india

Updated: Dec 22, 2018 23:57 IST

The Narendra Modi government is close to finalising a new model for its flagship farm insurance scheme, which will give it far greater control over an initiative on which a lot is riding ahead of next year’s general polls.

The model under consideration is similar to agricultural insurance schemes in Spain and Turkey, two systems that civil servants in the agriculture ministry studied extensively with the help of a World Bank team, an official familiar with the plan said on condition of anonymity.

The government is likely to move to a “risk-pooling system” of insurance, under which the government will get a deciding role on virtually everything, from fixing premiums to payouts. Insurance firms will be responsible only for implementing the programme in return for a fee.

“We have already examined it. We are in the process of taking a call on it,” the official cited above said, adding, the government is analysing the costs and benefits of shift to such a scheme.

The timing is significant. A farm crisis, the outcome of a glut in output and plummeting agricultural commodity prices that are forcing farmers to sell their produce below the cost of cultivation, is weighing heavily on the ruling Bharatiya Janata Party (BJP), which lost power this month in Rajasthan, Madhya Pradesh and Chhattisgarh, three key states in the Hindi heartland, partly on account of this. Agrarian distress is likely to be one of the key campaign issues in the 2019 Lok Sabha polls too. In the insurance business, risk-pooling has been around for decades, particularly in health insurance, in both developed and emerging economies. The ministry recently reviewed “global insurance best practices”, in which it was assisted by the World Bank. The Pradhan Mantri Fasal Bima Yojana (PMFBY), as the Modi government’s farm insurance scheme is called, became operational in 2016-17 and is now in its third year. It has undergone a series of changes to overcome hurdles such as delayed payouts that tend to anger farmers.

According to economist Ashok Gulati, who recently analysed PMFBY in his work ‘Supporting Indian Farms the Smart Way,’ prompt insurance settlement will need something more than just an efficient business model: costly technology. India needs a fleet of cloud-penetrating satellites for faster crop-loss estimates, he says.

Setting up such a constellation could cost up to Rs 2,000 crore, assuming an average cost of Rs 400 crore per satellite, according to Gulati’s calculations. The government would do well to adopt better models but given India’s federal structure, success will to a large extent depend on the efficiency level of states, said K Mani, a professor at the Tamil Nadu Agricultural University

A recent review of the farm insurance scheme showed Uttar Pradesh on top, as far as timely processing was concerned. Bihar is one of the worst performers. West Bengal, a laggard until recently, has moved up the ranks after clearing all outstanding claims. Under classic risk-pooling mechanisms, risks (or premiums of individuals covered) are bundled onto a common platform, which allows for higher costs of those at greater risk to be offset by lower costs of less risky.

A thumb rule is that larger risk pools create more stable premium regimes and make for greater predictability of risk.

The government will likely tweak the model to create a pool where, in theory, all participating insurance firms transfer their risks. The pool will be run by an agency created by the government, which will also sit on its board, the official cited above said.This state-run agency that will maintain the pool will also fix the premium rates for all crops everywhere. Since insurance firms will only be looking after implementing the scheme, they will only quote the administrative rates they intend to charge, through a bidding process. Crop insurance is mandatory for any farmer with a farm loan, which the government also subsidizes. Farmers pay between 1.5% and 2% of the premium, while the rest is shared equally by states and the Centre.

The “strength is in the implementation capacities”, the official cited above said, when asked why he thought the new model was better. If a company takes, say, a 1% charge for implementing the scheme in a particular area and is found wanting, it may be debarred from the scheme in the future. The pool will prefer companies with a better performance ranking in the last seasons. The official said bidding would only be opened for administrative costs to run the scheme, while the “entire premium and the entire liability” falls on the government. In other words, the model offers greater oversight and control.