I Crop Insurance in India

The National Agricultural Insurance Scheme (NAIS) replaced CCIS from the rabi season of 1999-2000. The Agricultural Insurance Company (AIC) has overall responsibility to implement the scheme. There are three policy goals implied in the scheme: (a) social response – providing support to the poor farmers who stand to lose the most during severe crop failures;

(b) risk management – improving rural financial services’ ability to manage commercial risk, which is important for improving access to finance by the farmers; and (c) fiscal exposure – controlling the fiscal exposure of the government, in terms of the average exposure as well as the peak exposure during disaster years. The scheme is a mix of voluntary and compulsory participation. The voluntarism is at the state level in terms of specific crops and areas to be covered. It becomes compulsory in selected areas of the state for farmers growing designated crops and taking loans from rural financial institutions. In other words, in the notified areas, farmers who borrow from financial institutions have to take insurance compulsorily.1

The objectives of the crop insurance schemes implemented in the country since 1985, have been (a) to provide insurance coverage and financial support to the farmers, in the event of failure of any of the notified crops as a result of natural calamities, pests and diseases; (b) to encourage farmers to adopt progressive farming practices, high value inputs and higher technology in agriculture; and (c) to help stabilise farm incomes, particularly in disaster years. Against this background, this paper comprehensively reviews the NAIS and suggests changes to make it more effective. The paper presents the result of detailed analysis of secondary data. Exhaustive data for 11 crop seasons since rabi 1999-2000 till rabi 2004-05 were provided by the AIC. Field investigations were also conducted in five major states, viz, Haryana, Rajasthan, Andhra Pradesh, Madhya Pradesh and Gujarat to assess response of farmers, bankers and other stakeholders such as government functionaries. Besides, field investigations, the authors also relied on discussions with knowledgeable persons like government functionaries from agriculture department, bankers, academicians and farmers representatives in Nagpur, Jaipur and Hyderabad.

II Market Penetration and Coverage

One of the objectives was to assess the coverage of farmers under NAIS and to assess the scope and define the strategy for fuller coverage in the coming years. This section gives a factual background on the coverage of farms in different seasons, their

Note: Figures in parentheses are number of participating states. Source: AIC.

Table 2: Small/Marginal Farmers Covered across Seasons

(No in Lakh)

break up in the categories of small and large farmers, crop are a insured – total as well as crop-wise – and share of different states.

Comprehensive crop insurance in India started in 1985 under CCIS and NAIS came into existence in rabi 1999-2000. Under CCIS, a total of 763 lakh farmers were covered between kharif 1985 and kharif 1999, while till rabi 2004-05, a total of 624.38 lakh farmers have been provided insurance cover during the 11 seasons of NAIS. Of the total number of the farmers covered, 79.51 per cent were loanee farmers (i e, those who have taken a loan from commercial or a cooperative bank) and the rest non-loanee farmers. In the case of loanee farmers, after the abrupt increase in rabi 2000-01, the coverage in terms of farmers insured had averaged around 19 lakh for three subsequent rabi seasons. However, during the next two rabi seasons (2003-04 and 2004-05), there was a significant improvement in coverage. While in case of non-loanee farmers, the coverage has widely fluctuated. The coverage in the kharif season has been far larger than in the rabi season. In five kharif seasons, since kharif 2000, a total of 475.31 lakh farmers have been covered, as against 149.07 lakh farmers in the rabi season (Table 1). The trend in kharif coverage appears to be linked to expansion of participating states, crops notified, extent of drought, and non-loanee farmers’ decision to participate in the scheme selectively, i e, after being certain of crop failure.

Since the inception of NAIS in rabi 1999-2000, till rabi of 2004-05, a total of 407.51 lakh small (including marginal) farmers2 were covered. A large proportion of these farmers –

90.50 per cent – were loanee farmers and the remaining were non-loanee farmers. A total of 97.14 lakh small farmers were covered during six rabi seasons since 1999-2000 (Table 2). Of these, 88.15 per cent were loanee farmers and the rest were nonloanee farmers. There is wide fluctuation in coverage of nonloanee small farmers over the various rabi seasons. In case of loanee small farmers, the changes are less volatile and smaller. During five kharif seasons, a total of 310.37 lakh small farmers were covered. A vast majority of them (91.24 per cent) were loanee farmers. The coverage of loanee small farmers has fluctuated, but peaked in kharif 2004 at 71.76 lakh. Non-loanee small farmers’ coverage fluctuated widely.

