Crop Insurance in India

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1.3.2 Price Risk

Many studies have revealed that variability in prices each year in generally less in domestic markets when compared to international markets, but intra-year variability follows the reverse trend. Price risks become necessary when farmers produce for the market.

Demand and Supply factors affect the prices of every commodity. The demand of agricultural products is predictable as it gradually changes over time, but supply side is subject to business cycles and technological developments. This fluctuation in supply side, which depends on demand elasticity, impacts the prices.

Another factor that affect prices are government interventions. Some of their interventions are:

- Public Distribution System releases

- Minimum Support Price operations

- Change in import/export policies.

The actual prices that the farmer receives is also determined by local infrastructure facilities and the integration of markets. According to a report, markets are now more integrated than before, and this integration in long-run is quite good, but short-run integration is still fairly poor and this leads to the difference in movements of prices with locations.

1.3.3 Roles of future markets

India is developing future markets, and it is seen as a great way for farmers to hedge or reduce the price risk. However, there are several problems attached with it.

Future positions requires the cash flow on day to day basis to predict changes in future prices. This leads to a liquidity problem for the farmers since the cash flow is only expected after the harvesting of crop by the farmers. Also the farmer faces the uncertainty of the quantity he should hedge as he faces both the price risk as well as the yield risk. This problem is further aggravated because of the correlation that exist between both the types of risks. So he is likely to face basis risk because of fragmented markets for their agricultural produce.

These problems cannot be completely eliminated, but they can be reduced if the farmers organize themselves in a co-operative.

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2. Analysis of Crop Insurance in India

2.1 Outline

Average Indian farmer has very less appetite for risk. This is because of the huge income disparity that exists between them. Rich farmers are able to diversify risks over time and thus manage their incomes in the most appropriate way. But small farmers are not able to afford it. Also no one has any control over the occurrence of a natural event, which creates widespread havoc for them.

What makes crop insurance different from others is that the risk not only depends on the insured but also on many other factors, it is distributed over time and space. So the losses suffered by farmers in one locality make the farmers in other region, who share mutual benefits with them because of what they produce, eligible for indemnity of insurance. So insurance schemes also depend on mutual benefits shared by various farmers. Crop insurance should also encourage farmers to go for new technologies in the farm that ultimately leads to an increment in the output. It also helps to reduce farmer’s defaults on loans. What happens is in case of crop failure, the reimbursement of insurance helps the farmers to repay the loans that they had taken. Insurance has also given the strength to farmers to take risky ventures, which otherwise would have been avoided by the farmers owing to their risk-averseness.

But crop insurance is India has drawbacks too. One of the biggest drawback is the lack of historical data. As a result, yield levels and risk position of different types of farmers cannot be estimated perfectly and so the insurance companies get to a tight spot. The reason behind lack of historical data is the fact that these schemes are fairly new, but the positive thing is that proper effort is being put into data collection and analysis of it. Other drawback is the presence of moral hazard and adverse selection criteria in the insurance market. Premium rates would be higher if more risk is associated with it. In Agri-field, high operational and specialized skills in farming makes one eligible for premium rates. But only high-risk clients are able to take advantage of it. Moral hazard makes an insured to not invest in loss prevention techniques. So they don’t invest in expensive fertilizers or pesticides, use low quality seeds etc. This all takes the private insurance companies towards bankruptcy, another reason for less competitors in the market.

2.2 Crop Insurance Schemes in India

Numerous schemes and programmes have been initiated by the Government of India in concern of insuring crops for the farmers. All these schemes are implemented following the ‘Area Approach’. Under the schemes, the coverage of crops under insurance is mandatory for borrowing farmers i.e; the farmers who take loans from Rural Financing Institutions. However, non-borrowing farmers are also eligible for benefits under the same schemes.

Timeline of various schemes launched by the government in India is given below:[pic 7][pic 8]

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A brief description of major schemes available to farmers in India concerning crop insurance is as follows:

2.2.1 National Agriculture Insurance Scheme (NAIS)

In 1999, Government of India introduced National Agriculture Insurance Scheme which is currently operating in some states. This scheme is centered on “Area Yield Index” and is a cover against all-risk.

Crops covered under the scheme

Practically, all crops for which historical yield data is available i.e; all food crops, oilseeds and all horticulture and commercial crops are covered under this scheme. With the start of each cropping season, notifications are released by the State Governments that contain the list of areas and crops that are eligible for insurance under the scheme, the premium rates offered for the corresponding season etc.

Farmers covered under the scheme

All farmers are eligible for insuring their crops under NAIS. However it is mandatory for loanee farmers