Performance of National Agricultural Insurance Scheme (NAIS) INTRODUCTION

Performance of National Agricultural Insurance Scheme (NAIS) INTRODUCTION Agriculture sector contributing 14.6 per cent (2009-10) to the national Gross Domestic Product (GDP) is one of the largest sectors of the Indian economy and a significant piece of the overall socio-economic development of India. Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the Green Revolution in India. However, agriculture in India is prone to various risks and uncertainties due to its heavy dependence on weather conditions which are generally unpredictable and lack of effective risk aversion mechanisms. With the growing commercialization of agriculture along with increasing consumers any eventualities during agricultural production to the supply of the produce to the consumers lead to heavy consequences to both the sides. Various mechanisms have been introduced like futures trading and contract farming in recent times to mitigate especially price risk either directly or indirectly. One of the most important is agricultural insurance which can effectively address the risks arising in agriculture due to various natural and manmade events. The question of introducing an agricultural insurance scheme was examined soon after the independence in 1947. Agriculture insurance was first initiated in 1972-73 when the General Insurance Corporation (GIC) of India introduced a crop insurance scheme on H-4 cotton and later included groundnut, wheat and potato. The first Individual Approach Scheme continued up to 1978-79 and covered only 3,110 farmers. After gaining experience of the aforesaid scheme and many discussions, Pilot Crop Insurance Scheme (PCIS) was launched by the GIC in 1979, which based on the Area Approach for providing insurance cover against a deficit in crop yield below the threshold level. The scheme covered cereals, millets, oilseeds, cotton, potato and chickpea and it was confined to loanee farmers of institutional sources on a voluntary basis. The PCIS had various shortcomings due to which it was closed down by 1984. The Comprehensive Crop Insurance Scheme (CCIS) was introduced by the central government during the year 1985-86. Till kharif 1999, the scheme was adopted by 15 states and 2 union territories. Both, PCIS and CCIS were confined only to farmers who had borrowed seasonal agricultural loans from financial institutions. The main distinguishing feature of the two schemes was that PCIS was on voluntary basis, whereas CCIS was compulsory for loanee farmers in the participating states and union territories. CCIS covered 763 lakh farmers but CCIS suffered from various shortcomings like skewed indemnity payouts towards a particular state or crop, coverage confining to loanee farmers, uniform premium rate for all the farmers and regions, coverage to few crops and time lag for indemnity payment, area approach (Jain, 2004). CCIS was subsequently replaced by the National Agricultural Insurance Scheme (NAIS) from 1999. 1

National Agricultural Insurance Scheme (NAIS) The NAIS which was introduced in the country from the 1999-2000 rabi season, was made available to both the borrower and the non-borrower farmers. The scheme operates on the basis of both area approach for widespread calamities and individual approach for localised calamities and hailstorms, landslides, cyclones and floods. All food grains, oilseeds and annual horticultural/commercial crops were covered for which past yield data are available for an adequate number of years. Among the annual commercial and horticultural crops, sugarcane, potato, cotton, ginger, onion, turmeric, chillies, coriander, cumin, jute, tapioca, banana and pineapple, are covered under the scheme. Presently, NAIS is implemented in all the states except Punjab, Arunachal Pradesh, Manipur, Mizoram and Nagaland. These five states did not join the NAIS and have extended different reasons for not joining the scheme. North East Hill (NEH) region states were interested in covering perennial horticultural crops under NAIS. Similarly, Punjab was also not interested in multi-peril crop insurance and wanted insurance cover against hailstorm only with higher indemnity limits. The concept of different premium rates for different crops was introduced. The premium rates applicable on the sum insured are: wheat 1.5 per cent, bajra and oilseeds 3.5 per cent, other rabi crops 2.0 per cent, other kharif crops 2.5 per cent. Actuarial rate applies for the annual commercial and horticultural crops. Subsidy of 50 per cent of the premium in the case of small and marginal farmers, were provided initially which will be shared equally by the Government of India and the concerned state/ut. The premium subsidy was to be phased out over a period of five years. Performance analysis of the NAIS of five crops viz. paddy, wheat, groundnut, potato and cotton in various states over the years is discussed subsequently. Paddy The rice harvesting area in India is the world's largest. India is the world's second largest rice producer, followed by China. Rice cultivation is found all over India. Andhra Pradesh is historically known as the "Rice Bowl of India". It is the staple food of the States in southern and eastern India. However, paddy production comes with a variety of problems and constraints. The problems / constraints in rice production vary from state to state and area to area. Some of the major problems in rice cultivation are: About 78 per cent of the farmers are small, marginal, and poor in resource. The problems of flash floods, water logging/ submergence due to poor drainage are very common in East India. Continuous use of traditional varieties due to the non-availability of seeds and farmers lack of awareness about high yielding varieties. Low soil fertility due to soil erosion resulting in loss of plant nutrients and moisture. Low and imbalanced use of fertilizers, low use efficiency of applied fertilizers particularly in the North-Eastern and Eastern States. The Eastern region experiences high rainfall and severe flood almost every year which lead to heavy loss. 2

