Farm policies counterproductive, govt must take a relook

Indian agriculture needs to feed about 1.3 billion people and is burdened with the responsibility of providing livelihoods to 60% of the people – 780 million people. No alien can meet this mammoth food demand nor any sector outside agriculture has the capacity to absorb this big workforce. But farming is in a deep crisis as indicated by the continued farmer suicides in addition to more than 3,00,000 farmers ending their lives in the last two decades.

This suggests that the governmental nostrums, hitherto experimented, could not be effective enough in stemming the tide. Two recent moves, one from the RBI and other from the government, in all probability, are also going to be counterproductive; there seems to be no learning of lessons from the failures.

The RBI committee on medium term path on financial inclusion under the chairmanship of Deepak Mohanty, its executive director, which submitted its report on December 28, 2015, recommended, among other things, to phase out the interest subvention scheme and to plough back the subsidy amount into a universal crop insurance scheme for small and marginal farmers.

It may be recalled here that the government has been giving interest subsidy of 2% on short-term crop loans of up to Rs 3,00,000 and additionally allowing a 3% incentive for prompt repayment of loans. The interest subsidy has increased from Rs 1,000 crore in 2006 to Rs 12,500 crore in 2016. The committee doesn’t want this expenditure to continue any further.

Three reasons are given for the discontinuation: 1) the scheme is for short-term crop loans, and as a result it discriminates against long-term loans and thereby, does not incentivise long-term capital formation 2) subsidised credit does not always flow to the actual cultivator and 3) it increases the probability of misuse.

The committee, therefore, recommended operating an effective crop insurance using this money to avoid the wastage. Unfortunately, the committee was oblivious of the fact that crop insurance could not be a substitute for cheap credit and the increased cost of credit would enhance the cost of cultivation leaving low revenue to the farmers, denting their income further, which is already very low, below the subsistence level of the farmers.

The National Sample Survey Organisation’s 70th round shows that the farmers operating on less than a hectare, meaning 70% of them, are earning much less than their minimum consumption expenditure.

A fortnight after the RBI’s report, came the Government of India’s new crop insurance scheme, Pradhan Mantri Fasal Bima Yojana (PMFBY), scheduled to be implemented from the kharif crop cycle beginning this June.

The scheme, though unlikely to bring in any big relief to the farmer, is undoubtedly going to increase the governments’ spend multifold to make the insurance business viable. Besides the Agricultural Insurance Company of India, 10 private companies have been empanelled to participate.

However, the PMFBY which replaces the existing two schemes NAIS and MNAIS (National Agricultural Insurance Scheme and Modified National Agricultural Insurance Scheme) is, prima facie, very attractive.

Farmers will get full insurance benefit, whenever they sustain crop loss on account of natural calamities and against  a  uniform ‘low’ premium like 2% in kharif, 1.5% for all rabi crops and 5% in case of annual commercial and horticultural crops.

Big gap

The balance between the actual premium charged by the insurance companies and that paid by the farmers is met by the government, no matter how big the gap is; it could be even 90% as asserted by the government. Insurance companies hereafter can fix their own rate without any ceiling.

But the details unmistakably suggest that the so called benefit to farmers is not going to commensurate with the cost to the exchequer. The Central and state governments are going to give premium subsidy – the gap between the rate fixed by the companies and the farmers’ share – in equal proportion upfront, whereas the insurance companies are allowed to fix their rates of premium taking into account their costs, risks and margins. That means the government is going to spend heavily even when there are no significant claims from the farmers. The combined expenditure of Central and state governments is expected initially to be Rs 17,500 crore per year.

The scheme is going to continue to be on an ‘area approach basis’ – village/village panchayat for major crops and the area above that level for other crops. That means the individual farmers suffering losses are not going to benefit, unless the entire area gets affected.

All said, not all the farmers are going to make use of the scheme although with all its imperfections. As per the governments own claim, only 25% of the cropped area of 194.40 million hectares has been covered under the insurance scheme so far and the goal now is to extend it to 50% in three years.

But, that is with regards to the cropped area; in terms of numbers it is still worse. Majority of the farmers are not under insurance coverage. For instance, 95.2% paddy farmers did not insure their crop in 2012 and in 2013 their number increased to 96.1%. Similarly, a high percentage of   wheat farmers – 95.3% in 2012 and 95.9% in 2013 – did not insure their crops as per NSSO’s 70th round survey.

The government should therefore take a relook at its farm policies and revise them in such a way as to cut the costs of farmers’ inputs, raise their revenue and thereby increase their income to make farming sustainable, instead of seeking to install crop insurance business propped up by actuarial premium rates and scheming to withdraw interest subvention benefit.