In case of large (including medium) farmers, a total of 216.76 lakhs were covered during 11 seasons since rabi 1999-2000. Of these 81.44 per cent were loanee farmers while the rest were non-loanee farmers. (Table3). A significant improvement in coverage of non-loanee large farmers is observed since 1999-2000 rabi.

Data shows that only 34.78 per cent of farmers insured during rabi seasons are large farmers and 65.22 per cent are small farmers. Five kharif seasons, since 2000, saw coverage of 1.65 crore large farmers (Table 3). Majority (87.08 per cent) of these were loanee farmers. There is a declining trend in coverage of loanee farmers since kharif 2000. Data shows that only 34.70 per cent of farmers insured during kharif seasons are large farmers and 65.30 per cent, are small farmers. The percentage coverage of small farmers among loanee farmers is 66.35 per cent, while among non-loanee farmers it is 56.06 per cent. Thus, small farmers require added support during kharif seasons due to higher vulnerability. This implies that if small farmers are adequately covered by credit by financial institutions, coverage could increase significantly under the NAIS.

In the first year of NAIS only nine states were implementing the scheme. Now a majority of the states/union territories are participating in the scheme. As regards the coverage of farmers, of the 624.38 lakh farmers covered during 11 seasons since rabi 1999-2000, 83.54 per cent are from Maharashtra, Andhra Pradesh, Madhya Pradesh, Gujarat, Uttar Pradesh, Orissa and Karnataka in order of importance (Table 4). In terms of area, the concentration of insured area (90.79 per cent) is in Madhya Pradesh, Andhra Pradesh, Maharashtra, Gujarat, Uttar Pradesh, Karnataka, Chhattisgarh and Orissa in order of importance. The coverage of farmers during rabi is concentrated in Uttar Pradesh, Madhya Pradesh, Maharashtra, West Bengal and Karnataka (74.39 per cent of all farmers covered and 88.95 per cent if we include Orissa and Andhra Pradesh). Rest of the country had hardly been covered. There is hardly any state where there is a continuous increase in coverage of farmers. There are sudden jumps and sudden falls during different years. Madhya Pradesh and Uttar Pradesh present a relatively more consistent picture of coverage.

In order to have a clearer picture of penetration by NAIS in each season, we relate the number of holdings (farmers) covered to total number of holdings. It is seen that in rabi 1999-2000 only

0.50 per cent of all holdings were covered by NAIS (Table 5). This proportion has been slowly going up since then and touched

3.81 per cent in the rabi 2003-04, but fell to 3.06 per cent in the rabi 2004-05. To arrive at these numbers we have taken the

Table 3: Medium/Large Farmers Covered across States

(No in Lakh)

Table 4: Coverage of Farmers and Area under 11 Seasons of National Agricultural Insurance Scheme since Rabi 1999-2000

yet only a very small proportion of the farmers have been covered by the scheme. A larger number of farmers are covered in the kharif season compared to the coverage in the rabi season. The bulk of the farmers covered are those linked to the banks as borrowers, i e, loanee farmers. Though there is no systematic trend, the share of non-loanee farmers is more in the rabi season compared to their share in kharif. The coverage of small farmers is primarily influenced by the compulsory nature of the scheme as far as the loanee farmers are concerned. Small farmers are still reluctant to get insurance coverage on their own. A larger number of small farmers, both loanees and non-loanees are covered if the preceding kharif season happens to have been poor. As far as the large farmers are concerned, the compulsory nature of the NAIS seems to have greater impact during kharif and a weaker impact during rabi. Crop insurance in our country has just touched the fringe of the total number of the farmers. The pattern of greater penetration in the kharif compared to rabi has not changed. No state suggests a steady increase in the number of farmers opting for crop insurance. Food crops are the main crops for which the farmers are keen to take insurance. Potatoes have emerged as an important commercial crop from the point of view of crop insurance.