Heavy infestation of weeds and insects/pests. Delay in monsoon onset often results in delayed and prolong transplanting and suboptimum plant population (Mostly in rainfed lowlands). In the years of scanty or adverse distribution of rainfall, the crop fails owing to drought etc. An analysis of the performance of NAIS of Paddy crop in five states was analysed and is given in Table 1. In Andhra Pradesh, claims were more than four times the premium paid during 2005-06 BE and 2009-10 BE. A comparison of claims/sum assured ratio and premium/sum assured ratio also indicates the magnitude of loss. The premium/sum assured was 2.5 per cent over the years, however, the claims/sum assured varied over the decade. The difference in claims/sum assured and premium/sum assured was the highest during 2005-06 BE and 2009-10 BE with 7.97 per cent and 9.18 per cent, respectively. This implies a loss of 77.97 per cent and 9.18 per cent of the value of output during the respective year. The percentage farmers benefited over the farmers covered was very low during 2007-08 BE with 7.79 per cent and was the highest with 38.41 per cent during 2005-06 BE. The area covered under the scheme fluctuated over the years and ranged from 27.4 per cent to 43.2 per cent. In Chhattisgarh, the claims ratio was more than three (3.72) during 2001-02 BE and was lower during the succeeding years. The premium to sum assured ratio ranged between 2-3 per cent over the years while claims/sum assured ratio fluctuated highly over the years. The magnitude of loss of the assured value of output was 7.53 per cent as indicated by the difference between the premium/sum and claim/sum assured ratio. The percentage farmers benefited to farmers covered was very low with only 1.60 per cent during 2005-06 BE and highest in 2001-02 BE with 37.02 per cent. The area under paddy covered by the scheme increased over the years and was the highest with 45.80 per cent during 2009-10 BE. The area covered under NAIS was low in low in Orissa as compared to Andhra Pradesh. The claims ratio was highest with four times the sum assured during 2001-02 BE, however, in the following years it was lower. In that year, the magnitude of loss of the value of output was 8.90 per cent. The percentage benefited was highest during 2001-02 BE with 35.16 per cent and decreased to around 5-6 percent in the subsequent years and increased gradually again to 14.47 per cent during 2009-10 BE. In Uttar Pradesh, the area covered rose gradually over the years to 20.14 per cent in 2009-10 BE. The claims ratio ranged between 1-2 in most of the years except during 2001-02 BE where the claims ratio was less than unity implying that premium collected was higher than the claim amount. In West Bengal, which is one of the most important paddy growing states in India, the area covered by NAIS of paddy crop remained very low has not reached even 10 per cent since its implementation. Claims during the initial years were low and the premium amount collected covered the claim amount. However, in the subsequent years the claims were almost 3-5 times the premium. The percentage los of the value of output was the highest during 2007-08 BE with 5.78 per cent. 3

