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Indian Institute of Management, Ahmedabad, Working Paper No. 2010-06-01, June Gurdev Singh (2010)

Based on a historical and largely qualitative assessment of crop insurance programmes in India, the paper evaluates the relative advantages and disadvantages of existing crop-insurance practices in Indian agriculture.

Risks are an integral part of agricultural production. Farmers are usually exposed to risks in every agricultural season, which can be generated by weather events like droughts or rainfall-variability, natural disasters like floods or fire, biological events like pest attacks or plant diseases and market events involving high price volatility. Historically, farmers have adopted varied response to such risks by sharing them through tenancy arrangements or reducing them by greater diversification of their cultivation enterprises. In this context, crop insurance serves as an important tool which protects farmers against risks arising from anticipated but uncertain events.

Crop Insurance is a technique where losses suffered by few farmers are met from funds accumulated through small contributions made by many who are exposed to similar risk. Insurance policy has been an important component of agricultural policy in both developed and developing countries, though the organization of agriculture greatly varies across them. Individual-based Approach and Homogeneous Area Approach are the two major ways to design crop insurance schemes, the choice of approach depending on the suitability to the specific organization of agriculture prevalent in a particularly region or country. Due to the higher costs of supervision and related problems of moral hazards, in developing countries (including in India) with large number of small-scale farms, it is usually the Homogeneous Area Approach that is adopted.

Singh delves into the issue of appropriateness and viability of different crop insurance schemes that have evolved in India after independence. He examines the historical development of crop insurance in India and the early debates over the required approach. Examining in a qualitative manner two major crop insurance schemes that were relatively more successful, the National Agricultural Insurance Scheme (NAIS) and Weather Based Crop Insurance Scheme (WBCIS), he assesses the positives and deficiencies of existing crop-insurance practices in Indian agriculture.

Immediately after independence, there was no agreement on the approach that should be adopted for providing insurance to farmers in India. While the Central government recommended a Homogeneous Area Approach, the state governments favoured Individual Approaches, where each farm household would be the basic unit of the insurance scheme. Early programmes based on the Individual approaches were not very successful in terms of either coverage or viability. A crop insurance scheme for H-4 cotton in Gujarat introduced by the General Insurance Corporation, later extended to other crops and states, was one such example. The scheme ran for around six years in the 1970s but covered only 3110 farmers. It was also not a viable scheme given that claims (INR 3.79 million) were many times the premium (INR 0.45 million) collected.

The Pilot Crop Insurance Scheme (PCIS) operational between 1979 and 1984, based on the ‘Area Approach’, was more effective, covering 627000 farmers in 13 states, and the total amount of claims were also lesser than the premium. Based on the PCIS experience, the Comprehensive Crop Insurance Scheme (CCIS) was implemented in 1984 and continued till 1999. Farmers availing crop loans were compulsorily included in the scheme at a nominal premium while those not doing so could also separately participate in the scheme. The success was mixed given that the claims were nearly six times the premium collected and involved a large volume of government subsidy, but the scheme had an impressive outreach covering a whopping 76.2 million farmers over 15 years.

Within the Homogeneous Area Approach that prevailed in India over time, two categories of crop insurance schemes, yield-based and weather-based, emerged. The two major crop insurance instruments, NAIS and WBCIS, currently functional in the markets are differentiated on this basis. The NAIS is largely based on the earlier CCIS model and covers a wide range of risks related to weather, natural events and pest attacks. Based on administrative areas, it is recommended that ideally Gram Panchayats (local self governments at village level) should be made the unit of insurance.

The WBCIS insures only against risks arising out of weather events like inadequate rainfall, frosts or hailstorms. In that sense, the coverage is lower than the NAIS. WBCIS is also based on an area approach, where the ‘Reference Unit Area’ (RUA) is notified prior to every season. Each notified RUA is linked with a ‘Reference Weather Station’ (RWS) from where it accesses weather data. However, it is easier to design a yield-based scheme like the NAIS, for which yield data of previous 10 years is sufficient. A scheme like the WBCIS requires historical weather data for a longer period of at least 25 years, often not available in many areas.

However, where the WBCIS scores over the NAIS is in the domain of claims assessment. For the NAIS, regular crop cutting experiments have to be undertaken to assess crop failures and significant subjectivity has been observed to creep into this exercise. The procedure involves higher costs also. In contrast, assessments based on weather data are more objective and transparent and assessment costs are negligible. A distinct advantage of the WBCIS is that payouts are given to farmers even in cases where crops have not failed but suffered in quality due to inappropriate weather conditions. Quality losses are beyond consideration in the NAIS. The average time required for claims settlement is also higher for the NAIS due to cumbersome assessment procedures whereas the WBCIS mandates that payouts are given to farmers within 45 days of the end of the period of insurance.

The examination of the currently operational major crop insurance schemes in India reveals the relative advantages and shortcomings of different approaches of insurance against agricultural risks. The success of various schemes has also been largely of a mixed nature in terms of coverage, viability and efficiency. An important observation that emerges from the paper though not emphasized by the author is the lack of any crop insurance scheme that insures farmers against market and price risks, which has acquired larger dimensions in recent times in India.