Every dark cloud has a silver lining!

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Every dark cloud has a silver lining!

Crop failures are often linked to weather failures and it has always been said that Indian agriculture is a gamble with monsoon. Now this gamble is being tempered on account of innovative insurance schemes.

CJ: Sanjeev Chopra

Sat, Apr 26, 2008 22:08:39 IST

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agriculture insurance :

AT THE meeting of the state agriculture ministers with the union minister for agriculture, held on April 23, 08 the idea of moving from an insurance system based on crop failures, to one which is based on weather received positive support from most quarters. The idea behind ‘weather based crop insurance’ is that while factors like timely sowing, weeding, winnowing, application of fertilisers and pesticides are well within the control of the farmer, the weather is not. Therefore, if it fails to rain during the planting season, there is no way, which the crop is likely to be successful, but the insurance payout will have to wait till the crop cutting experiment have been conducted, and the actual yield compared to the standard yields. Not only is the payment delayed till the end the crop cycle, the possibility of making interventions in the nature of sowing late verities or applying micronutrients to make up for the lost time is reduced for the farmer, just does not have the resource to make the additional investment.

Very briefly, weather based crop insurance schemes gives the farmer an assurance that if there are major fluctuations in verifiable indicators like rainfall, temperature, humidity, wind chill etcetera payments will be made to the farmer, irrespective of the damage caused to his crop. The insurance companies, in consultation with the state departments of horticulture and agriculture will evolve certain parameters for each crop, and when the variation in rainfall, temperature, wind chill factor etcetera exceed or are below a certain threshold, payouts will be made to the farmer. As farm insurance is now compulsory for those who avail crop loans, the insurance company will transfer the funds directly to the farmers account in the bank, so that he can avail of these payments for growing late varieties or alternate crops.

The second advantage with this system is that it is based on actuarial principles, and not on crop cutting experiments and Commission for Agriculture Costs and Prices (CACP) tend to be highly subjective. In other words, based on twenty five year weather data, the insurance company will be able to anticipate the likely payments in case of rainfall fluctuations. The insurance company would have already received the premium; therefore it does not have to run around after the center and state governments to get funds released just before the crop failure.

As things stand, farmers will still have to pay about two to three per cent of the sum assured (this will of course vary from crop to crop and season to season), with the balance being paid by the central and the state governments. Thus if an acre of paddy is being insured for rupees fifteen thousand, the farmer will be expected to bear between three to four hundred rupees, with the central and state bearing another five hundred rupees each, and the insurance company receiving about fifteen hundred rupees. Under the crop based insurance schemes, the farmers were expected to pay a marginally lesser amount, but the payments were often delayed to the next crop cycle.

The third advantage that your columnist sees is that the monopoly of the state owned Agricultural Insurance Corporation of India (AICI) will be called to question by players from the co-operative and the private sector. ICICI Lombard and IFFCO Tokyo Insurance companies are now promoting weather based insurance scheme in a big way among non-loaner farmers, but is likely that the Insurance Regulatory Development Agency (IRDA) and the Compete ion Commission of India (CCI) will recommend a level playing filed for all insurance companies offering a similar product and within the parameters laid down by the insurance regulator. Positive fallout of this will be the establishment of a network of weather stations in rural India to capture the data, on which these insurance premiers are to be based and this means more job opportunities in the rural areas. It must be mentioned here that as of now the only parameter being used in weather based insurance is the rainfall data, but it is only a matter of time before the system becomes more refined and tailor made to suit the specificities of the agro climatic regions and crops.

The fourth advantage, which this insurance system offers is an ‘insurance against loan waivers’ because crop failures has already been factored in. This also means that the liquidity position of the banks on account of farmers loans will remain in fine shape and the dependence on the government will be minimal. As the crop loans are mostly given by co-operative banks, it augurs well for their finances as well.

Last but not the least; this is also a positive first step towards insurance against market risks. Once a system for insurance against possible production losses has been mainstreamed, the next challenge will be to insulate the farmers from price fluctuation. While it is true that a transparent price discovery mechanism is taking shape on account of the Forwards Markets Commission (FMC) and the spot and futures exchanges, terminal markets and partnership farming arrangements, which primary producers have with processors and consolidators, the ideal system will be on, in which the farmers can insure themselves against a sudden fall in market prices, emanating from whatever reason. This will be especially relevant for the crops, which are not covered under the CACP system. Incidentally most horticulture crops are not, but given the stress that the government is laying on diversification, and with the sector becoming more salient in the farm economies, it is a matter of time before the demand for insurance product gains momentum.

How does one conclude this essay? One is reminded of the adage ‘every dark cloud has a silver lining today the silver has become more important! The clouds don’t matter as long as the silver is assured.

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