Friday, February 05, 2016

Why crop insurance schemes will fail without good institutional design

Suicides by farmers distressed by failed crops have been a recurring cause of concern in several parts of India. Despite the furore that these incidents cause, nothing much has been done so far to hit at the root of the problem. While in some parts of India, agricultural loans are not difficult to come by and the peasants do not depend on the loan sharks to bail them out, repayments can become a problem when the crop fails. This is especially true of those regions where the farmers invest heavily in fertilizers, pesticides and irrigation whenever possible. The dependence on the monsoon however continues to remain the fundamental feature of agriculture in India. When the rains are scanty, the entire financial cycle of loans, investments on the crops, good harvest, good prices for the product gets completely disrupted. This is when the Indian bankers already distressed by enormous NPAs chase the farmer down, humiliate and threaten him in the manner of any other loan shark and often drive him to take his own life as the only route of escape.  

In a scenario like this crop insurance would seem to be the panacea that gives the farmers enough breathing space and waiting time as the next harvest gets ready. The trouble is in the world of finance loans and insurance are inseparable issues and there is a world of difference between the status of the indebted farmer and otherwise from the insurance viewpoint. This is not all – there are other problems that can choke an insurance scheme to death if corrective measures are not taken in time. This article lists most of them which just goes to prove that Indians have a problem designing their institutions and their operational norms.

In his last ‘Man ki Bat’, PM Modi put the idea of crop insurance in the forefront as an original brainwave, the fact being that the devil lies in the details and insurance for crops as such is not the panacea at all, unless a policy is formulated to remedy the pitfalls.

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