The government’s ambitious crop insurance scheme, should it be cleared later today, will be a big move in curing India’s agriculture of its biggest problem—a policy-induced distortion that favours cultivation of wheat and rice above other crops. Farmers grow wheat and rice in preference to other crops not because these are the most lucrative or the most suitable to the agro-climatic conditions—indeed, overuse of water to grow wheat and rice has rendered large tracts of land in Punjab and Haryana unsuitable for cultivation—but because the overall risk is the least. In 4-5 states, where the Food Corporation of India (FCI) or state agencies procure grain, there is no price uncertainty for farmers; in the case of other crops where there is no government procurement, in contrast, the farmer faces both a crop risk as well as a price risk. Crop insurance takes crop-failure risk out of the farmers’ equation which makes it that much easier to move to other crops.
What makes the scheme attractive, going by some of the numbers doing the rounds, is that the government has worked with insurance companies to dramatically lower the premium that needs to be paid. While it would be advisable to wait for the finer details to be made public, a lower premium will encourage greater crop insurance—ideally, most of this should be paid by the central and state governments and, in any case, insuring 70% of India’s total farm area will cost around Rs 20,000 crore a year which is not large in comparison to the annual subsidy expenditure. Lowering the premium, while good, is not going to be the real clincher though—the speed at which the insurance claims are paid out is critical. If the government uses weather stations—covering the entire country will cost a mere Rs 350 crore—or drones, this can quickly give data on rainfall to the insurance company; claims that will no longer be based on assessment of damage to crop, but on quickly verifiable non-subjective rainfall data, can then be sent directly to the Jan Dhan bank accounts of farmers within 2-3 days of the rain failure.
What would dramatically change the farm equation is the government combining crop insurance with lowering FCI purchases—consumers could be given direct cash transfers instead of physical wheat/rice—and use the money saved to give farmers cash transfers based on the size of their holdings. Once FCI purchases of wheat/rice are reduced dramatically, the price-risk becomes equal across all crops—that means farmers will react to market signals. It is not clear whether the government has the guts to reduce FCI purchases since rich—and politically strong—farmers will protest, especially in states like Punjab which will go to polls soon. But crop insurance is a good first step towards the next green revolution.