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According to the Economic Survey 2018, long-term weather patterns indicate that climate change could reduce annual agricultural incomes in the range of 15% to 18% on average and up to 20% to 25% for unirrigated areas in India. Finance Minister Arun Jaitley proposed to hike the farm credit target by Rs. 1 lakh crore to a record Rs.11 lakh crore in the Budget 2018-19 to improve credit flow in the agricultural sector. In 2017-18, the government had kept a credit target of Rs.10 lakh crore.

The present Budget also suggests a suitable mechanism to enable access of lessee cultivators to credit without compromising the rights of land owners. Announcing a major step to help small and marginal farmers in the fisheries and the animal husbandry sector, Jaitley extended the facility of Kisan Credit Cards (KCC) to the sectors.

Despite such advances, the government needs to focus more on existing relief and compensation mechanisms to deal with crop losses in India. Several studies have shown that existing the relief and compensation mechanism for farmers against crop loss is chaotic, politicised, and has failed to bring timely and adequate help to the affected farmers. The expectations from the recently launched flagship crop insurance scheme are therefore quite high.

Crop insurance schemes are considered a failure in India due to adverse selection risks and the problem of execution. India has two main crop insurance schemes, namely, the Pradhan Mantri Fasal Bima Yojana (PMFBY) and the Revised Weather-Based Insurance Coverage Scheme (RWBICS).

According to Nibu Pullamvilavil, an alumnus of the Indian School of Business (ISB), PMFBY is a yield based insurance that uses crop-cutting experiments (CCEs) to determine the yield lost by farmers due to natural catastrophes and adverse weather conditions. The yield obtained through the CCE determines the pay-out made by the insurance firm to the farmer. The new scheme looks to improve on the existing schemes by removing caps on the premiums and by using modern technology. However, there are several problems that exist with the PMFBY such as the delay in crop cutting experiments and its associated high costs, delayed/non-payment of insurance claims to farmers and lack of transparency. As a result, farmers lose interest in the crop insurance schemes.

PMFBY came into operation from April 2016. During the 2016 Kharif season, gross premium collected was Rs. 16476.06 crore, total claims were `9582.33 crore, and the number of farmers benefitted was 99, 13,133. During Rabi 2016-17, gross premium collection was Rs. 5527.69 crore, total claims was Rs. 3709.72 crore and number of benefitted farmers were 16, 93,156.

The Centre made provision of Rs. 5,500 crore for PMFBY for 2016–17. Further, it planned to bring 40% of agricultural area under PMFBY in 2017–18 and, accordingly, a provision of Rs. 9,000.75 crore was made in Budget 2017–18. Later on, an additional allocation of Rs. 1,701 crore was made through supplementary demands, taking the total allocation to Rs.10,701 crore, as per the news reports.

Another problem that faces crop insurance schemes in India is coverage. The PMFBY scheme reveals that overall area insured has decreased over the last two years (from 53.7 million hectare in 2015-16 and 57.2 million hectare in 2016-17 to 47.5 million hectare in 2017-18). This is less than 24% of the gross cropped area (against a target of 40%) as compared to 89% in the US and 69% in China.

A promising insurance product that mitigates the risks associated with yield-based crop insurance is weather-indexed insurance. It is a financial instrument consisting of contingent claims contracts held by farmers. The pay-outs are determined by a combination of objective weather parameters (rainfall, temperature etc.) that are highly correlated to crop yields and are automatically triggered once the weather parameters reach a pre-specified level. This results in timely pay-outs for the farmers and low administrative costs as there is no need for field-level damage assessment. As the weather index is publicly available and transparent, it allows the insurance companies to transfer a part of their risk to international markets.

However, for weather-indexed insurance to be viable, it is necessary to mitigate basis risk. Basis risk is the possibility that the insurance may not pay out even though the customer has experienced a loss or the insurance pays out even though no loss occurs. In order to address basis risk, it is pertinent to increase the density of automatic weather stations (AWS) and rainfall data loggers in India. At present, there are only 706 AWS installed by the government across the country.

Problems with crop insurance policy in India

A CAG report titled “Report of the Comptroller and Auditor General of India on Performance Audit of Agriculture Crop Insurance Schemes - Union Government (Civil), Ministry of Agriculture and Farmers’ Welfare, Report No. 7 of 2017, (Performance Audit)” released in July 2017 had raised serious concerns on the way crop insurance schemes are being implemented in India. The report says that despite provision of large amount of funds under the schemes by government to private insurance companies, there was no provision for audit by the Comptroller and Auditor General of India. Sources on the condition of anonymity, say that private companies are not properly monitored and premium subsidy is released to them simply on the basis of affidavits provided by these companies without checking actual situation on the ground.

The report also raised serious questions on whether insurance claims actually reach beneficiary farmers or not. It says that since implementing agencies did not ensure submission of utilisation certificates by bank/financial institutions, even the minimum assurance that claims had been distributed to beneficiary farmers is lacking. The report noted that agriculture insurance companies failed to exercise due diligence in verification of claims by private insurance companies before releasing funds. CAG found various issues like delays in issue of notifications, receipt of declaration from bank within cut-off dates, delays in receipt of yield data from state governments, delay in processing of claims by implementing agencies and irregularities in disbursement of claims by banks to farmers’ accounts.