By Making Crop Insurance Optional for Farmers, Has the Centre Effectively Ended the Scheme? 

Making crop insurance mandatory for loanee farmers provided an attractive deal for insurance companies. Without this, will the business still be viable?

This is the first in a two-part series about the changes made to the Pradhan Mantri Fasal Bima Yojana. Read the second part here.

On February 19, 2020, the Union Cabinet approved major modifications to the two crop insurance schemes, the Pradhan Mantri Fasal Bima Yojana (PMFBY) and Restructured Weather Based Crop Insurance Scheme (RWBCIS).

While the former provides insurance on the basis of guaranteed crop yield, the latter provides coverage on the basis of weather parameters, irrespective of the yield of crop.

The two schemes were launched in 2016 and there were major modifications in guidelines in 2018. The implementation of the overall project has attracted criticism from farmers, some state governments and the media for delay in settlement of claims and inadequate pay outs in the event of losses.

The most important decision taken by Cabinet is to make the scheme optional.

Thus, at the time of availing crop loan from bank or cooperative, a farmer (henceforth referred to as ‘loanee farmer’) will be able to decide if he wants to take crop insurance. So far, insurance premium was deducted from his crop loan even if he didn’t want the insurance. There are several other positive changes in the scheme but this one decision alone will decide the future of crop insurance in India.

Also read: BJP Manifesto: Voluntary Enrolment Under PMFBY Could Kill the Programme

It was a long-standing demand of farmer organisations and activists that crop insurance should not be compulsory for loanee farmers.

Compulsory insurance was important, though, because it provided insurance companies an idea about the number of farmers and the premium they will be able to collect. Now that it has become optional, before submitting their bids for premium rates, insurance companies will have to devise alternative methodologies to estimate the number of farmers who will take insurance for their crops. If they want to continue in this business, they will have to aggressively reach out to farmers and explain to them the benefits of crop insurance.

This will not be easy as farmers in less risky districts (e.g. irrigated areas) may not opt for crop insurance. Similarly, in the event of a normal monsoon, farmers may not go for insurance either.

The real impact of this decision will be known soon, through the response of insurance companies in tenders in various states. In the last four years, after the launch of the scheme in 2016, the number of non-loanee farmers has been going up. In 2018-19, 2.11 crore non-loanee farmers insured their crop while the number of loanee farmers was 3.57 crore. But, out of 2.11 crore non-loanee farmers, 1.29 crore farmers were in Maharashtra alone.

West Bengal, Tamil Nadu, Karnataka and Jharkhand were other states where non-loanee farmers took crop insurance. In most other states, the scheme predominantly provided insurance coverage to loanee farmers only. Here, it must be noted that the state governments notified the crops which could be insured.

Sturdy crops, where risk was not perceived to be very high, like sugarcane, were generally not covered by the state governments under crop insurance.

Also read: Exclusive: Centre’s Crop Insurance Scheme Fails the Drought Test, 40% Claims Unpaid

Tenders of Uttar Pradesh, Haryana and Jammu and Kashmir to select insurance companies for 2020-21 have already been issued by state governments. After the Cabinet decision to make the scheme optional, the J&K tender was canceled on February 20.

Insurance companies retain only about 25% of premium in their books. For the rest, they take ‘reinsurance’, a form of insurance for insurers. The terms and conditions of reinsurance may also undergo a change due to this decision.

In all likelihood, insurance companies will quote a much higher premium due to chances of heavy reduction in the number of farmers and the premium, at least in kharif 2020. Due to this decision of the Union government, there may well be substantial decrease in area coverage under crop insurance in 2020-21.

If the insurance companies assess that there will be a substantial decline in the number of farmers who will insure their crops, they will quote higher (actuarial) rates of premium and the premium subsidy will substantially increase, as premium paid by farmers is fixed at 2% for kharif, 1.5% for rabi and 5% for annual commercial and horticultural crops.

The difference between premium quoted by companies and what the farmer pays is borne by the Centre and state governments in the ratio of 50:50.

A farmer carries firewood during the dry season in Nicaragua, one of the Central American countries affected by a recent drought. Photo: Flickr

If insurance companies do not quote in tenders or give exorbitant rates, the states may decide not to go for crop insurance at all. In this event, farmers will have to be provided relief under the State Disaster Relief Fund (SDRF). For agriculture, horticulture and annual plantation crops, compensation to small and marginal farmers (called input subsidy) is Rs 6,800 per hectare (of sown area) in non-irrigated areas and Rs 13,500 per hectare in irrigated areas.

In the case of farmers owning more than 2 hectares of land, the assistance is limited to only 2 hectares. Under crop insurance, the sum insured is based on the scale of finance for the district and it is many times more than the compensation for which farmers would be eligible under SDRF.

For example, in kharif 2018, the scale of finance in Rajkot district of Gujarat was Rs 39,000 per hectare for castor, Rs 58,000 per hectare for irrigated cotton and Rs 42,000 per hectare for groundnut.

So, in the absence of crop insurance, the farmers will get a much smaller amount of compensation under current norms of SDRF.

Implementation of crop insurance has substantially improved over the last four years and some decisions of Cabinet will further improve the scheme. But all this is subject to insurance companies finding it a viable business.

Siraj Hussian was Union Agriculture Secretary. Presently, he is Visiting Senior Fellow, ICRIER