Foolish scheme

The public sector company newly formed for conducting a farm insurance business (the Agricultural Insurance Company of India) is projecting business worth a whopping Rs 60,000 crore in 10 years, basing its lofty optimism on the untapped potential of this sector.

If its fanciful wishes come true, agricultural insurance would rank among the most successful commercial ventures of the decade. But there are good reasons to not take the claim seriously.

Both agriculture and agricultural insurance are high-risk enterprises. That is why all the bids made in the past to introduce crop insurance through public agencies fell flat.

The first such significant venture "" the comprehensive crop insurance scheme launched in 1985 "" had to be folded up because the claims to be paid out to farmers turned out to be five times the premium collected.

The next version of the scheme "" the national agricultural insurance scheme introduced in 2002 "" faced a similar fate with a premium-claim ratio of 1:4. The fate of the latest incarnation "" the farm income insurance scheme "" is unlikely to be any different, being not only the most ambitious but also the most flawed, conceptually.

It seeks to protect farmers' income by covering both yield and price risks. The logic is that, instead of lending price support through procurement of produce, the farmer would be compensated for loss of income in case he sold his produce at a lower than expected price. The flaw in thinking is obvious. Agri-commodity prices normally dip during the peak harvest season.

In the absence of government procurement in terms of price support operations, this price drop gets even sharper, worsening the premium-claim ratio and, in turn, putting a question mark on the economic viability of the scheme.

Though the government is chipping in with a hefty (and questionable) subsidy of 50 to 75 per cent on the premium, this goes to the farmers, leaving the insurance company in the lurch.

There are several other drawbacks in this new venture. By offering to protect farmers' income, the measure serves as a disincentive for producing more or for striving to get the best price through efficient marketing "" an old and recognised problem that economists call moral hazard.

Also, since the stipulated income level is based on the average income realised previously in the entire area, it discriminates against the more efficient farmers who normally bag bigger harvests and better returns.

It is no wonder then that the scheme has remained a virtual non-starter in most of the areas where it has been introduced in the latest rabi season.

In three districts of Madhya Pradesh, the farmers' reaction was so hostile that the state government had to abandon the scheme half way through and ask its agencies to enter the mandis to lend price support.

So the government as well as the concerned company would do well to review the whole scheme afresh and come out with an economically viable proposition. Otherwise, neither the insurance scheme nor the implementing company will survive, and neither would deserve to.