Crop insurance and the agrarian crisis in India
With one farmer committing suicide every half-an-hour, the number of farmers who have ended their lives as per official records in India is estimated at over 300,000 over the past two decades. These numbers do not include suicides by agricultural labourers, though they too are victims of the agrarian crisis. As each death affects at least the immediate family of the deceased, the number of persons in severe distress is very large. With over half the country dependent on agriculture for a livelihood, these suicides constitute a colossal agrarian crisis in India.
There are multiple reasons for the crisis: rising costs of inputs, non-availability of key resources such as water for irrigation, volatility in prices of produce, inadequate knowledge of modern methods of farming, changing and inimical policy regimes, and worsening terms of exchange.
The key reason for the crisis, however, lies in a fundamental characteristic of agriculture. It is an economic activity that requires a significant part of the costs to be incurred upfront, without certainty of outcome. The quantum and value of output are affected by factors largely out of the control of farmers, such as weather patterns, global supply-demand determined price situation, and exchange rates. Unlike any other economic activity, farming does not stabilize over time. Even after decades, a farmer is helplessly exposed to the same endemic risks every cycle.
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The proximate reason for farmer suicides is inability to pay back the loan taken at the beginning of the cycle if the crop fails. Crop insurance could mitigate the risk faced by farmers. As part of ongoing research, we examined the efficacy of crop insurance schemes propagated by the government over the last four decades. The analysis shows that crop insurance has failed to provide much-needed relief to farmers from destitution. The reasons for failure include: a) reluctance on the part of governments to allocate adequate funds for providing subsidy required to support cost of insurance—exacerbated by the problems that arise when the central and the state governments have to agree on a subsidy-sharing formula; b) delays in payment of compensation—arising from bureaucratic hurdles in assessment of damage and disbursal of compensation; and c) inadequacy of the compensation amount in the case of crop failure.
As a part of our ongoing research, we analysed nation-wide crop insurance data gathered by the National Institute of Securities Markets or NISM (through a survey conducted in 2014) and concluded the following: a) average awareness about crop insurance country was only 38.8%, and b) average usage of crop insurance was merely 6.7%. Awareness and usage varied widely across states. The low awareness, despite four decades of dissemination, indicates inadequate efforts by government to promote crop insurance. The low usage indicates that farmers either do not find crop insurance useful or are denied access to the insurance. Further, as crop insurance is a mandatory requirement for availing of crop loans, farmers are either not aware that their crops are insured, or loans from formal channels are not reaching the farmers. Formal channels have failed to carry out their mandate of providing adequate funding with due insurance cover to farmers.
Another reason for low coverage of crop insurance may be adverse selection. Insurance works best when a large pool of insured ensures that providers of insurance cover their costs through the realization of assumed probabilities for payment of claims. However, claims payout has exceeded the premiums collected by a wide margin at the aggregate level. This suggests adverse selection; crop insurance is being availed of only by farmers aware their crops are likely to fail. Disaggregated analysis based on the ratio of claims paid out to insurance premium collected revealed that farmers in certain states benefitted much more compared to farmers in the rest of the country.
Our results indicate that the insurance penetration is higher in states where the claims to premium ratio is very high. We did not find a significant relationship between awareness about crop insurance and claims-to-premium ratio across states.
The ongoing agitation by farming communities is perhaps the beginning of a fightback by the agrarian communities for equity in society. The mass support such agitations garner is an expression of the suppressed belief that agriculturists in particular and rural India in general are being short-changed by the rest of the country. Successive governments have paid only lip service to help those affected by the agrarian crisis.
In January 2016, the government announced a revamped crop insurance scheme, the Prime Minister’s Fasal Bima Yojana (PMFBY), with the objective of removing the debilities of extant insurance schemes. Analysis of the scheme shows that the past shortcomings of crop insurance schemes have not been addressed effectively—and unfortunately, farmers in India continue to “wait for Godot”. Unless an effective solution to the agrarian crisis is found through farmer education, use of technology, and equitable risk sharing, the social situation in the country may spiral out of control.
Sobhesh Kumar Agarwalla is a faculty member in the finance and accounting area at the Indian Institute of Management- Ahmedabad and Samir K. Barua is a former director and retired faculty member of IIM Ahmedabad.
This article presents the authors’ personal views and should not be construed to represent the institute’s position on the subject.