III Premia and Claims

According to present practice the sum insured for loanee farmers must be at least equal to the amount of the crop loan. They are, however, allowed to select additional coverage up to 150 per cent of the average threshold yield. Non-loanee farmers can insure values at 150 per cent of the value of the threshold yield times the plantings. For all the 11 seasons taken together the sum insured under NAIS amounted to Rs 57,238.58 crore (Table 6). The share of food crops in the sum insured is high and rising.

Among the loanee farmers, the share of small/marginal farmers is higher in ‘sali’ paddy, groundnut, maize, ragi and potato during the rabi seasons, and in paddy, ragi, sugar cane, banana, cotton, chilli, turmeric and potato during the kharif seasons. In most other crops, large farmers have a higher share in the sum insured.

Premium collected in 11 seasons taken together amounted to Rs 1,777.83 crore. There is improvement in overall growth rate in premium collection in recent years though the season-wise experience differs. A total of Rs 241.75 crore were collected as premium in six rabi seasons, while during five kharif seasons the collection was Rs 1,536.09 crore (Table 7).

As only a few crops are getting insured, premium collection is also from a small number of crops. In rabi 2004-05, the share of food crops was 74.33 per cent of all premium collected. Wheat and paddy are two major rabi crops contributing the largest share in premium collection. The importance of different crops has varied over a period of time (Table 8). The figures suggest that though a large number of crops are being covered by NAIS, the farmers get only a few crops insured.

Premium collection in a state naturally depends on crops; we have also seen that the sum insured is higher in the kharif season. The latter was due to the fact that initially the NAIS covered states, which had relatively smaller proportion of area under rabi.

To the extent premium rates are below actuarial levels, there is an implicit subsidy. Apparently this subsidy is quite large. In an attempt to make rates actuarially sound and yet protect the small farmers, the latter have been made eligible for a 50 per cent premium subsidy. At present the state/UT government and the government of India equally share the subsidy. The premium subsidy was to be phased out in five years with premium rates progressively moving towards actuarial rates. The estimated amount of explicit subsidy over the seasons is as in Table 9.

small/marginal and large farmers but also higher compared to loanee farmers (Table 10).

Loss-Cost Ratio

The loss-cost ratio4 at the aggregate level has been fairly high. The sum of claims for 11 seasons since rabi 1999-2000 turns out to Rs 57,238.58 crore when the claims paid amounted to Rs 5,690.42 crore. This gives a ratio of 9.94. At the state level, the loss-cost ratio ranges between a low of 0.92 in Haryana and a high of 27.87 in Bihar. There are seven states with a loss-cost ratio of 10 per cent or more. At the state level, nine out of 23 states had a loss-cost ratio of below 2 per cent and another three states had a ratio of 2 to 4 per cent (9 seasons since rabi 1999-2000). A few states, such as Gujarat, Himachal Pradesh, Karnataka, Orissa, Chhattisgarh and Tamil Nadu account for high ratio (Table 11). When two more seasons are added, more than half the states have a loss-cost ratio of more than 4 per cent. One-third of the states have a loss-cost ratio of below two. Evidently, the highest loss-cost ratio was reached during kharif 2002 and the least during rabi 1999-2000 in food crops. Generally, the loss-crop ratio in food crops has been higher than annual crops (Table 12).

We can say that the sum insured during kharif is higher than that during rabi season and the share of sum insured for food crops is high and over the years it is improving. With the exception of a few crops such as potato, and occasionally sugarcane and cotton, small farmers largely insure their food crops. The premium collection has increased over the years due to increased penetration especially among non-loanee farmers. As more food crops are covered, premium collected is higher in case of food crops/oilseeds across seasons. However, the importance of different crops is changing over the period. Generally, the states, which are more vulnerable during kharif (due to rainfall failure) go for insurance to a larger extent. There are, however, a few outliers – Orissa and Uttar Pradesh (in rabi) and Gujarat and Karnataka (in kharif). Small farmers’ share in premium paid is higher in the case of food crops both in kharif and rabi. The large farmers have a higher premium share in case of annual crops compared to food crops. Both for the small farmers and large farmers wheat is emerging as an important insured crop.

