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Private insurers reap a windfall from crop cover scheme

Farmers’ distress is likely to cause yet more trouble to the government. 
Contrary to Agricultural Minister Radha Mohan Singh’s claim that insurance companies, mostly in the private domain, have not unduly benefited from the Pradhan Mantri Fasal Bima Yojana (PMFBY), official data shows that they would have made a windfall of over ₹16,700 crore in 2016-17. Participating in a debate in the Lok Sabha on Wednesday on the farmers’ condition, many Opposition party leaders alleged that the crop insurance scheme had been designed in such a way that private insurance firms were favoured. Read more of the news here...

Anirudh Rajan writes The Pradhan Mantri Fasal Bima Yojan (PMFBY) is turning out to be a textbook case of how modern welfare policies are conceptualised to benefit priavte interests.

The scheme, launched in January 2016, aimed to make crop insurance available to all farmers, covered by the scheme and limit the premium payable by the famer to a range between 1.5% to 5%. (1.5% - Kharif, 2% - Rabi and 5% - Commercial and Horticultural Crops). 

The inusrer would be a private or public entity, selected from an empanelled list of eligible insurers, awarded coverage districts, under a bidding scheme whereby the lowest premium bid is chosen. This entity would provide the coverage to the farmer, who’s limited premium would be automatically deducted from the insuree’s bank account, linked to the scheme.

Though farmer’s premium is limited, the scheme contains no provisions regarding limitation of gross premiums charged by insurers, beyond limitations fostered by competitive bidding, with the balance portion being met via subidies borne equally by centre and state.

Lack of limitation, coupled with the scheme short policy period, allows for private players to bid only when the situation favours a low claim scenario. For example, if the arrving monsoons are predicted to be within the range of normalacy, being neither in deficit or glut, the bidding process would be inundated with a host of private insurers, pre-positioned by inclusion in the empanelled list, hoping to rake in premiums in a scenario where the probabilty for claims materializing would be low. If however, the monsoon predictions are unfavourable in terms of the harvest, private players would be under no pressure to competitively bid and bear risk. Here, the presense of the Agriculture Insurance Corporation (AIC), the state agri insurer, and public sector insurers like United India Insurance, New India Assurance and Oriental Insurance on the empanelled list, would ensure that the requisite coverage would be made available. To put simplistically, private enterprise would be the archetypal fair weather friend in the above scenario.

2016-17, the scheme’s first year of implementation, saw such a situation transpire. As the monsoons predictions were favourable, the bidding process witnessed a great deal of enthusiam from the private sector with entities like HDFC ERGO, ICICI Lombard, Reliance GI and Iffco-Tokio reporting healthy increases to the crop insurance portfolios.

Offical data released at the closure of the year revealed that the insurers, mostly private, have made a windfall of roughly Rs. 16,700 crores. 11 general insurance companies over the 2016 Kharif and Rabi seasons collected Rs. 20,374 crore as premium but paid out only Rs. 3,655 crore as claims, which in itself constitutes only 63% of the claims submitted. This stats emphatically disprove claims made by Agriculture Minister Radha Mohan Singh that private companies have not unduly benefited from the scheme.

The rationale being roping private concerns to facilitate the scheme was the old “transperency and efficiency” dialogue, touted time and again to justify privatisation. But with claims halted supposedly on account of delays in payment of premiums by states, the farmer is witnessing little or no benefit from private management of crop insurance. In fact, the scheme’s structural and operational pecularities seem to facilitate an almost criminal transferrance of public funds from the exchequer to private coffers. In a halfearted attempt to arrest this phenomenon, the centre, via the Minister of Agriculture, recently asked to states to set up their own insurance companies to facilitate the crop insurance scheme. However with only Gujarat and Punjab in agreement as of yet, private particiption/plunder will most likely be the standard operating procedure of PMFBY.

With the scheme’s planned coverage set to expand on a yearly basis, in an attempt to aid meeting governemental targets of doubling famer income by 2020, covering more and more of India’s farmers and agricultural districts (its current coverage is around 30%), the state’s fiscal burden is set to increase substantially over the coming years, especially if the current model is followed. This financial cost to be incurred will have to be met either via increases in state revenue or reductions in expenditure (cuts in welfare), with the latter being far more likely than the former if one were to factor recent fiscal trends and limitations placed on fiscal policy by the proposed reimplemetation of FRBM Act.

The PMFBY though laudable in its efforts to promote state sponsored crop insurance on a national scale, brings to head several questions that are fundamental to current and future structuring of welfare policies, the foremost of which revolves around an ideological everpresent need to foster private sector participation. If crop insurance at levels deemed affordable by a majority of India’s peasantry was a profitable sector, private participation would not require prodding from the state. In the given scenario, as such is not the case, private sector involvement is dependent on state incentivatisation. However, with profits accruing to insurers transcending levels justifiable as mere incentivisation, the situation has tranformed into one which amounts to shamefaced profiteering on the back of an agrarian crisis. Furthermore, as mentioned before, the scheme would let private players off the hook if monsoon forecasts seem risky. This rationale questions the financial justifcation of private participation in the scheme beyond ideological compulsions.

As India’s agrarain economy is predominently monsoon dependent, it is inherently a risk prone sector in terms of insurance. If the current methodology is maintained, private capital would benefit in good years while public funds would bear losses during the lean. This would lead to an unbearable fiscal deficit, which might at least have been tolerable if solely incurred for the benefit of the marginalized. Austerity, neoliberalism’s miracle drug for all fiscal negatives, would indeed be a bitter pill to swallow if imposed on account of private syphoning of public funds, that too in the name of welfare.  


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