Joint Group Report

Report of the Joint Group

Contents

S. No / Description / Page No.

Executive Summary

/ I - VI
Prologue / : / 1- 4

Crop Insurance Programmes in India – A Review

1.1. Evolution
1.2. National Agricultural Insurance Scheme (NAIS)
i)Salient features
ii)Coverage statistics
iii)Experience Analysis
iv)Main issues and perceptions of interest groups
1.3. Farm Income Insurance Scheme (FIIS)
i)Basic objectives
ii)Experience of FIIS
iii)Concerns & Constraints
1.4. Weather Insurance
i)Concept
ii)Advantages over traditional crop insurance
iii) Summary of products introduced upto Kharif 2004 / :
:
:
:
: / 5-22
5-6
6-15
16-19
19-22

Remote Sensing Technology

2.1. Background
2.2. Remote Sensing Applications in Agriculture in India
2.3. Remote Sensing Applications in Crop Insurance in India / : / 23-30

Crop Insurance – A Way Forward

3.1. National Agricultural Insurance Scheme (NAIS)
i)Fundamental Issues
ii)Suggested Improvements
iii)Actuarial regime
3.2. Farm Income Insurance Scheme (FIIS)
i)Key Issues
ii)Recommendations
3.3. Weather Insurance
i)Future directions
ii)Agri-Met & blended Products / :
:
:
: / 31-66
31-47
48-49
50-66

Modified National Agricultural Insurance Scheme

/ : / 67-77

Scope for Package Insurance Policy

/ : / 78-83

Private Sector Participation in Crop Insurance

/ : / 84-90

Financing Crop Insurance

7.1.Crop insurance penetration targets
7.2. Financing mechanism
i)Subsidy levels in other countries
ii)Farmers’ Capacity to pay Premium
iii)Government’s support
7.3.Financial outlay of the Government (existing & future) / :
:
:
: / 91-104
Recommendations’ Summary / : / 105-109
References / : / 110
Appendices / : / i - xlvi

PROLOGUE

Background:

National Agricultural Insurance Scheme (NAIS) was introduced w.e.f. Rabi 1999-00 substituting the Comprehensive Crop Insurance Scheme (CCIS), which was in operation between 1985 and 1999. Despite addressing the shortcomings noticed during implementation of CCIS and launching of improved version of crop insurance in the form of NAIS, the scheme failed to appeal to the farming community. Consequently, only about 10 percent of the farmers could be covered under the scheme. This is despite nearly 75 percent subsidy in the scheme, which came in the form of subsidy in premium and deficit financing of claims. Though the scheme provided for annual review, no review worth mentioning has been carried out since inception. The government therefore is keen to address some of the constraints/ bottlenecks to make the scheme more attractive to the farmers.

The National Agricultural Policy (NAP) 2000 inPara titledRisk Managementreads:

“Despite technological and economic advancements, the condition of farmers continues to be unstable due to natural calamities and price fluctuations. National Agriculture Insurance Scheme covering all farmers and all crops throughout the country with built in provisions for insulating farmers from financial distress caused by natural disasters and making agriculture financially viable will be made more farmer specific and effective. Endeavour will be made to provide a package insurance policyfor the farmers, right from sowing of the crops to post-harvest operations, including market fluctuations in the prices of agricultural produce”.

Union Budget 2004-05: Crop Insurance

The text of Honorable Union Finance Minister’s 2004-05 budget speech concerning Risk Mitigation on agriculture is produced below:

“The Agriculture Insurance Company (AIC) was incorporated in December 2002. The National Agricultural Insurance Scheme (NAIS), which insures the yield or crop, is in operation since Rabi 1999-2000. AIC is redesigning the scheme. We shall continue with the scheme and make another evaluation. Meanwhile, a pilot scheme insuring farm income (as opposed to crop) has been launched in 19 districts across 12 States during Rabi 2003-04. The government has decided to extend the scheme to Kharif 2004 in order to assess its feasibility. I wish to add that a weather insurance scheme appears to be more promising, at least in the design. AIC is introducing the scheme on a trial basis in 20 rain gauge stations in the current crop season. It is difficult to tell at this stage which of the three schemes will be successful. Agriculture insurance as well as livestock insurance are complex products and have to be designed with care. I wish to re-affirm government’s commitment to provide insurance cover to farming and livestock.”