Per farmer premium subsidy was not much (Rs 35) and bulk of it was accounted by the loanee farmers. There is concentration of claims payment. The top six states collected 85.4 per cent of all claims. Failure of food crops accounted for a major share of claims paid. Though the overall share of claims was higher in Gujarat, because of the importance of a vulnerable crop such as groundnut, the distribution of claims among the states varied seasonally. Overall, the claim-premium ratio for small farmer is less than half of the large farmers. The claim-premium ratio is higher for non-loanee farmers in rabi as well as kharif seasons than the loanee farmers. Overall, high loss-cost ratio is influenced by a few states. With the exception of rabi 1999-2000 and kharif 2001, in all other seasons the loss-cost ratio in case of food crops has been higher. With the exception of one or two seasons, small/ marginal loanee farmers have a lower loss-cost ratio compared to large farmers in case of both food crops and annual crops. In the case of non-loanee farmers also the same holds true. With the present arrangements the AIC should be prepared to contribute approximately 20 per cent of the loss cost.

IV Issues and Approaches

Compulsory versus Voluntary Nature of the Scheme

It is a maxim in insurance that the “risk spread is risk minimised”. On this principle, there is a clear need to extend the scope of NAIS rather than curtail it. At the same time the financial considerations cannot be overlooked. A huge amount of subsidy make the scheme unsustainable in the long run. Our study of the loss-ratio farm category-wise and crop-wise has shown that there is a scope to be discriminating in this regard. As far as the small farmers are concerned there is a strong case of retaining its compulsory character, as they do not have the capacity to withstand risk and, at the same time, hardly enjoy any other risk-mitigating device. To cover all small farmers is, however,administratively an uphill task. But this is not so when it comes to the loanee farmers. As the rural credit policy lays high emphasis on covering small farmers by rural financial institutions (RFIs), the two policies can be made to synergise. Also, on the ground of national food self-sufficiency – a strategy which we cannot abandon at this stage of our development

– there is a case for keeping all foodgrains in the ambit of crop insurance. As the largest area of the small farmers is devoted to foodgrains production, the insurance cover for these crops will also serve the objective of supporting small farmers more effectively. The burden of evidence and logic suggest that NAIS should be made compulsory for all loanee small farmers, and all loanee farmers, large or small, growing foodgrains. As more and more small farmers will be covered by RFIs, one should expect that all small farmers will enjoy insurance cover for their food crops, and every food crop grower will have an insurance cover.

Prioritising Areas of Extension

There is a strong case for extending NAIS to all parts of the country. This objective is by and large fulfilled, as apart from Punjab no major state has remained uncovered. But as far as the crops are concerned there is a long way to go. There is at the same time need for a clearer strategy of extension to crops than evidenced now. NAIS has been moving into new crops very rapidly. However, it is not clear how much data, especially on yield are available for these new crops. In all probability the data on yields for some of these crops are limited to a few years and may not be very reliable. Not all crops are subjected to crop cutting experiments. As a consequence chances of mistakes in rating are multiplied which create difficult actuarial problems. These could be serious issues, especially if AIC is going for re-insurance. Given the resources available to NAIS, the immediate need is to consolidate the coverage of the existing crops under its cover rather than increase the number of crops. It is suggested that in the first instance all farmers growing paddy, wheat and other cereals may be fully covered. The next priority may be accorded to oilseeds, especially groundnut, mustard and sunflower. The third priority should be given to other crops such as cotton, onion, sugar cane and potatoes. While food crops should be given first priority in every region, the second and third priority may change depending on the region’s agriculture. For high value crops such as plantation crops special insurance products need to be designed.