Table 1: Performance of NAIS of Paddy in various states Year Area (BE) Covered Claims Ratio (Claims/Prem ium) Premium / Sum assured Claims / Sum assured Farmers Benefited/ Farmers Covered ANDHRA PRADESH 2001-2002 35.4 2.48 2.50 6.21 22.38 2003-2004 43.2 1.09 2.50 2.72 12.75 2005-2006 27.4 4.19 2.50 10.47 38.41 2007-2008 29.9 0.83 2.50 2.08 7.79 2009-2010 38.1 4.67 2.50 11.68 34.88 CHHATTISGARH 2001-2002 35.0 3.72 2.62 10.15 37.02 2003-2004 33.8 0.14 2.59 0.37 2.05 2005-2006 29.2 0.14 2.61 0.38 1.60 2007-2008 37.7 1.41 2.55 3.67 15.57 2009-2010 45.8 2.13 2.53 5.43 21.13 ORISSA 2001-2002 23.0 4.14 2.65 11.55 35.16 2003-2004 17.4 0.96 2.70 2.53 5.67 2005-2006 18.3 0.59 2.54 1.50 5.04 2007-2008 16.3 1.17 2.54 2.98 8.75 2009-2010 22.1 2.09 2.51 5.25 14.47 UTTAR PRADESH 2001-2002 6.06 1.30 2.50 3.25 17.16 2003-2004 3.58 0.55 2.50 1.36 9.72 2005-2006 5.49 1.55 2.50 3.87 20.27 2007-2008 11.59 1.54 2.50 3.85 12.03 2009-2010 20.14 1.36 2.50 3.40 12.72 WEST BENGAL 2001-2002 4.06 0.06 2.40 0.14 3.42 2003-2004 3.58 0.55 2.50 1.36 9.72 2005-2006 3.61 3.26 2.50 8.16 21.94 2007-2008 3.44 3.31 2.50 8.28 19.75 2009-2010 4.22 2.75 2.50 6.88 21.34 Source: Authors calculation based on data taken from AIC and Agricultural Statistics at a Glance. 4

It can be observed that area covered has not reached 50 per cent in the past ten years of its implementation in all the states. Over and above, in all the states, claims were much higher than the sum assured, indicating a loss in the scheme. Wheat Wheat is the second most important crop of India next to rice. It is the staple food of north- western India. Performance of NAIS of wheat crop in Madhya Pradesh, Rajasthan and Uttar Pradesh is given in Table 2. Table2: Performance of NAIS of Wheat in various states Year (BE) Area Covered MADHYA PRADESH Claims Ratio (Claims/Premium) Premium / sum insured Claims / sum insured Source: Authors calculation based on data taken from AIC and Agricultural Statistics at a Glance. Farmers Benefited/ Farmers Covered 2001-2002 25.59 5.15 1.50 7.74 36.97 2003-2004 34.92 2.28 1.51 3.43 21.96 2005-2006 75.35 0.93 1.50 1.40 15.11 2007-2008 67.56 7.33 1.50 11.00 33.22 2009-2010 38.67 2.12 1.50 3.18 13.52 RAJASTHAN 2001-2002 NA NA NA NA NA 2003-2004 0.80 0.19 1.50 0.29 1.23 2005-2006 24.12 1.52 1.48 2.25 14.06 2007-2008 21.28 1.84 1.50 2.76 20.82 2009-2010 15.57 0.92 1.50 1.38 12.79 UTTAR PRADESH 2001-2002 6.41 1.15 1.50 1.72 19.71 2003-2004 7.85 1.47 1.50 2.21 24.98 2005-2006 8.54 5.01 1.50 7.53 42.60 2007-2008 13.31 3.32 1.50 4.98 23.15 2009-2010 15.34 0.87 1.50 1.31 13.84 5

In Madhya Pradesh, the area covered reached as high as 75.35 per cent during 2005-06 BE. The claims ratio was almost 5-7 times during 2001-02 BE and 2007-08 during which percentage farmers benefited to the farmers covered was also the highest with 36.97 per cent and 33.22 per cent during the respective years. Similarly to Madhya Pradesh, in Rajasthan the claims ratio was high during 2007-08 BE, during which the percentage farmers benefited was also the highest with 20.82 per cent as compared to rest of the years. There was a loss of 1.26 per cent of the value of output during 2007-08 BE. However, during 2003-04 BE and 2009-10 BE the claims ratio was lower than one which indicates that the premium collected was more than the claims. Therefore, the percentage farmers benefited was quite low during the years where the claims ratio was low. The percentage area covered was the highest during 2005-06 BE with 24.12 per cent. In Uttar Pradesh, the area covered under NAIS ranged from 8-15 per cent during the last 10 years of its implementation. The claims ratio is overall can be said to be low except for the years 2005-06 BE and 2007-08 BE where the ratio was 5.01 and 3.32, respectively. During 2005-06 BE, the loss of value of output was naturally high with 3.48 per cent. The percentage farmers benefited to the farmers covered was 42.60 per cent during 2005-06, where the claims ratio was also the highest. Among the three states, the area covered was the highest in Madhya Pradesh and was the lowest in Uttar Pradesh. However, the percentage farmers benefited was the highest in Uttar Pradesh and lowest in Rajasthan. In most of the years the claims ratio was higher than one indicating that in all the three states the loss to the scheme was more and was therefore not economically viable. Groundnut Groundnut is grown on large scale in almost all the tropical and sub-tropical countries of the world. India occupies first position in the acreage as well as production. It is grown over an area of 75.48 lakh hectares with total production of 63.87 lakh tons. Its cultivation is mostly confined to the southern Indian states. Groundnut is the single largest source of edible oil in India and constitutes roughly 50 percent of the total oilseeds production. India is the largest producer of groundnut in the world. But average yields are low at 745 kg/ha. One of the important factor contributing to low yield is disease attack. Groundnut crop is prone to attack by numerous diseases to a much larger extent than many other crops. More than 55 pathogens including viruses have been reported to affect groundnut. Nearly 80per cent of the area sown to groundnuts in India is rainfed and relies entirely on summer monsoon rainfall. The rainfall in most of the groundnut-growing regions is low and erratic. There is a high variability in the onset of monsoons, annual rainfall, and distribution of rainfall over the growing season. Moreover, such high variability in precipitation is generally associated with a high probability of an early season drought. The performance of NAIS of groundnut crop in five major groundnut growing states is given in Table 3. 6

