Unseasonal rains are breaking the back of Indian farmers. The prime minister has taken the first step to ease this burden by deciding to raise compensation for crop loss by a hefty 50%, from the existing R9,000/ha for irrigated crop, R4,500/ha for non-irrigated crop and R12,000/ha for perennial crop. Further, the compensation will be given to all those who have suffered even one-third loss, relaxing the existing criterion of at least 50% damage to eligible for compensation. Also, procurement quality norms for wheat have been relaxed. All these steps are in the right direction and the Modi government needs to be commended for that.
But the central question remains: Is this enough to bring back smiles on the faces of Indian farmers? And the short answer is, ‘not really’. To understand better why Indian farmers will not be happy with this otherwise positive decision of Modi government, consider the following facts: In this rabi season, the crop that has suffered the most is wheat. The yield of wheat on irrigated tracts is between 4 to 5 tonnes/ha. Even if one takes 4 tonnes as the wheat yield on irrigated area, at a minimum support price of R14,500/tonne, the gross value turns out to be R58,000/ha.
A farmer’s out-of-pocket expenses are generally half of this gross revenue. One can now see that even with a 50% increase in the existing compensation of R9,000/ha, the farmer will not recover the out-of-pocket expenses incurred on various inputs. How he will survive the next 4-6 months is beyond imagination. No wonder, under desperation, many of them unfortunately take extreme steps.
Obviously, compassionate heart and slogans of Jai Jawan, Jai Kisan are not enough. We need better insurance policies that are rational and sustainable, more as business models. The current set of insurance policies under National Agriculture Insurance Scheme (NAIS), Modified NAIS, and Weather-based Insurance Scheme (WBIS) have failed miserably to protect our farmers. The compulsory deduction of premiums from loans of farmers who take institutional credit basically protects the banks from potential bad debts but not the farmers. The Modified NAIS and WBIS have very high premium rates, hovering around 10% of the sum insured, based on three years average data collected for kharif and rabi seasons. No wonder, as per NSSO’s Situation Assessment survey of farmers for FY13, less than 5% farmers (presumably beyond loanee farmers’ accounts) opted for crop insurance. With 95% farmers exposed to the vagaries of nature, insurance coverage have a long way to go.
Why are crop insurance premiums so high in India? One key reason is the small scale of coverage—less than 15 million hectares—in any typical crop season. A country where net sown area is around 140 million hectares and gross cropped area hovers between 190-200 million hectares, insuring only 15 million hectares or so is just peanuts! We need a major overhauling of our crop insurance system, and this is a good time to do so, converting a crisis into an opportunity to set a more robust and sustainable system in place. Before I suggest a method, it is good to have a quick glance at how the world is insuring their crops and farmers from the vagaries of nature. Maybe, we can learn something from international best practices.
The US and China are the world’s biggest crop insurers. In the US, the state supports almost 70% of premiums paid by the farmers and, in China, the state used to support 50-65% of the premium—this support has been raised to almost 80% in 2013. So, the first lesson for Indian policy-makers is that state will have to pitch in heavily here. Assuming that we have to have a minimum coverage of 100 million hectares, insurance experts tell us that premiums will fall to less than 5% of sum insured, and may stabilise around 2.5-3%. Even assuming that the premium falls from 10% to 5%, as the scale of insured area increases from, say, 15 million hectares to 100 million hectares, and that the sum insured is, say, R30,000/ha (R40,000/ha for irrigated crop and R20,000/ha for non-irrigated crop, with equal weights), the premium required will be R15,000 crore for 100 million hectares covered (or R1,500/ha). If the state is ready to bear say two-thirds of this, one-third can be charged to the farmer. On a per hectare basis, the share of farmer will be only R500/ha as premium for an insurance cover of R30,000/ha, and this is very much a workable business model. If the state governments are also taken on board under ‘cooperative federalism’, the share of Centre can be reduced to 50% (R750/ha) while that of the state government can be kept at 25% (R375/ha) and the farmer’s at 25% (R375/ha).
From where will the government get R10,000 crore to insure 100 million hectares? Former prime minister Atal Bihari Vajpayee, for the development of the national highways network and for rolling out the Pradhan Mantri Gram Sadak Yojana, put a 2% cess on fuel. A similar route can be taken for comprehensive farm insurance, by putting a 2% cess on the farm input industry (viz. tractors and farm machinery, fertilisers, pesticides, and even agri-credit) and a 3-5% export duty on exports of water-guzzling farm produce (e.g., rice, sugar, buffalo meat, etc).
Private sector insurance agencies can be invited to bid for the government’s share of insurance at the lowest premium and fastest settlement of claims at the block level, without any plot to plot assessment. Farmers’ accounts can be linked to mapping of their fields, and satellites can be used, to generate reports that agronomic experts can study to gauge the extent of damages.
If the Modi govt can do this, it will be the best Baisakhi gift to Indian farmers on April 13, and it can bring smiles back to their faces and give them insurance cover for the years to come.
The author is Infosys Chair Professor for Agriculture at ICRIER