Bearing in mind the shortcomings of existing crop insurance programme, and the commitment of the Government to the farming community, review of the existing crop insurance scheme was felt imperative.

Constitution of Joint Group:

The Hon’ble Prime Minister while reviewing the status of National Common Minimum Programme (NCMP) directed the Ministry of Agriculture to constitute a Joint Group to expeditiously study the improvements required in the existing crop insurance schemes. Ministry of Agriculture vide letter no. 16012/05/2004-Credit II dated 31st August 2004 constituted a Joint Group under the chairmanship of Shri A K. Singh, Additional Secretary (Ministry of Agriculture). The other members of the Group are Shri Satish Chander, Joint Secretary (Ministry of Agriculture), Shri. G. C. Chaturvedi, Joint Secretary (Ministry of Finance) and Shri. Suparas Bhandari, Chairman-Cum-Managing Director (Agriculture Insurance Company of India Limited).

Terms of the Reference

The Terms of the Reference of the Group were as under:

i)To review the status position of existing Crop Insurance Schemes i.e. National Agricultural Insurance Scheme (NAIS), Pilot Project on Farm Income Insurance Scheme (FIIS), Varsha Bima Yojna and other agriculture related schemes floated by Private General Insurance Companies.

ii)Improvements required in National Agricultural Insurance Scheme.

iii)To develop broad parameters/ concept paper of an appropriate andfarmers friendly crop insurance scheme after taking into account the professional inputs obtained from experts and private sector general insurance companies.

iv)To make assessment of up front subsidy, if any, to be paid by the government.

The communication for constituting Joint Group is appended as Annexure-1.

Meetings and Interactions

The Joint Group held 15 meetings on 10th, 21st & 29th September; 20th & 27th October and 3rd, 6th, 9th, 10th, 15th, 18th, 19th, 25th November, 10th15th December, 2004.

The Joint Group in the course of discussions, consulted experts in different fields. These included- Dr. J.S. Parihar, Group Head (ARG), ISRO (Ahmedabad), Dr. S K. Goel, Commissioner for Agriculture (Maharashtra), Dr. R. K. Parchure, Professor at National Insurance Academy (Pune), Dr Gurbachan Singh, ADG (Agro), ICAR (Delhi), Dr J.P. Mishra, ADG (PP&IPR), ICAR (Delhi), and Shri Rajiv Mehta, Member Secretary, CACP (Delhi).

The Group made extensive use of statistical data available with implementing agency of NAIS in analyzing the present situation. The Group also made conscious effort to examine views and suggestions received from various interest groups – Farmers, States, Members of the Parliament, Banks etc.

The Group also interacted with many private sector insurers, took presentations on private sector perspective of crop insurance, and explored possibilities of package policy and weather insurance.

Members of the Joint Group also visited Space Applications Centre (SAC) within Indian Space Research Organization (ISRO), Ahmedabad to understand the applications of remote sensing technology in agriculture, particularly in the field of crop insurance. Shri G.C. Chaturvedi and Shri Suparas Bhandari of the Group also interacted with ‘National Commission on Farmers’ to understand their perceptive of risk mitigation and role of crop insurance.

This Report is the result of collective efforts of many people. The Joint Group gratefully acknowledges inputs and guidance received from all concerned and wishes to thank all those, too numerous to be mentioned by name, who contributed to various aspects of preparing this report.

The report is being submitted by the Joint Group with the hope that its recommendations and the initiatives based on these recommendations will find acceptability by all the stakeholders who look forward to having a better crop risk protection system, committed to the cause of minimizing the impact of crop failure on the income cycle of farmers.

(A.K. Singh)
Additional Secretary
Ministry of Agriculture
Government of India
(Chairman)
(Suparas Bhandari)
CMD,
Agriculture Insurance Company of India Ltd.
(Member) / (Satish Chander)
Joint Secretary
Ministry of Agriculture Government of India
(Member) / (G. C. Chaturvedi)
Joint Secretary
Ministry of Finance Government of India
(Member)

1. CROP INSURANCE PROGRAMMES IN INDIA – A REVIEW

1.1. Evolution:

Agriculture continues to be the mainstay of Indian economy. It contributes 22 percent of GDP, provides 58 percent of employment, sustains 69 percent of population, produces all the food & nutritional requirements of the nation, important raw materials for some major industries, and accounts for about 14 percent of exports. Heavy dependence on weather conditions and its long production cycle makes agriculture a risky economic activity.