Table 3: Performance of NAIS of Groundnut in various states Year (BE) Claims Ratio Premium / sum assured Area Covered ANDHRA PRADESH Claims / sum assured Farmers Benefited/ Farmers Covered 2001-2002 47.04 5.51 3.50 19.29 47.50 2003-2004 55.63 4.61 3.50 16.14 25.26 2005-2006 71.19 10.07 3.50 35.24 63.40 2007-2008 78.81 7.77 3.50 27.20 43.85 2009-2010 90.58 4.70 3.50 16.44 47.16 GUJARAT 2001-2002 66.16 6.38 3.50 22.33 34.91 2003-2004 80.31 2.85 3.50 9.98 22.03 2005-2006 95.39 4.18 3.50 14.62 27.29 2007-2008 73.73 3.04 3.50 10.64 20.16 2009-2010 81.71 4.61 3.50 16.12 38.33 KARNATAKA 2001-2002 18.94 4.49 3.74 16.39 54.23 2003-2004 15.54 5.52 4.02 23.32 75.53 2005-2006 22.67 4.44 3.49 15.52 42.82 2007-2008 21.12 2.55 3.50 8.94 14.71 2009-2010 17.51 3.57 3.50 12.49 34.20 MAHARASHTRA 2001-2002 62.25 0.51 3.50 1.79 7.99 2003-2004 59.24 1.40 3.53 4.92 21.08 2005-2006 24.64 0.86 3.64 3.14 16.82 2007-2008 16.18 1.34 3.82 5.12 8.64 2009-2010 8.88 0.93 3.78 3.54 18.32 TAMIL NADU 2001-2002 0.37 1.34 3.50 4.70 18.87 2003-2004 0.15 1.21 3.50 4.23 31.52 2005-2006 0.12 0.69 3.50 2.40 14.75 2007-2008 0.27 0.07 3.50 0.26 2.74 2009-2010 1.05 1.37 3.57 4.98 35.63 Source: Authors calculation based on data taken from AIC and Agricultural Statistics at a Glance. 7