Problem of Moral Hazards

As we have observed earlier, many farmers, especially nonloanee farmers do not buy insurance cover till they are sure that the weather is adverse and that there will be serious crop loss. NAIS does have sales closing dates for two principal agricultural seasons, for kharif (April-September) and rabi (October-March). At present closing dates for submitting insurance declarations and premium payments for the non-loanee farmers are July 31 for kharif season and December 31 for the rabi season. The loanees farmers are covered before the end of 30 days following the months in which the loan is received. There are two serious problems with the present practice. As NAIS is optional for nonloanee farmers, chance of them getting adversely selected increases. They can possess more knowledge based on how the crop growth is advancing before deciding whether to go for crop insurance or not. It is suggested that the policy sales closing be set at between four and six weeks prior to planting. Secondly, sales closing dates need to fit the planting pattern in the specific regions as it varies widely across the country, even within the states. For example, in Rajasthan kharif sowing is far behind sowing in Kerala. It is important that each state should have a separate calendar.

Premium Fixation

Premium rates for kharif season food and oilseed crops are as follows: 3.5 per cent of the value of output at threshold level for rice, 2.5 per cent for bajra and oilseeds and other food crops. Premium rates for rabi season crops are 1.5 per cent for wheat and 2 per cent for other food crops and oilseeds, or actuarial rate, whichever is less. The premium rates for annual and horticultural crops are based on actuarial rates. There is a large element of subsidy with the prevailing premium rates. Therefore it is suggested in some quarters that in order to make NAIS financially viable actuarial rates should be charged. The earlier discussion has shown that the time is not yet ripe to charge actuarial rates from all sections for all crops. Given the present level of coverage an indiscriminate movement towards actuarial rates will take away the protection accorded to the small farmers for their major crops. As it is, even with subsidised premium only a fraction of the small farmers have opted, voluntarily, for crop insurance. There is no denying the fact that eventually actuarial rates will have to be applied to most of the crops. However, a beginning can be made to charge such rates for non-food crops, while exempting food crops for the time being. The other debatable issue is the uniformity of premium rate for a given crop all over the country. As a matter of fact, uncertainty and vulnerability varies from state to state, in fact within the state. There is a case for a risk weighted variable premium rate, especially for high value crops, e g, horticultural crops.

Determining Threshold Yield

As was discussed earlier, the NAIS is obligatory for loanee farmers for notified crops in notified areas up to the full loan amount. Additional coverage is available up to the value of threshold yield at normal premium rates, and from value of

Economic and Political Weekly November 4, 2006

At the same time, that the states are not represented on the board of the AIC is an anomalous fact. Several agencies including NABARD have made arrangements for the representation of the states on their boards on rotational basis. AlC should also follow these examples.

The commercial and the cooperative banks have a seminal role in the implementation of NAIS. First in canvassing the business of crop insurance, especially for the loanee farmers and then distributing the amount of indemnities to the affected farmers. Our discussion with bankers and other concerned parties suggested a lack of enthusiasm on the part of the banks to conduct this business although they are paid a token service charge. This is untenable, because the banks are the direct beneficiaries of crop insurance as the sum advanced by them is recouped even in the time of crop failure with the amount received by the growers as compensation. Indemnity payments are finally credited to the farmer’s loan or bank account. There is a need for greater involvement of the banks. The fact that some private banks on their own are entering the field of crop insurance, in one or the other variant, suggests that this business is not alien to them. AIC and the concerned banks should arrive at some arrangement which ensures greater stake of the banks in crop insurance. NABARD and GIC are among the sponsors of AIC. They should take a more proactive role in meeting the targets of larger coverage and smoother functioning of the scheme. Their representatives on AIC Board should act as two-way conduit between their parent organisations and AIC.

Role and Responsibilities of AIC

Within a short period of its existence AIC has performed creditably in this difficult area. It has also shown dynamism in experimenting with new methods and new approaches. However, several improvements are needed both at the organisational and at the functioning level. We understand that a study on the organisational and structural aspects of AIC is already afoot. Nevertheless we will like to comment on a critical area of organisation, i e, on the need for, and forms of decentralisation.

