Farmer groups which demanded making the Pradhan Mantri Fasal Bima Yojana (PMFBY) voluntary are celebrating their victory now, but the fate of many million farmers hangs in the balance.

Coverage under the PMFBY in the 2020 kharif season dropped 32 per cent, with about 60 lakh farmers fewer than last year under cover. These farmers now have no financial protection against crop loss due to events such as drought, flood or pest/ disease attack.

The PMFBY is in many respects a brilliant scheme. It covers a wide array of risks including post-harvest losses, localised calamities and ‘prevented sowing’ (wherein the insured crop cannot be planted due to floods, droughts, or other disasters), and uses the village panchayat as the insurance unit to capture losses accurately, thus filling the gaps of earlier schemes such as the National Agricultural Insurance Scheme and the Modified National Agricultural Insurance Scheme.

While it would have made sense for States to work with the Centre and plug in technology to check anyone drawing undue benefits, they made a bad decision of withdrawing from the scheme. A look at the schemes introduced by the States in place of PMFBY shows that that they can’t be a sustainable solution to farmers who face crop-loss risks every year. An insurance scheme can’t be any day replaced by cash doles. The failure to appreciate the insurance principle is behind the opposition to the PMFBY.

Ineffective replacements

Large agriculture States including Gujarat and Jharkhand, besides Bihar, West Bengal, Telangana and Andhra Pradesh, have walked out of the scheme. Bihar, which opted out of the PMFBY in 2018, launched a scheme called Bihar Rajya Fasal Sahayata Yojana (BRFSY) in the kharif season of the same year. Farmers are not required to pay money to enrol for the scheme. It pays out ₹10,000 per hectare if the loss is more than 20 per cent and ₹7,500 per hectare if loss is less than 20 per cent. There is, however, no insurance back-up for the scheme. While 2018 and 2019 were good years for the State, in 2020, there has been large-scale damage to standing crops of paddy and maize because of floods. With finances already strained, one is not sure how the State is going to compensate farmers.

Now, the Gujarat government, too, is likely to burn its fingers. Chief Minister Vijay Rupani recently launched the Mukhya Mantri Kisan Sahay Yojana in the place of the PMFBY. With no insurance back-up, this scheme is set to bring huge loss to the government as over last few weeks there have been heavy rains and floods in Gujarat.

Risks overlooked

It was misguided for States to offer a crop assistance scheme without assessing risks. From the data available with the Centre on the PMFBY, it is clear that crop losses can be very high in certain seasons. Sample these claim ratios (claim as a percentage of premium) under the PMFBY: In kharif 2016, the claim ratio was 209 per cent in Kerala. In rabi 2017, it was 286 per cent in Tamil Nadu. In kharif 2017, it was 451 per cent in Chhattisgarh; 269 per cent in Haryana; and 216 per cent in Odisha. In rabi 2018, it was 226 per cent in Odisha. In kharif 2018, it was 215 per cent in Himachal Pradesh.

The Andhra Pradesh government has gone one bewildering step ahead. It has applied to the Insurance Regulatory and Development Authority of India (IRDAI) for a licence to operate an insurance company to sell the PMFBY to its farmers. Given the high probability of the venture making losses because of the concentrated portfolio, why does the State government want to start this venture at all? And, how is it going to ensure that loss assessments are done without bias? In election years, if the government wants to appease farmers, it can manipulate data and pay out higher sums. So, how will the conflict of interest be checked? Will the IRDAI and or the Centre raise these questions with the State government?

While farmer bodies and States raise a hue and cry in years when insurance companies make a profit, they need to understand that losses in the years of monsoon failure or, say, a pest attack can be huge and insurance companies absorb them completely.

Finding solutions

It is true that there have been irregularities in the PMFBY. But there are ways to mend the scheme. To begin with, States need to ensure that CCE (crop cutting experiments) are captured with geo-tags (through photo or video) via a mobile application. This will reduce disputes over loss assessment. It will also check manipulation of data by interested parties. Premium rates under the PMFBY in certain pockets are high because State governments manipulate data on yield loss to help their farmers get higher compensation. When the CCE process is digitised, there will be no scope for such manoeuvring of data and it will over time bring the yield data to reasonable levels and also reduce premium rates.

The Centre should also appoint an independent third party to audit the CCE process. There should be a grievance redressal panel set up in each district to address farmers’ issues; the panel should have representatives of insurance companies, State governments and farmers.

If States want to reduce their premium outgo, they can consider an ‘excess of loss protection’ cover where there will be a cap on the loss that the insurer will bear. This is different from the model that is in operation now in some States such as Maharashtra (in the Beed district), where the government shares the loss as also the profits with the insurer . This model can’t be replicated on a large scale as re-insurers will shy away because it caps their profits.

To put to rest the concern over private insurers making money under the PMFBY and to have a check on premium rates, the Centre was considering the idea of ‘risk-pool’ — an arrangement where three-fourth of the premium under the PMFBY will come into a pool managed by a government entity. This entity will fix the premium for crop insurance and to the extent of the premium it takes, it will share the claims too. Any surplus after claims settlement will remain in the pool to be utilised in years of heavy loss. The IRDAI, however, rejected this proposal. Unlike Turkey and other small countries that use the pool model, in India, the agriculture crop insurance market is huge which could make operations of a risk pool challenging. Also, it will take a few years to set up an entity that can manage such a large pool of risk.

Thus, the best way to offer protection to farmers against crop loss is through insurance, and through the current structure of insurance companies and re-insurers. With a little bit of tinkering, the PMFBY can work effectively.

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