In Andhra Pradesh, the area covered rose gradually over the years and reached 90.58 per cent during 2009-10 BE. Overall, the claims ratio ranged from 4-7, reaching 10 times of the premium paid during 2005-06 BE, which was the highest. The claims/sum assured ratio and the percentage farmers benefited was also the highest during 2005-06 BE. In Gujarat, the area covered fluctuated over the decade and ranged from 66-96 per cent and the highest percentage covered was 95.89 per cent during 2005-06 BE. The premium/sum assured ratio was fixed at 3.5 per cent and the claims/sum assured ratio varied from 10-23 per cent. A loss of 15.95 per cent of the value of output was observed during 2001-02 BE where the claims ratio was also the highest with more than six times of the value of premium paid. The percentage farmers benefited was the highest during 2009-10 BE with 38.33 per cent. Though the claims ratio was lower than that of 2001-02 BE, the farmers benefited was higher in 2009-10 BE and this can be attributed to the higher area coverage during 2009-10 BE. In Karnataka, the claims ratio was 4-5 times of the premium paid in majority of the years. Almost 76per cent of the farmers covered were benefited during 2003-04 BE, accordingly the claims ratio was also high during that year which was 5.52 times the value of the premium paid. The area covered was low ranging from 18-23 per cent of the total area under groundnut. The area coverage reached the highest of 22.67per cent during 2005-06 BE and decreased thereafter. The area under groundnut covered by the NAIS was initially high in Maharashtra reaching 62 per cent during 2001-02 BE and decreased over the years and reached an all time low during 2009-10 BE with only 8.88 per cent of the area covered. The claims ratio was less than one in most of the years indicating that premium collected was higher than the amount which was claimed. There might be less risk leading to the lack of need to claim insurance because of which the popularity of the scheme must have reduced over the years in Maharashtra. The farmers benefited/ farmers covered ratio was also low, the highest being 21 per cent. As compared to the above four states, the area covered was the lowest in Tamil Nadu. Further study may be needed to look into the reasons for such a low popularity of groundnut NAIS in Tamil Nadu. The claims ratio was low in all the years and in some years it is less than one indicating that the premium collected over the claims was higher. In 2009-10 BE as compared to the previous years the area covered was higher, which was 1.05 per cent. In 2009-10 BE, as the area coverage rose, the claims ratio and the percentage farmers benefited over the farmers covered also increased which was 35.63 per cent. The performance of the groundnut NAIS varies from state to state or region to region with the variation of the degree of risk. Among the five states studied, it can be said that the groundnut NAIS was most popular in Gujarat while in Maharashtra the popularity declined over the years. In Tamil Nadu the penetration remained low since its implementation. Potato Potato is the world's fourth important food crop after wheat, rice and maize because of its great yield potential and high nutritive value. It constitutes nearly half of the world s annual output of all root and tuber crops. With an annual global production of about 300 million tonnes, 8

potato is an economically important staple crop in both developed and developing countries. India ranks 4 th in area and 3 rd in production of potato in the world after China and Russian Federation. Potato cultivation involves various risks caused by pests, diseases, weather, etc. Potato crop is infested about by one dozen pests. The historically significant Late blight remains an ongoing problem. Potatoes are sensitive to heavy frosts, which damage them in the ground. Table 4: Performance NAIS of Potato in various states Year (BE) Area Covered Claims Ratio Premium / sum assured 9 Claims / sum assured Farmers Benefitted/ Farmers Covered ASSAM 2001-2002 0.11 0.01 6.74 0.10 6.89 2003-2004 0.27 0.42 6.73 2.85 17.25 2005-2006 1.24 2.91 6.19 18.85 50.47 2007-2008 1.35 0.40 5.87 2.50 10.43 2009-2010 5.36 0.59 5.28 3.14 21.47 BIHAR 2001-2002 0.11 0.83 5.88 3.91 42.18 2003-2004 0.14 0.01 6.50 0.07 5.38 2005-2006 0.38 0.96 7.35 7.12 53.53 2007-2008 3.89 5.49 5.70 29.21 82.86 2009-2010 5.09 9.41 6.30 58.83 78.98 UTTAR PRADESH 2001-2002 19.14 0.03 3.28 0.10 3.23 2003-2004 28.70 2.24 2.07 4.32 18.57 2005-2006 25.40 1.15 2.55 2.86 27.88 2007-2008 24.04 1.19 4.02 4.74 31.43 2009-2010 19.12 0.44 3.48 1.47 14.19 WEST BENGAL 2001-2002 7.84 0.15 3.60 0.48 3.70 2003-2004 15.08 5.31 3.27 17.25 30.87 2005-2006 29.12 2.61 3.58 8.86 29.20 2007-2008 29.35 8.33 3.57 26.74 50.48 2009-2010 43.68 2.41 10.05 24.26 48.24 Source: Authors calculation based on data taken from AIC and Agricultural Statistics at a Glance. Therefore, insuring potato crop serves as a measure to combat the many risks involve. The analysis of the performance of NAIS of potato crop is presented in Table 4. In Assam the area coverage increased over the years of its implementation though the coverage is low, the highest being 5.36 per cent during 2009-10 BE. The claims ratio was the

