Pradhan Mantri Fasal Bima Yojana, PMFBY : Challenges and Way Forward

Dr Gursharan Singh Kainth,
Dr Rajinder Singh Bawa, and
Navdeep Singh Kainth

Agriculture industry in India is proverbially called a “Gamble on the Monsoon”. The Indian agricultural environment has undergone numerous structural changes due to changes in the government policies. Farmers face floods, drought, pests, disease, and a plethora of other natural disasters. The weather is their greatest adversary, something that can never be controlled by man.

Yet, farming has been in existence since the caveman turned his spear in for a hoe. Farming has come a long way since then; nevertheless; farmers are still at the mercy of the heavens. Crop insurance is a risk management tool that farmers can use in today’s agricultural world. For a premium, farmers can pass their weather-related risk onto a third party. Farmers in India have been subjected to publicly administer insurance schemes since 1972. Every scheme has been flawed, yet the Government of India is still attempting to strengthen agriculture by protecting its farmers from the weather. India’s failure at providing public crop insurance does not stand alone. In both the developing and developed world, governments’ crop insurance schemes have run at huge losses while not delivering an effective product. The inadequacy of such schemes is a well-established fact. On the other hand, private insurance does exist in situations where it is feasible and no subsidized insurance is offered. The farmers stand to benefit even more from private insurance when there are several competitors.

Government crop insurance has proved to be a failure worldwide, but India seems to have ignored both its own failure and the failure of other countries. Various crop insurance schemes will not fix the ills of Indian agriculture planned by the authorities, how grand it may be. Private crop insurance may or may not develop if all government crop insurance is abolished. Abandoning insurance schemes does not mean abandoning farmers. The new insurance government policy, Pradhan Mantri Fasal Bima Yojana (PMFBY) could have wide-ranging effects. The study covered the opportunities and constraints for agricultural insurance in India, how PMFBY will be supported and governance will be maintained, and the best strategy for technology to increase farmer’s awareness and successful implementation. The government’s focus will be to bring in more farmers without loans (which comprise merely 5 per cent of total farmers at present) under the scheme.  A total of 5,000 automated weather stations will be set up across the country. The IRDA (Insurance Regulatory and Development Authority), AIC (Agricultural Insurance Company), and 11 private and four state-owned non-life insurers have expressed their interest to participate in the scheme. Opportunities for agricultural insurance in India are numerous and insurance can be a risk transfer mechanism for Indian farmers that depend heavily on rains especially with the increasing influence of climate change. There is room for experiments and expansion of new insurance products since penetration is low and there also a favorable political environment for insurance and support of agricultural livelihoods.

Various constraints include the mindset of farmers and states, finances, technology, logistics, convenience, transparency, and the role of insurers. In the current budget, the Finance Minister has allocated Rs 5000 crores to support the PMFBY which will have additional support from the state budgetary resources. This spread across India per hectare comes to Rs 243 per hectare which is a limited amount if the scheme becomes popular.

One of the major challenges that remain is: How to segregate insurance and disaster relief. Insurance products have a commercial basis whereas the disaster relief for small and marginal farmers has a social implication. However, it is important to distinguish between subsistence farmers with no or very low chance to become commercially viable for whom insurance should be designed as a Social Protection Policy rather than as a commercial risk management tool. However, they can be issues of distinction between these two groups.

There are data constraints that also greatly limit the use of insurance.  Additional yield data and farm gate data, data on land holdings, crops grown and damage calculations are needed. The scheme now covers most of the crops and with small areas in particular crops, loss may not be assessable via remote sensing or drones. Lack of adequate databases for determining premiums and indemnities and lack of adequate infrastructure create constraints in implementing crop insurance in India, particularly in backward states. The procedure is complicated for fixing the farm gate price for non-MSP crops, which may give rise to disputes. Furthermore, modernization of the land records should be promoted by the states and provisions of including land tenants be considered.

There is also a lack of public awareness of agricultural insurance. In particular, backwards regions are still facing lack of development in getting the benefits of government programs since they lack awareness and non-corporation of concerned officials, as well as unreliable and untimely harvesting information.

There is high expenditure from the public sector, as the scheme is not based on commercial viability, but depends on large subsidies, which may become problematic in the long run. To reduce competition, the government decided to have a single insurer in any district to avoid duplication in coverage. The selection of insurers is based on the premium rates rather than qualitative parameters which can be restrictive in terms of growth. Political pressure and interference can also lead to complications.

