With just around 45% of the claims made by farmers over the last three crop seasons—data for the last rabi season is not available—paid by the insurance companies under the Pradhan Mantri Fasal Bima Yojana (PMFBY), it is fair to say the scheme hasn’t taken off; indeed, nine months after the last kharif season ended, just 5% of the claims made for crop losses in it have been paid (see graphic on the falling payout ratios). At this rate, it is difficult to see how this flagship scheme is going to progress and achieve the targets set—50% of the country’s gross cropped area is to be insured by 2018-19 from around 30% today, and while Madhya Pradesh is at roughly this level, Odisha and Uttar Pradesh are at just around 20%.
Though a central government initiative, the scheme really has to be rolled out by the state governments and, so far, not too many seem enthused or they simply don’t have the money to roll it out. Indeed, the reason for the very low payout of claims is that few state governments are paying their share of the premiums on time—and till they do, the central government doesn’t pay its share either. Till they get the premium, insurance companies simply sit on the claims.
In Kharif 2016, the total premium paid was Rs 14,400 crore, against which Rs 9,797 crore of claims were made and payouts of Rs 9,306 crore were made. That would suggest all premiums were paid, though it is not clear how much of a delay there was in this. Claims payouts, however, have fallen drastically since. The rabi season in 2016-17 saw payouts fall to a mere Rs 4,054 crore as compared to claims of Rs 6,900 crore, or a payout ratio of 59% as compared to 95% in Kharif 2016. Things got dramatically worse in Kharif 2017 when payouts were a mere Rs 733 crore, or 5% of the Rs 14,454 crore of claims made—if states have not paid their premiums, it is hardly surprising the insurance companies are not honouring claims.
Equally worrying is the high, and increasing, levels of claims. While the claims ratio—the value of the claims made to the premium charged—was a reasonable 68% in Kharif 2016, this shot up to 88% in Kharif 2017 and could go up even more since some claims are still to be processed. Once you take into account the margins insurance firms need to make, this means they are out of pocket in just the second year of the scheme itself and that too in a year which had a normal monsoon; in which case, claims ratios will skyrocket in drought years.
In most such cases where insurance firms are in the red, such as in group health insurance schemes, the solution lies in raising premium rates, but given how high agriculture premium rates are already, this may not be possible. Certainly higher coverage could help lower rates, but it is difficult to do that till farmers feel the scheme is delivering—they pay around a fifth of the premium , with the Centre and the state governments paying the rest. The government will also have to think of whether the current model of insurance is the best since premium levels are really high in several states. Use of drone and low-orbit satellites in place of traditional crop-cutting experiments could also lower payouts—and make them much faster—if they deliver more accurate results.
More important, however, if the government genuinely wants to push insurance as a way to protect the farmer, it has to re-imagine the current system of incentives. If a state government, say, has Rs100 to spend on agriculture, this can either be spent on subsidised electricity and water or insurance; similarly, if the central government is going to spend so much on fertiliser subsidies, can it afford agriculture insurance? In other words, the government—centre and states—have to relook their entire spending on agriculture and allocate money to the place where it is best used. If farmers are to be given MSP-based cash transfers for all their crops—as was proposed in the last budget—do we really need an inefficient FCI-based procurement system that adds to costs?
Similarly, the government needs to relook cropping incentives. If Maharashtra is going to be growing very water-intensive sugarcane when it has both a water shortage as well as poor levels of irrigation, surely insurance premiums are going to be high and crop failures more common? Indeed, with the wrong crops being grown in so many states, this is a big factor in insurance premiums being high. Addressing, and fixing, all these issues is not easy, but unless prime minister Modi is able to address the major ones, one of his big election planks will come to nought—that will be tragic given how little the government has done for agriculture since it came to power.