highest during 2005-06 BE in which the claims was almost three times of the premium collected. The farmers benefited were around 50per cent of the farmers covered during that year. In Bihar too, the same pattern of increasing area coverage as in Assam can be observed and the maximum coverage over the years of its implementation of 5.09 per cent can be seen during 2009-10 BE. Though the claims ratio was the highest during 2009-10 BE with 9.41, the highest percentage of farmers benefiting to the farmers covered was during 2008-09 BE with 82.86 per cent. The area covered was higher in Uttar Pradesh as compared to Assam and Bihar, however, a declining trend can be observed in the area coverage after 2003-04 BE. The claims ratio was more than two time the premium paid during 2003-04 BE. The farmers benefited ranged from as low as 3.23 per cent during 2001-02 BE to 31.43 per cent during 2007-08 per cent. In West Bengal too, the area coverage increased over the years and as compared to the previous three states, the coverage was the highest with coverage of 43.68 per cent of the total area under potato. The claims ratio was also very high with the value of the claims ratio reaching 8.33 during 2007-08 BE and there was a loss of 23.19 per cent of the assured value of output during the biennium. From the analysis, it can be observed that the adoption of the scheme for potato was low in Assam and Bihar and at the same time, the claims ratio was also low in the two states. Over the years lack of awareness or not facing serious risks in potato cultivation may be thee reason for the low adoption in these two states. In West Bengal, high claims ratio can be observed in majority of the period except during 2001-02 BE, indicating that potato cultivation in West Bengal is risk prone, and therefore, the adoption of the insurance scheme on potato must be high leading to high area coverage. On the insurance institution side, since most of the time the claims ratio was higher than one, the economic viability of the scheme is questionable. Cotton Cotton is one of the most important commercial crops playing a key role in economic and social affairs of the world. It is an important fibre crop, which is cultivated in more than 80 countries of the world but ten countries including USA, China and India account for nearly 85 per cent of the total production. India ranks first in the world in respect of acreage with about 8 million hectares under cotton cultivation and fourth in total seed cotton production. In India nearly 60 per cent area under cotton cultivation is rain fed. Table 5 gives and analysis of the performance of NAIS of cotton crop in four important cotton growing states of the country. In most of period in Andhra Pradesh, the area coverage ranged from 12-17 per cent of the total cotton growing area. The claims ratio was less than one in most of the years reaching one only once during 2003-04, indicating that in Andhra Pradesh, cotton insurance was economically viable since its implementation. The farmer benefited too was less than 10 per cent of the farmers covered in majority of the biennium except during 2003-04 BE. 10

Table 5: Performance of NAIS of cotton in various states Year (BE) Area Covered Claims Ratio Premium / sum assured 11 Claims / sum assured Farmers Benefitted/ Farmers Covered ANDHRA PRADESH 2001-2002 11.83 0.39 6.36 2.54 5.81 2003-2004 17.00 1.00 4.88 4.89 11.17 2005-2006 15.55 0.17 8.11 1.38 6.34 2007-2008 10.68 0.03 6.81 0.22 2.11 2009-2010 12.90 0.32 5.97 1.90 5.98 GUJARAT 2001-2002 23.66 4.25 7.43 28.86 71.78 2003-2004 53.11 0.05 13.13 0.59 2.95 2005-2006 3.57 0.02 14.77 0.24 1.48 2007-2008 1.02 0.03 11.63 0.38 4.54 2009-2010 42.34 0.25 8.88 2.27 10.66 MADHYA PRADESH 2001-2002 30.51 0.33 9.87 3.24 19.07 2003-2004 26.11 0.02 7.64 0.11 1.14 2005-2006 21.33 0.00 7.98 0.00 0.00 2007-2008 9.47 0.00 3.95 0.00 0.00 2009-2010 18.95 0.04 5.25 0.23 3.84 MAHARASHTRA 2001-2002 71.11 0.07 8.38 0.58 5.73 2003-2004 31.78 0.23 6.12 1.38 5.96 2005-2006 11.27 0.08 3.75 0.58 3.90 2007-2008 7.43 0.13 13.09 1.68 6.67 2009-2010 42.54 0.69 6.09 5.92 27.23 Source: Authors calculation based on data taken from AIC and Agricultural Statistics at a Glance. In Gujarat, the area coverage fluctuated over the years and reached all time low with only 1.02 per cent coverage during 2007-08 BE, and rose steeply to 42.34 per cent during 2009-10 BE. The claims ratio was four times the premium collected during 2001-02 BE benefiting 71.78 per cent of the farmers covered by the scheme. The high number of farmers benefiting maybe one of the reasons for the drastic increase in the area coverage during the consecutive biennium of 2002-03. However, during the rest of the biennium, the claim ratio remained low with a value less than one.

