By Devaprakash Ramakrishnan
Devaprakash Ramakrishnan is a Development Specialist with a deep interest in Development Finance. After a decade of work as a development banker, he served in advisory capacity to the Government for a major women empowerment program.
Indias farm distress could not derive even a part of succour from the much-revamped crop insurance, partly standing as mute witness to the bloody trail of unfortunate farmer suicides. While every half an hour, a farmer ends his lifewith the National Bureau of Crime Records registering 30,000 unnatural deaths since 1985one of the underlying causes for agrarian agony is failing agriculture, apart from perpetual drought, poor returns and a vicious debt-trap.
National Sample Survey Office (NSSO), 2013 reported that 52% of agricultural households are in debt with 40% of households taking loans from non-institutional sources. With very little evidence of Indian farmers changing practices to adapt to climate change, University of California, Berkeley found 59,300 farm suicides over the past 30 years, attributing to increased warming. An increase of just 1 Celsius on an average day during the growing season was associated with 67 more suicides. Climate conundrum emerges as one of the biggest threats to headwind smaller gains of farm prosperity.
Riddled with problems since its inception
Crop insurance, since its advent in 1972, seen as a forced commodity laced with formal crop loans, riddled with design woes and clogged with inefficiencies, is struggling to scale. With the coverage ratio of 23% in 2016 and 26% for 2017 so far, crop insurance bears pangs of adverse selection, delayed and inadequate claims, heavy largess and faulty claim process ignoring individual losses. It is neglected in agriculturally prosperous states like Punjab, Sikkim, Manipur and Nagaland.
It sucks off overall subsidy of Rs 28,386.91 crores as of 31st December 2016, according to the Agricultural Ministry. With data revealing crop loss being high when crops are insured than when not insured, Andhra Pradesh, Gujarat and Rajasthan lead the pack as claim guzzlers.
Indias uninsured losses were at 84%, as against the global uninsured loss of 60%, dangling with a huge protection gap from disasters borne out of 25 catastrophic events in 2015, according to Swiss Re. Food and Agriculture Organization (FAO) quantifies 22% of the damages caused by natural hazards accounted for by agriculture sector. Agriculture absorbs 84% during the drought with crops bearing the major brunt of 42% of losses, exposing the vulnerability of crop-based enterprise.
Funding Universal Crop Insurance (UCI)
Taxing large farmers through an incremental graded approach is gaining ground as big farmers continue to pocket benefits from ill-advised loan waivers, interest subvention and input subsidies meant for deserving farmers, due to errors of inclusion and exclusion. Taxing farm income above the threshold will give the advantage to mop up considerable revenue from the 13.94% percent share of agriculture in 2013-14 GDP of the economys $ 2.2 trillion GDP. Bringing the top 4.1% of total agricultural households (farmers having over 4 hectares as per National Sample Survey, 70th round) at an average tax of 30%, can potentially yield over Rs 25,000 crore as agricultural income tax.
Annual credit and insurance subsidies added with agricultural income tax swell to over Rs 55,000 crores which are adequate to make Universal Crop Insurance (UCI) scheme up and running. This will complement efforts towards funding the expanded coverage as crop insurance is low ticket high volume business entailing high transaction cost with poor incentives for providers.
Some key recommendations
It is worthwhile to refresh the recommendations of the Deepak Mohanty Committee’s mid-term path on financial inclusion. It suggests doing away with interest subvention to originate mandatory UCI, with a graded approach by weaning away subsidy to large farmers repositioning the blotched agriculture risk management framework, with case groundswell for a public policy on UCI.
Key design and scaling considerations include:
- Distribution channels like input suppliers, agribusinesses, Micro-Finance Institutions, community federations and Non-Government Organizations should be easily accessible to farmers with commitment from providers to invest in intermediation and literacy skills
- The huge tract of the informal population presents challenges on taxation and premium collection to cover up the operational cost. Aadhar-enabled enrollment linking to mobile-based platforms enabling sign-ups through bank accounts; claims will be paid through mobile phones at the end of the season instantly.
- Standardising design into single-coverage program to simplify product specifications in the beginning and expanding over time gradually towards saturation by covering subsequent layers of risk profile
- Data and profit sharing protocols with providers will drive the joint review and evaluation process of claims and after-sale services for enabling mid-course corrections
- Lottery system to be adopted to allocate companies to geographies and providers should be ready to serve the entire geography with commitment for cent percent coverage through sign-ups and derive value through cross-subsidization.
- While identified small and marginal farmers will be covered through Universal Crop Insurance (UCI), the rest of the farmers will be saturated through commercial insurance; both premium and claims for UCI will come from Government whereas for large farmers it will be a market-led approach through cost recovery principles
Differential risk pricing business model
In order to scale the distraught agricultural insurance, it requires a two-pronged approach through differential pricing mechanism to adequately cross-subsidize and cover costs. Tying farmers with end markets and linking premium to produce-harvested can revive the stagnant crop insurance.
The private insurance market is coming good in dealing with non-systemic risk and large farmers, as commercial insurance may not work for family farms exposed to systemic risk demanding a different risk modelling. A shift from public-funded to market-based agricultural insurance, linking farmer sale-receipts to premium collection through forward-contract arrangements for large farmers and enlarging the current format of selective index-based insurance to a mandatory UCI alone can save the family farms by making them viable and sustainable, reassuring food security to 117 million family farms vulnerable to food insecurity and climate flippancy.
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