Crop insurance is a mechanism to protect the farmers against uncertainties of crop production due to natural factors, beyond the control of farmers. It is also a financial mechanism, which minimizes the uncertainty of loss in crop production by factoring in large number of uncertainties having impact on crop yields, thereby distributing the burden of loss. In a country like India, where crop production is subjected to vagaries of weather and large-scale damages due to attack of pests and diseases, crop insurance assumes a very vital role.

An all-risk Comprehensive Crop Insurance Scheme (CCIS) for major crops was introduced in 1985, coinciding with the introduction of the VII-Five-year plan and subsequently National Agricultural Insurance Scheme (NAIS) w.e.f. Rabi 1999-00. These Schemes have been preceded by years of preparation, studies, planning, experiments and trials on a pilot basis. A brief chronology preceding the present NAIS would be a fruitful introspective exercise:

  1. Scheme based on ‘individual’ approach (1972-1978): The first ever scheme started on H-4 cotton in Gujarat, extending later to a few other crops & states. The scheme covered 3110 farmers for a premium of Rs. 4.54 lakhs and paid claims of Rs. 37.88 lakhs.
  1. Pilot Crop Insurance Scheme – PCIS (1979-1984): PCIS was introduced on the basis of report of late Prof. V.M.Dandekar and was based on ‘Homogeneous Area’ approach. The scheme covered food crops, oilseeds, cotton, & potato; and confined to loanee farmers on voluntary basis. The scheme was implemented in 13 states and covered 6.27 lakh farmers for a premium of Rs. 196.95 lakhs and paid claims of Rs. 157.05 lakhs.
  1. Comprehensive Crop Insurance Scheme – CCIS (1985-1999): The scheme was expansion of PCIS, and was compulsory for loanee farmers. Premium rates were 2 percent of sum insured for cereals & millets and 1 percent for pulses & oilseeds, with premium and claims shared between Centre & States in 2:1 ratio. The scheme was implemented in 16 States & 2 UTs and covered 7.63 crore farmers for a premium of Rs. 403.56 crores and paid claims of Rs. 2319 crores. The State of Gujarat received 47 percent of total claims, followed by AP (21 percent), Maharashtra (9 percent) and Orissa (8 percent). Deficit rainfall accounted for 75 percent of claims, followed by cyclones / floods (20 percent). The claim ratio (claims: premium) was 5.75 and loss cost (claims: sum insured) was 9.29 percent.
  1. Experimental Crop Insurance Scheme – ECIS (Rabi 1997-98): ECIS was introduced as an experiment to additionally cover non-loanee small / marginal farmers in 14 districts of 5 States with 100% premium subsidy. It covered 4.55 lakh farmers for a premium of Rs. 2.84 crores and paid claims of Rs. 37.80 crores.

1.2National Agriculture Insurance Scheme (NAIS):

NAIS was introduced during Rabi 1999-00 by improving the scope and content of erstwhile CCIS.

1.2.1. Salient features of the Scheme:

(a)States and Areas covered: The Scheme is available to all States and UnionTerritories on optional basis. A State opting for the Scheme will have to continue for a minimum period of three years.

(b)Farmer covered: All farmers including sharecroppers and tenant farmers growing the notified crops in the notified areas are eligible for coverage. The scheme is compulsory for farmers availing loans and voluntary for others.

(c)Crops covered: The Scheme covers

Food crops (Cereals, Millets & Pulses)

Oilseeds

Annual Commercial / Horticultural crops of Sugarcane, Cotton, Potato, Onion, Chilly, Turmeric, Ginger, Jute, tapioca, annual Banana & annual Pineapple

(d)Sum insured: The minimum Sum Insured (SI) in case of loanee farmer is the amount of loan availed, which can be further extended upto 150% of average yield. For non-loanee farmer, it can be upto value of 150% of average yield.

(e)Premium Rates: The premium rates are 3.5% for oilseeds & bajra and 2.5% for cereals, millets & pulses during Kharif; 1.5% for wheat & 2% for other food crops and oilseeds during Rabi. The rates for annual commercial / horticultural crops are actuarial.