The earlier discussion has highlighted two important facts in this respect. One, the need for proper coordination with all stakeholders at the states level. Without involving states in a more active mode, an important activity such as crop insurance cannot be carried out effectively. Apart from the representation of the states at the board level, there is a need for an active state level advisory body, comprising state government representatives, agricultural experts and representative of the lead bank of the state together with representatives of AIC. To start with such advisory bodies may be constituted zone-wise with constituent states and their lead banks being represented on a rotational basis. An equally important step would be to have AIC’s presence at the district level. Following the model of NABARD’s district managers, a one-man office of AIC manager can be established. The persons recruited for this position should be carefully selected and properly trained. They will have an important coordinating role at the district level and will also act as the “ears and eyes” of AIC, lest it loses touch of the ground reality. We understand that the board of AIC is contemplating such a move. Our study lends support to this idea.

A related question is “outsourcing”. It is important to move in this direction if the coverage has to be extended and costs have to controlled. Unit for such out sourcing should be a district. There are several organisations functioning at the district level which may qualify to undertake the “agency” function for AIC. There could be Krishi Vigyan Kendra, an agri clinic, a vibrant NGO or a private sector enterprise. Following LIC’s example, AIC should also think in terms of involving private sector banks in the business of crop insurance, the role, which currently is assigned to only public sector and cooperative banks. AIC should be more catholic in the selection of the agent and should not follow a rigid model. The arrangement with these agencies should be flexible and subject to periodic review. For effective implementation of the scheme involvement of stakeholders at various level, monitoring of the activities at the district level and outsourcing to creditable organisation emerge as imperatives.

For millions of Indian farmers the NAIS is vital for providing insurance cover to farmers, across regions, across seasons and across crops. Based on our study, we have offered a few suggestions to improve the efficacy of the scheme.

EPW

Email: surjit@idsj.org

Notes

[This paper is part of the larger study conducted at the behest of the Agriculture Insurance Company of India. The authors had the benefit of detailed discussions with the chairman of AIC, his colleagues on the Board and the staff of AIC on more than one occasion.]

1 The underlying assumption is that systems that improve risk management and help stabilise farm incomes will improve access to rural financial services. It would imply encouragement to savings, borrowing and insurance. Under NAIS, state government gives consent for implementation of schemes; notifies the crops and areas; and generates actual yield data through cropcutting experiments at harvest time. Generally, there are 24 crop-cutting experiments at the district level, 16 at the tehsil level, 10 at the mandal and at the gram panchayat levels. The loan granting banks are responsible for issuing coverage; collecting premium and disbursing claims. AIC works through an identified nodal bank branch. All programmes are based on area approach. Almost all-major states, with the notable exception of Punjab, are implementing the scheme. The scheme covers broadly three groups of crops, viz, food crops, oilseeds and annual commercial/horticultural crops (e g, sugar cane, cotton, potato, onion, chilly, turmeric, ginger, jute, tapioca, banana and pineapple). Major crops grown in the country are largely covered (for details see, Vyas and Singh 2005).

2 Definition of the small and marginal farmers is the same as used in Agricultural Census. 3 NSSO, Some Aspects of Farming based on the Situation Assessment Survey of Farmers, December 2003 for the agricultural year 2002-03. 4 Loss cost ratio is claims as per cent of sum insured.

References

Chakravarti, S (1920): Agricultural Insurance: A Practical Scheme Suited to Indian Conditions, Government Press, Bangalore (as cited in P K Misra, 1995, ‘Is Rainfall Insurance a New Idea? Pioneering Work Revisited’, Economic and Political Weekly, June 24).

Dandekar, V M (1976): ‘Crop Insurance in India’, Economic and Political Weekly, June 26. Hardaker, J B, R B M Huirne and J R Anderson (1997): Coping With Risk in Agriculture, CAB International, New York.

Vyas, V S and Surjit Singh (2005): Agricultural Crop Insurance: Performance and Needed Reforms, a report submitted to Agriculture Insurance Company of India.

Economic and Political Weekly November 4, 2006