Revamped insurance plan marks major farm reform
A revamped flagship crop insurance scheme unveiled last week by the Cabinet is the Modi government’s first real reform in the farm sector, with the Centre virtually exiting the scheme and handing the insurance market and states a deciding role, analysts say.
The Pradhan Mantri Fasal Bima Yojana (PMFBY), which became operational in 2016-17, has been hobbled by long delays in paying off claims, upsetting farmers.
To be sure, the scheme is crucial in a country where crops are vulnerable to drought, unseasonal rains and pest attacks. Nearly 54% of the net-sown area lacks irrigation and 12 million hectares, on average, suffer annual weather shocks.
A key change in the scheme is that farmers can now choose whether to buy crop insurance or not. Earlier, insurance was compulsory for any farmer with a crop loan.
This change is not just aimed at addressing a common gripe of farmers, but will also have a deeper impact on premium rates and how the scheme eventually fares, several analysts said, after reading the fine print.
Farmers’ share of premium remains unaltered: they continue to pay between 1% and 2% of the total premium. Earlier, the rest of the premium was shared between Centre and states equally.
The Centre has now restricted its share of subsidy to 30% of every ~100 of sum insured for crops in unirrigated areas and 25% for irrigated lands. A straight calculation shows that if the new premium for an insured crop area is 30%, the Centre will now pay 14% and the states pay equal share, since the farmers will pay 2%. For irrigated areas, the Centre will pay up to 11.5%.
But if the premiums are beyond 30%, the states’ burden of subsidy will rise because the Centre has now capped its share.
“It is a reform that is aimed to discipline states and ultimately, the scheme itself because state governments have to now take a major responsibility in implementing the scheme because they have to do everything,” said Rajeev Choudhary, the general manager of the Agriculture Insurance Company of India Ltd.
Since the scheme has been made optional for farmers, premium rates are likely to go up because only farmers who perceive their crops to be “high risk” will go for insurance, Choudhary said. The earlier scheme made for indiscriminate coverage and companies got a lot of business from low risk areas.
Now, the pool of clients will shrink and insurance companies will no longer have a ready platter of a large business, which included farmers who were forced to buy insurance.
This may not be a bad thing, said Amulya Ghosh, an industry expert, since there was a lot of adverse selection of farmers who didn’t really need insurance.
“Giving a deciding role to insurance players and state governments means they will now have to sort out the scheme. Someone will have to do the deep dive,” said a senior government official who asked not to be named.
States will not be allowed to implement the scheme in case they make a “considerable delay” in releasing their share of premium subsidy to Insurance companies. Cut-off dates for invoking this provision for kharif and rabi crops (monsoon and winter) will be 31st March and 30th September. According to the official, insurance companies often quoted very different rates for the same crop because states would not provide required data, such as crop failure rates.
The Centre has expanded its share of premium subsidy to 90% for north-eastern states from the existing sharing pattern of 50:50 between Centre and states to promote insurance in relatively uncovered region.
If the new experiment succeeds, it will spell a huge relief for the Modi government, which has often faced huge protests from farmers for unpaid dues and low crop prices, said Ghosh.