The Aakhya Weekly #123 | Reforming Crop Insurance to Secure India’s Farmers
In Focus: A Safety Net Full of Holes- India’s Crop Insurance Conundrum
by Devyani Wadera
Agriculture in India is both the backbone of its economy and a high-stakes gamble for its farmers. It sustains nearly half the nation’s population and feeds over a billion people, yet it is riddled with uncertainty. Unpredictable weather, pest infestations, and volatile market prices turn every planting season into a wager fraught with risk. For many farmers, a failed crop is more than just a financial setback; it plunges them into cycles of debt, despair, and often, an irreversible decline in livelihood.
PMFBY: A Buffer Against Farm Woes
The Pradhan Mantri Fasal Bima Yojana (PMFBY) was launched to address these perennial vulnerabilities in 2016. Envisioned as a robust safety net for farmers, PMFBY sought to mitigate financial risks arising from crop failures, offering insurance coverage for both kharif and rabi crops. The scheme’s affordability is a cornerstone of its design, with premiums fixed at 2% for Kharif crops, 1.5% for rabi crops, and 5% for commercial and horticultural crops. The remaining premium cost is subsidized equally by the Centre and States. Since its inception, PMFBY has processed over 57 crore farmer applications and disbursed ₹1.55 lakh crore in claims to 23 crore farmers, making it one of the world’s largest crop insurance programs. Farmers are insured against 12 natural disasters, including cyclones, droughts, and floods, and receive compensation when crop losses exceed 33%. By sharing the financial burden of disasters, the scheme aims to ensure that farmers can recover and rebuild after calamities.
Too Many Gaping Holes
Despite its ambitious goals, the implementation of PMFBY has faced significant challenges. A major issue is its limited reach—only 30% of India’s gross cropped area is insured under the scheme, leaving the majority of farmers unprotected. Enrollment numbers have also declined over the years, reflecting a disconnect between policy intent and ground realities. Farmers frequently cite delays in claim settlements, cumbersome documentation requirements, and a lack of trust in the system as barriers to participation. Although claims are meant to be settled within six months, delays of 12 to 18 months are common, leaving farmers without financial relief during critical periods. This delay is especially debilitating for small and marginal farmers who often rely on timely payouts to sustain their livelihoods.
Documentation requirements are another significant hurdle. Farmers must provide extensive paperwork, including proof of land ownership, sowing certificates, and past harvest records, to file claims. For smallholders, assembling this documentation can be an insurmountable task, leading to further delays and frustrations. Even when claims are eventually processed, farmers often find themselves under-compensated, receiving payouts that do not reflect the actual losses they have incurred. This discrepancy arises from flaws in the crop loss estimation process. Currently, assessments are based on small sample sizes collected from fields within a panchayat. These samples frequently fail to capture the full extent and diversity of damage across larger areas, resulting in significant gaps between reported and actual losses.
The credibility of PMFBY has also been undermined by administrative errors and malpractice. Instances of deserving farmers being excluded from beneficiary lists due to bureaucratic lapses are not uncommon. Conversely, there have been cases where compensation was paid to individuals who had not suffered crop losses, often due to collusion between local officials and beneficiaries. Such incidents deepen the trust deficit among farmers, many of whom view the scheme as a bureaucratic maze that benefits insurance companies more than the insured.
Private Insurers: Profits Over Protection
Many farmers have stated that the scheme in disguise works as a profit-minting endeavor for private entities. Between 2016-17 and 2020-21, private insurance companies managing PMFBY operations earned ₹24,350 crore in profits, while government-owned firms incurred losses of ₹3,344 crore. Reports suggest that private insurers selectively target low-risk clusters—based on weather, soil, and crop patterns—to maximize their profits while leaving high-risk areas underinsured. Moreover, private companies have been accused of delaying payouts to earn interest on the premiums collected. Farmers often pay premiums well in advance, but claims are delayed by over a year, allowing insurers to benefit from interest earnings. In some instances, private insurers have returned premiums to farmers after anticipating losses for a particular season, effectively dodging their responsibilities. Such practices further erode the scheme’s credibility, discouraging wider participation.
State Governments: Struggling to Shoulder the Burden
The financial burden of PMFBY has also become a contentious issue, particularly for State governments. With the Centre gradually reducing its share of premium subsidies, States have struggled to meet their financial commitments. This has prompted several states, including Gujarat, Bihar, and West Bengal, to withdraw from the scheme and develop their own alternatives. The strain is further exacerbated by the exclusion of certain types of crop damage from the scheme’s coverage. While PMFBY compensates for losses caused by 12 recognized disasters, newer threats such as heatwaves and unseasonal climatic changes are not included under the National Disaster Management Fund. As a result, States must rely on their own State Disaster Management Funds (SDMF) to provide relief, which differs from state to state. For instance, Rajasthan provides ₹8,500 per hectare for rainfed areas and ₹17,000 per hectare for irrigated areas, while Delhi offers a much higher compensation of ₹50,000 per hectare. Such variations mean that farmers' relief depends heavily on their State's financial capacity, placing additional pressure on already stretched State treasuries. In cases of severe disasters, States can seek additional funds from the Centre, but this process is often ad hoc and influenced by political considerations. During the 2023 drought, Karnataka estimated losses of ₹35,162 crore, but the Centre approved only ₹3,454 crore after the State appealed to the Supreme Court. Such stark discrepancies between reported damages and approved aid undermine the effectiveness of the insurance framework and leave farmers vulnerable to financial ruin.
Blueprint for Better Protection
For PMFBY to realize its potential as a transformative safety net, comprehensive reforms are necessary. A critical step is the integration of advanced technologies for crop loss assessment. The use of satellite imagery, drones, remote sensing, and Geographic Information Systems (GIS) can significantly improve the accuracy and transparency of loss estimations. These tools can provide real-time data, eliminate disputes over yield assessments, and reduce delays caused by manual surveys. Accurate loss assessments would ensure that compensation aligns more closely with the actual damage suffered by farmers, addressing one of the scheme’s most persistent criticisms.
Timely claim settlements must also be prioritized. Stringent timelines should be enforced for processing and disbursing claims, with penalties for delays. When delays are caused by government lapses, such as late premium subsidy payments, insurers should be required to return premiums to farmers with interest. Such measures would incentivize all stakeholders to adhere to deadlines, reducing the financial uncertainty farmers face.
Reforming the monopolistic structure of insurance provision under PMFBY is another key area. Currently, farmers are often restricted to insurers assigned to their region, leaving them with little choice or bargaining power. Allowing farmers to select from multiple insurers could foster competition, improve service quality, and ensure that insurers prioritize farmer welfare over profits. At the same time, greater participation by public sector insurers could help balance the scheme’s commercial and social objectives.
Transparency and accountability must form the foundation of all reforms. Implementing effective grievance redressal mechanisms at both district and state levels is vital for addressing farmer complaints, yet currently, only 15 states have such systems in place. These mechanisms should involve local representatives to uphold fairness and accountability. Analyzing data from grievances can also help identify areas for continuous improvement in the scheme’s implementation. Moreover, insurance companies are mandated to maintain operational offices in every tehsil, but many districts lack these essential facilities. Such offices are crucial for assisting farmers in overcoming challenges and ensuring they can access the scheme's benefits effectively.
By addressing its design and implementation flaws, the scheme can evolve into a robust safety net, ensuring that agriculture remains a source of sustenance and stability rather than a gamble fraught with risk. As agriculture continues to underpin India’s economy and food security, empowering farmers through reliable and effective insurance mechanisms is not just an economic imperative but a moral one.
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