Crop insurance scheme: Firms making whopping profits

The governments of free India have undoubtedly been toiling to free the farmers from the perils of crop loss and the bondage of indebtedness that results from it. Unfortunately, the very similar efforts in that direction which started in the initial years of independence, still continue.

This means the failure of the measures in addressing the root causes of the farm crisis. None of the crop insurance schemes, nor their revisions, though continuous, yielded the desired results. Now there are indications of reform in the ongoing Prime Minister’s Fasal Bima Yojana (PMFBY), too. But no tinkering without learning from history would of any use.

Crop insurance history goes back to 1915 when J S Chakravarthi, as finance secretary of the princely state of Mysore proposed a rain insurance scheme. After independence, in 1947 itself, the government commissioned a study after a discussion and demand in parliament for crop insurance.

The first and foremost dilemma of the study group was on the mode of crop insurance: whether it should be an individual approach or the homogenous area based one? The former method seeks to indemnify the individual farmer to the full extent of the losses. But its implementation requires the reliable and accurate data of crop yields of individual farmers.

The real issue was the fear of ‘moral hazard’, which simply means the fear of farmers making wrong claims if the individual-based insurance is adopted. The ‘area’ approach, on the other hand, comprised selecting a homogenous agroclimatic area as a crop insurance unit; farmers get benefit only if the entire area suffers losses under this model.

In the end, the study report recommended and the government accepted the ‘homogenous area’ approach. The government sent a model scheme to the state which they did not accept due to their financial constraints.

The same fate meted out to the 1965 Crop Insurance Bill and another model scheme. The bill was later vetted in 1970 by the Dharm Narain Committee which opposed the feasibility of crop insurance.

However, at last, the first-ever crop insurance scheme came in 1972; it was an individual based scheme. The General Insurance Department of the LIC implemented, limiting it only to H-4 cotton in Gujarat. Later, the newly set up General Insurance Corporation (GIC) and added groundnut, wheat and potato and extended it to four more states: Andhra Pradesh, Maharashtra, Tamil Nadu, Karnataka and West Bengal. This experimental scheme continued up to 1978-79 and covered 3,110 farmers in all.

Against a premium of Rs 4.54 lakh, claims of Rs37.88 lakh was paid. That means the claim amount was eight times greater than the premium collected; to be exact, the premium claims ratio was 1:8.34. This was a good plea for the government to discard the individual approach.

In 1979, the GIC introduced Pilot Crop Insurance Scheme (PCIS), an area-based scheme as recommended by V. M Dandekar. Later several other schemes, including Comprehensive Crop Insurance Scheme (CCIS 1985), National Agriculture Insurance Scheme (NAIS 1999), Modified National Agriculture Insurance Scheme (MNAIS 2010), Weather Based Crop Insurance Scheme (WBCIS 2007), National Crop Insurance Programme (NCIP 2013) were experimented before introducing the PMFBY in 2016.

The CAG Report 7 of 2017 has focused on the serious flaws in crop insurance scheme from 2011 to 2015-16. The most important of its findings was the insignificant crop insurance coverage.

During the five kharif seasons in these five years, only between 14 and 22% of total farmers were covered under insurance, which means 78 to 86% were outside the insurance protection. The small and marginal farmers’ case was worse with only 5.75 to 13.32% coverage, meaning 86.86 to 94.25% of them were uninsured during the five kharif seasons.

During the five rabi seasons, 88 to 92% of the total farmer and 94.38 to 97.28% of the small and marginal farmers did not have the crop insurance coverage. This also meant that those many people could not access bank credit; if they got the loans, they would have been compulsorily insured as per the rules of the crop insurance scheme.

Disturbing facts

Other disturbing facts CAG found were: i) two-thirds of the farmers surveyed by it did not even have the knowledge of crop insurance; ii) 97% of the insured limited their insurance cover only to the extent of bank loan, although they were entitled to higher sums and, iii) the insurance companies did not stick to the 45 days limit for settling the claims. The CAG observed abnormal delay, even up to 1,069 days, in the nine states it studied.

Another noteworthy failure is the neglect of tenants who account for 40 percent of the actual farmers.

As for the PMFBY, the governments reply to an RTI question revealed that 11 insurance firms paid claims worth Rs 31,612.72 crore against the gross premiums of Rs 47,407.98 crore they had received in two years 2016-17 and 2017-18.

Thus, they have reaped a whopping profit of Rs 15,795.26 crore from fasal bima. This means a payout of Rs 50 to the insurance companies to every Rs 100 benefit to the farmer.

Now the government wants to bring in reforms but it has given no hints of reducing the role of private insurance. The actuarial private insurance can never alleviate farmers woes. What is needed is a scheme which makes the public expenditure efficacious, which increases the farmers’ incomes.

A mechanism to compensate farmers in the event of loss due to any reason - crop failure due to bad weather events, pests or any other reason and more so from adverse market conditions. All this needs the governmental will and a vision to ensure the income and employment security of the farmers and food security of the people.

(The writer is a development economist and commentator on economic and social affairs)