(f)Premium subsidy: Small / Marginal farmers are subsidized in premium to the extent of 50 percent, to be shared equally between the Centre & States. The premium subsidy is, however, to be phased out over five years period on sunset basis. Accordingly the eligible subsidy during 2004-05 is 10 percent.

(g)Scheme approach: The scheme covers losses from sowing to harvesting, and operates on ‘area approach’ for widespread calamities. For this purpose a unit of insurance is defined which may be a Village Panchayat, Mandal, Hobli, Circle, Phirka, Block, Taluka etc. to be decided by the State govt. / UT. However, each participating State govt. / UT was required to reach the level of Village Panchayat as the unit within a maximum period of three years.

The Scheme is to operate on‘individual’ basis for specified localized calamities. However, individual assessment of losses is experimented only in a few areas – one block / taluka in each state.

(h) Loss assessment, Levels of Indemnity & Threshold Yield: The Threshold Yield (TY) or Guaranteed Yield for a crop in a Insurance Unit shall be the moving average yield based on past three years in case of Rice & Wheat and five years yield in case of Other crops, multiplied by the level of indemnity. Three levels of Indemnity, viz., 90%, 80% & 60% corresponding to Low Risk, Medium Risk & High Risk areas shall be available for all crops. The insured farmers of unit area may also opt for higher level of indemnity on payment of additional premium.

If the ‘Actual Yield’ (AY) per hectare of the insured crop for the defined area falls short of the specified ‘Threshold Yield’ (TY), all the insured farmers growing that crop in the defined area are deemed to have suffered shortfall in their yield.

(i) Sharing of Risk: Until transition is made to actuarial regime, Govt. of India and States shall share claims beyond 100% of premium for food crops & oilseeds on 50:50 basis. In case of annual commercial / horticultural crops, claims beyond 150% of premium in the first 3 or 5 years and 200% thereafter are borne by Centre and State on 50:50 basis

A copy of National Agricultural Insurance Scheme is appended as Annexure-2

1.2.2. COVERAGE UNDER NAIS:

Following 23 States & 2 UTs are presently implementing the scheme:

1. Andhra Pradesh, 2. Assam, 3. Bihar, 4. Chhattisgarh, 5. Goa, 6. Gujarat, 7. Haryana, 8. Himachal Pradesh, 9. Jammu & Kashmir, 10. Jharkhand, 11. Karnataka, 12. Kerala, 13. Madhya Pradesh, 14. Maharashtra, 15. Meghalaya, 16. Orissa, 17. Rajasthan, 18. Sikkim, 19. Tamilnadu, 20. Tripura, 21. Uttar Pradesh, 22. Uttaranchal, 23. West Bengal, 24. A&NIslands, 25. Pondicherry.

Following 5 States & 5 UTs are not implementing the scheme:

1.Arunachal Pradesh, 2. Manipur, 3. Mizoram, 4. Nagalad, 5. Punjab, 6. Chandigarh, 7. Dadra, Nagar & Haveli, 8. Daman & Diu, 9. Delhi, 10. Lakshwadweep.

Till Rabi 2003-04, NAIS covered 461.99 lakh farmers for a premium of Rs. 1242.66 crores and finalized claims of Rs. 4751.78 crores. The season-wise coverage since its inception is given in Table – 1 below:

Table- 1
Season
/ No. of covered States/UTs / Farmers covered (lakhs) / Area covered (lakhs ha.) / Sum
Insured
(Rs.crores) / Premium
(Rs. crores) / Claims
(Rs. crores) / Farmers Benefited
Kharif
2000 / 17 / 84.09 / 132.20 / 6903.38 / 206.73 / 1222.48 / 3635252
2001 / 20 / 86.96 / 128.88 / 7502.46 / 261.62 / 493.27 / 3145776
2002 / 21 / 97.69 / 155.33 / 9431.69 / 325.47 / 1821.85 / 4337041
2003 / 23 / 79.70 / 123.30 / 8114.06 / 283.26 / 634.17 / 1617802
TOTAL / 348.44 / 539.93 / 31951.59 / 1077.08 / 4171.77 / 12735871
Rabi
1999-00 / 9 / 5.80 / 7.81 / 356.41 / 5.42 / 7.69 / 55288
2000-01 / 18 / 20.92 / 31.11 / 1602.69 / 27.79 / 59.49 / 526697
2001-02 / 20 / 19.55 / 31.46 / 1497.51 / 30.15 / 64.66 / 453325
2002-03 / 21 / 23.27 / 40.38 / 1837.53 / 38.50 / 188.34 / 926392
2003-04 / 22 / 44.01 / 92.21 / 3027.09 / 63.72 / 259.83 / 1070725
TOTAL / 113.55 / 202.97 / 8321.23 / 165.58 / 580.01 / 3032427
Grand Total / 461.99 / 742.90 / 40272.82 / 1242.66 / 4751.78 / 15768298

