be paid by him is determined with reference to his own past yield and loss experience. As such it necessitates reliable and accurate data of crop yields of individual farmers for a sufficiently long period for fixation of premium on actuarially sound basis.

The homogeneous area approach envisages that in the absence of reliable data of individual farmers and in view of the moral hazards involved in the individual approach, a homogeneous area would form a basic unit, instead of an individual farmer. The homogeneous area would comprise villages that are homogeneous from the point of view of crop production and whose annual variability of crop productivity would be similar. The choice of approach depends on the suitability to the specific establishment of agriculture, prevalent in a particular region and country. In developing countries like India, the homogeneous area based approach is usually adopted.

The major aspects of this scheme are – premium, capping, coverage and faster compensation payment. The most crucial element of the new scheme is that it will bring down the premium rate to be paid by farmers substantially. The new scheme proposes to introduce a differential premium method, under which a farmer will pay 2 per cent of the sum insured as premium for Kharif crops (summer-sown crops) and 1.5 per cent for Rabi crops (winter crops). The rest will be paid by the state and the central government. According to Mr. Ashoke Gulati, the chair professor of International Council for Research on International Economic Relations (ICRIER), actuarially based premiums range between 10 per cent and 12 per cent for Kharif crops and 8-10 per cent for Rabi crops. The year long cash crops and horticultural crops will be 5 per cent in the new scheme. At

present the premium for the these crops is calculated on actuarial basis, meaning premiums could be as high as 25 per cent depending on the risk factor involved.

The government has also done away with the provision of capping. Now, farmers will get claims against full sum insured without any reduction. The government will subsidise the balance premium even if it is very high.

Under the previous crop insurance scheme, risks were only partially covered. The existing premium rates vary between 2.5 per cent and 3.5 per cent for Kharif crops and 1.5 per cent for Rabi crops but the coverage is capped. This means the farmer could at the best recover a fraction of their losses. The premium for commercial and horticulture crops is calculated on actuarial basis, meaning premiums could be as high as 25 per cent depending on risk factor involved.

The government aims to cover at least 50 per cent of the total crop area of 194.40 million hectares in three years under the new scheme. In order to achieve this,the government has decided to involve 642 Krishi Vigyan Kendras (KVKs). These KVKs will be spread across the country, to reach out to the farmers and make them aware of the benefit of the new scheme.

There will be only one insurance company in the entire state. Private insurance companies along with the Agriculture Insurance Company of India Ltd will implement the scheme. The concerned state governments will do the selection of this agency.

According to media reports, at present the crop insurance scheme’s coverage is only 23 per cent. Most of the farmers either don’t know about the existence of any schemes or don’t have the access to them. The current insurance schemes cover only half of the states. The important agricultural states like Punjab, Haryana, Uttar Pradesh and Madhya Pradesh have very low insurance coverage. States, which have high levels of insurance coverage, have equally high levels of insurance frauds. However, internationally, India covers one of the largest numbers of farmers under the insurance schemes. In 2010, 22 million farmers were under NAIS scheme and more than three million farmers were under the pilot project of WBCIS.

The new crop insurance scheme intends to pay compensation in the shortest possible time (the exact time is not yet mentioned). For this, instead of relying on yield data, the government intends to use high-end technologies. It has been proposed that smart phones, automatic weather stations (AWSs), drones, Low earth orbits (Leos) and satellites will be used to access the crop damage data faster and more accurately. This scheme also entails the immediate payment of 25 per cent of the compensation through direct money transfer to the farmers’ bank accounts.

The new crop insurance is more extensive. Going beyond the conventional methods of compensation and crop cover, this scheme will provide coverage for yield loss of standing crops, prevent sowing/planting risk, post-harvest losses and other localised risks including inundation. There will be farmer level assessment of localised loss and post-harvest loss. According to First Object Technologies, an analyst firm, “the scheme is certainly the best for the farmers in India, till date, as it provides for localised events and removes the cap.” The overall response to the new crop insurance scheme is overwhelmingly positive. However, there are some apprehensions from several quarters. Mr. Prakash Singh Badal, the Chief Minister of Punjab, feels the   plot rather than village should be considered as the unit to compensate the farmers’ crop loss. Amir Ullah Khan, an agricultural economist, is apprehensive about the viability of the direct transfer of funds into the bank accounts of the farmers since only 20 per cent of the farmers have bank accounts. Mr.Vijay Kelkar, the noted economist, agreed that since less than 35-40 per cent of farmers have access to banking services, more will have to be connected quickly. Mr. G. V. Ramanjanayulu, an agricultural specialist, shared his concerns about the identification of tenancy farmers. Thirdly, the plot-wise information needs to be digitised and synchronised with the bank account, Aadhaar card number and mobile number of each farmer.

Pradhan Mantri Fasal Bima Yojna can be a game changer provided it is implemented properly. Firstly, since the project is heavily dependent on technology, building infrastructure for it as well as its operation are time consuming and difficult. Therefore, it will be very difficult to make the infrastructure operational before the implementation of the scheme.

Secondly, in order to pay the compensation immediately, say within a week’s time, the financial provisions need to be in place. Thirdly, the plot-wise information needs to be digitised and synchronised with the bank account, Aadhaar card number and mobile number of each farmer. There is also an apprehension about whether the benefit would reach the tenancy farmers or not.

All these and much more are needed to make this mission successful. The Prime Minister will have to choose an efficient and reliable courier service so that his gift reaches the right destination without damage, and on time. As a return gift he will get something which no money or power can buy – he will remain forever in the heart of millions of neglected, poor farmers. Isn’t that a priceless return gift?

By Madhumanti Sen Gupta

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