The cooking gas scheme, intended for those below the poverty line is a follow-up of the innovative programme encouraging the more affluent to give up their liquefied petroleum gas (LPG) subsidy. Given the Economic Survey’s analysis of subsidies transferred to the rich, this is a small step but in the right direction. Coupled with a health insurance programme for the vulnerable, this should have directly beneficial consequences for the poor. My only worry is that as the earlier experience with the Rashtriya Swasthya Bima Yojana has shown, implementing a subsidised health insurance programme is fraught with problems.
Indeed, there are certain pitfalls the government must avoid to successfully implement these programmes. All of these will have to be subsidised and subsidies, by their very nature, lead to distorted actions. Since these will be targeted, there will be scope for leakages, at best, and corruption, at worst.
Let me discuss this with the help of the proposed crop insurance programme. Market-driven crop insurance has largely been ineffective in most countries where the probability of loss is too high. Insurance markets work on two premises: (a) the risk of loss is low; and (b) those buying insurance do not face highly correlated risks. Since the programme is aimed at covering risks of drought and floods, both assumptions are likely to be false. When bad weather hits, all farmers in the region are affected (high correlation) and the incidence of bad weather in rain-fed agriculture is high (once in five to seven years, leading to a probability of loss between 14 and 20 per cent). To appreciate what this translates into, note that a market premium for insurance is close to the probability of loss. Thus, to insure Rs 1 lakh worth of crop value, the premium required will be, at least, between Rs 14,000 and Rs 20,000. The premium will be higher if the risks are correlated. It is difficult to expect poor farmers to give up such large amounts of current liquidity to meet their premium payments.
The government website describing the programme mentions 1.5 to two per cent as the premium rate, implying this programme will run at a loss and, hence, be subsidised. While the objective is commendable, the exact solution being proposed is not sustainable in the long run. Subsidising the premium will encourage risk-taking, especially for crops with minimum support prices (MSP). The MSP has already resulted in suboptimal crop choice by farmers and subsidised insurance will make it worse. There are other ways to mitigate farming risks; subsidised insurance is among the worst.
However, in paragraph 110 of his speech, the finance minister has mentioned that all schemes will have a “sunset date” and an outcome review. With all transfers and, hence, subsidies being operated through the Aadhaar platform, outcome reviews will be easy. I sincerely hope the government will experiment with different ways of mitigating farm risks and not be wedded to subsidised crop insurance alone.
Indeed, the sunset date suggests a government thought process that is open to experimentation. If proper evaluation designs are implemented, it is possible to come up with solutions that meet the objective and are cost-effective.
The writer is research director at India Development Foundation