There was a strong need for awareness drive among farming families, especially small and marginal farmers. The private sector can play an important role in dissemination about PMFBY. Banks and insurers can also play a key role alongside government. Banks can have agents who can motivate farmers, arrange insurance policy, payment of premium etc. Damages by wild animals should be included because farmers are not cultivating many crops (pulses) in summer season due to concern about animal damages. Price risk should be considered along with yield risks and that products such as insurance, credit, information be bundled otherwise they will be outcompeted by the informal insurance sector. Insurance and ad-hoc relief are not run together; preference will be to avoid paying premiums if ad-hoc relief is offered.  Both these programs have to be implemented separately.

Technology usage will be critical both for design and usage by farmers and India do possess strong IT capacity.  Measures can be taken to improve weather insurance products including involvement of international experts, using satellite imagery with innovative computer models, and creation and usage of specialized indices like Normalized Difference Vegetation Index.  The credibility of Crop Cutting Experiments (CCEs) should be improved using a digital confirmation and auditing process and the State should ensure the use of General Packet Radio Service (GPRS) enabled and camera-fitted mobile phones while conducting CCEs.  Development of a web portal could make data on land records for all states available to financial institutions for speeding the insurance processing.

Technology can also be used to send SMS-based weather data to progressive farmers and farming groups, to provide training through videos or SMS communication about insurance, and to promote index-based insurance as part of a wider package of services, grafted into existing, efficient delivery channels with private sector engagement and with access to international risk transfer markets. In addition, Community-Based Insurance with farmer producer organizations (FPOs) needs to be encouraged to reduce the high transaction costs in the existing model. FPOs, through Private Public Partnerships (PPP) can promote mobile technology use for money transfer both for premium collection and compensation payments. Related training and certification of FOs who in turn can train large number of small and marginal farmers can also be made part of the system. A shift from Social Crop Insurance Program towards Market based crop insurance program should also be explored with time.

Private crop insurance can be observed worldwide, even though it is not highly developed. Private crop insurance has tended to cover more specific risks and not cover management-related risks. These insurance policies offered must fit needs of farmers and be beneficial–otherwise they would not exist. This is not necessarily the case with government sponsored crop insurance. Private insurance works in a wide range of countries for a wide range of agricultural activities. Insurance programs vary from tropical plantation crops in Latin America to tree crops in the USA.

Government crop insurance has proved to be a failure worldwide, but India seems to have ignored both its own failure and the failure of other countries. The PMFBY will not fix the ills of Indian agriculture, nor will any other grand insurance scheme planned by the authorities. Private crop insurance may or may not develop if all government crop insurance is abolished. Abandoning insurance schemes does not mean abandoning farmers. Farmers could be given an income guarantee not based on yield, price, or area planted. Even now an income insurance scheme is being considered in India. Investment in agricultural infrastructure/research would be more equitable as opposed to subsidies to crop insurance and may yield more long-term benefits. Farmers deserve the chance to farm on their own. They know the weather better than anyone—it is their greatest foe and their greatest friend. The government should stop trying to play God and help farmers help themselves. The government has admitted that it lacks the resources to administer a proper insurance scheme at the individual level. For various reasons a second-rate scheme is deemed as necessary.

Globally, the value of crop insurance, private or subsidized, is much debated by academics and policy makers. The concept of index-based contracts for natural disasters in place of crop insurance has been recently introduced. Farmers would purchase a contract and be compensated when a certain event or natural disaster occurs. Rainfall contracts are one example. Rain is relatively simple to monitor and the history of rainfall in most areas is well known. Farmers would be compensated if the rainfall in an area would go below a set level, with varying levels of payment depending upon the level of rainfall. The faults of this approach lie in its similarity to the area approach. However, the benefits are significant, including reduction of moral hazard, adverse selection, and transaction costs. This alternate model could be adopted as an improvement over the PMFBY but would still deter the private sector from entry into crop insurance. A better option would be an income guarantee not based upon yield, crop grown, or farm size. Farmers could be given an income guarantee not based on yield, price, or area planted. Considering the various subsidies that are given to farmers through various means–fertilizers, seed, price supports, etc.–an income guarantee should not be an unfeasible option. Farmers need to be able to respond to market forces and develop their own risk-management tools.