New take on an old idea

BS OPINION

Krishi Bhawan's proposal for launching a new scheme through public and private insurance companies to insure farmers' income is novel in several respects.

It seeks to expand the concept of price support to all farmers instead of confining it to few crops in a handful of states (notably wheat and rice in Punjab, Haryana and Andhra Pradesh).

The proposed scheme is aimed at compensating farmers for the loss of income due to selling their produce at below the minimum support prices (MSP) fixed by the Centre.

Thus, theoretically speaking, it will absolve the government of the responsibility of actually procuring the farm produce to provide the minimum price. The insurer will compensate the grower for the difference between the market price and the MSP.

As such, the prospects of operational losses for the agency providing price support get considerably reduced (because it does not involve physical handling, storage and transportation of stocks).

This aside, barring a few exceptions, the market prices of most agro-products generally remain above the MSP.

The insurance companies will have to step in only in situations where prices crash due to over-production or lack of outlets in domestic and export markets.

And, if the premiums are fixed on actuarial basis, as is said to be the case, the economic viability of the operation would improve further.

Even though the government would be subsidising the premium for resource-poor farmers, the total outgo on subsidy under this scheme is unlikely to be as high as in the case of the open-ended grain procurement system.

An MSP-linked income insurance scheme would differ from production-linked crop insurance in another respect as well.

In situations where production is low due to natural or other factors, requiring compensation for output loss, prices would tend to remain high, obviating the need to compensate for lower returns.

No wonder then that the insurance companies are said to have responded positively to the government's initiative.

However, there is no guarantee that the scheme will get off the blocks either quickly or smoothly. Many states are bound to be reluctant to bear even a part of the expenditure (read premium subsidy) on the scheme.

Even the existing crop insurance scheme that stipulates equal sharing of losses has not yet been implemented by all states. The non-participating states include even agriculturally progressive ones like Punjab and Haryana.

Secondly, if the present arrangement for procurement, albeit applicable only to a few crops and regions, has to co-exist with the proposed scheme, the total subsidy bill is bound to swell to untenable proportions.

And any move to dismantle the existing procurement system is sure to create a political backlash that the government may find difficult to withstand.

Unless the formulators of the scheme keep these issues in the reckoning, they may end up creating a situation which is economically unsustainable.