Note: Claims of Rabi 2003-04 are provisional, as a few States are yet to report

1.2.3. Experience Analysis:

Analysis of crop & crop-group wise, state wise and farmer category wise performance of NAIS upto Rabi 2003-04 (since its inception) is presented in Tables 2 - 4:

Table-2
National Agricultural Insurance Scheme: Crop-wise Premium (as % total), Claims (as % total), Claims Ratio, and Loss Cost for Rabi 1999-00 to Rabi 2003-04 (All Seasons)
(Premium & Claims Rs. Crores)
Crop / Premium
(% of total for all crops) / Claims
(% of total for all crops) / Claim Ratio (Claims/ Premium) / Loss Cost
(Claims as % of Sum Insured)
Paddy (rice) / 328.06
(26.40%) / 1225.02
(25.81%) / 3.73 / 9.08
Wheat / 34.09
(2.74%) / 116.23
(2.42%) / 3.41 / 5.15
Jowar / 22.39
(1.807%) / 179.21
(3.78%) / 8.00 / 19.79
Bajra / 16.62
(1.34%) / 61.21
(1.27%) / 3.68 / 18.01
Other cereals / 17.34
(1.40%) / 130.74
(2.70%) / 7.54 / 18.17
All cereals / 418.50
(33.68%) / 1712.41
(35.98%) / 4.09 / 9.67
Groundnut / 279.93
(22.47%) / 1603.08
(33.78%) / 5.74 / 19.70
Other oilseeds / 90.15
(7.25%) / 301.37
(6.37%) / 3.34 / 11.05
All oilseeds / 369.40
(29.73%) / 1904.45
(40.16%) / 5.16 / 17.52
Pulses / 45.13
(3.63%) / 305.64
(6.46%) / 6.77 / 16.94
Sugarcane / 57.17
(4.60%) / 120.18
(2.50%) / 2.10 / 2.88
Cotton / 287.91
(23.17%) / 498.71
(10.50%) / 1.73 / 12.44
Other Commercial
Crops / 64.54
(5.19%) / 210.38
(4.41%) / 3.26 / 11.53
All Commercial crops / 409.62
(32.96%) / 829.27
(17.40%) / 2.02 / 8.31
All crops / 1242.65
(100%) / 4751.77
(100%) / 3.82 / 11.78
Source: Agricultural Insurance Company of India (AIC) Ltd.

As can be seen from Table-2, the Loss Cost is 11.78 percent in case of NAIS as compared to 9.29 for the Comprehensive Crop Insurance Scheme. However, the claim ratio for the NAIS is lower i.e. 3.82 as compared to 5.75 for the CCIS, even though the indemnity as a percentage of the sum ensured is higher. This is because of higher premium rates under NAIS. The average premium in case of the NAIS was 3.08 percent, compared to 1.62 percent under CCIS.

Groundnut crop accounts for a major part of the indemnity in the NAIS (Table-2). It has the highest Loss cost of 19.70 per cent and accounts for 34 per cent of the total indemnity though its share in the premium is only 22 per cent. Oilseeds and Pulses have high loss cost at 17.52percent and 16.94 percent, while annual commercial crops and cereals have lower loss cost at 8.31 percent and 9.67 percent.

Six States, viz. Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Andhra Pradesh, and Orissa account for major part of the indemnity. As can be seen in Table- 3, these States account for 83 per cent of the sum insured, 88 per cent of the premium and 91 per cent of the claims for the entire country. The States of Gujarat and Karnataka posted the maximum loss cost with 21.57 percent and 18.78 percent, respectively. Andhra Pradesh posted least loss cost with 6.92 percent, while Maharashtra, Madhya Pradesh and Orissa had loss cost in between, at 9.24percent10.04percent and 11.90 percent, respectively. Deficit rainfall accounted for 90 percent of claims.