In Madhya Pradesh, the value of claims ratio was less than one in all the years and during the 2005-06 and 2007-08 BE, the claims was nil. The area coverage fluctuated over the years, but remained low attaining 30per cent only during 2001-02 BE. The claims ratio was also less than one in all the biennium in the state of Maharashtra. The area coverage rose drastically during 2009-10 BE to 42.54 per cent after an all time low of 7.43 per cent during 2007-08 BE. The percentage farmers benefited was high during 2009-10 BE with 27.23 per cent. Overall, in the four states it is observed that the claims ratio was low indicating that the scheme was economically viable to the insurance companies for cotton crop as there was no loss in premium received by NAIS in these states. In three states, the area coverage increased steeply during 2009-10 BE, the reason which might be increased in awareness. Crop-wise at All-India level The performance of NAIS crop-wise viz. paddy, wheat, groundnut, potato and cotton at all India level during 2007-10 is given in Table 6. The area coverage of the crops was well below 40 per cent except for groundnut which was 51.59 per cent during 2007-08 and which gradually increased to 69.88 per cent in 2009-10, indicating the growing importance of the crop among the farmers insured. Though coverage was low, an increasing trend can be observed in cotton crop which increased from 3.77 per cent during 2007-08 to 5.53 per cent during 2009-10. In potato crop a declining trend can be seen where the area coverage declined from 31.08 per cent in 2007-08 to 13.87 per cent in 2009-10. Wheat and paddy, the two most important foodgrain crop of India, the area covered by NAIS is still very low with value lying below 30 per cent. The claims ratio was less than unity in three crops i.e. groundnut, potato and cotton in 2007-08 and during the two consecutive years, it was more than unity in majority of the crops. In 2009-10, the claims ratio was high in all the crops compared to other years and the highest can be seen in groundnut crop with a value of 9.06. The percentage farmers befitting to the farmers covered was the highest during 2008-09 with almost 79 per cent of potato farmers who has taken the insurance benefitting from the scheme. The percentage crop output in value terms covered by the scheme fluctuated over the years for paddy, wheat and potato, in groundnut and cotton, the percentage coverage has declined over the years. In groundnut, the value declined from 4.38 to 1.87 per cent and in cotton it declined from 69 to 27.08 per cent. In the decade of its implementation, the penetration of NAIS is still low though it differs from region to region and lacks financial viability. Various factors may be responsible for its low penetration among which the nature of the insurance products and its delivery system are some of the most important factors. 12

Table 6: Performance of NAIS crop-wise at all-india level Crops Area Covered Claims/ Premium ratio Premium/Sum assured 13 Claims/Sum assured Farmers Benefited/ Farmers Covered Sum assured as % of Value of Crop Output 2007-08 Paddy 18.21 3.87 2.43 9.41 15.55 9.81 Wheat 13.20 5.96 1.51 9.00 28.01 17.43 Ground- 51.59 0.19 3.47 0.66 2.52 4.38 nut Potato 31.08 0.89 4.61 4.09 15.77 10.75 Cotton 3.77 0.03 7.61 0.24 0.80 69.00 2008-09 Paddy 14.91 5.11 2.37 12.14 25.22 9.88 Wheat 13.99 3.19 1.52 4.83 16.84 13.83 Ground- 52.98 9.06 3.47 31.45 53.26 3.23 nut Potato 21.16 4.35 7.39 32.17 78.87 6.60 Cotton 4.99 0.10 10.22 0.98 6.77 49.20 2009-10 Paddy 26.02 3.79 2.47 9.36 31.73 5.12 Wheat 12.30 1.39 1.50 2.08 16.41 17.00 Ground- 69.88 6.99 3.48 24.36 59.90 1.87 nut Potato 13.87 0.13 7.67 1.00 3.93 8.10 Cotton 5.53 0.58 7.28 4.20 15.04 27.08 Source: Authors calculation based on data taken from AIC, Economic Survey and Agricultural Statistics at a Glance. Issues related to the NAIS A look into some of the issues related to NAIS which has been identified by the Planning Commission, 2007 and in other related studies (Raju and Chand, 2008) is discussed below: a) Reducing the insurance unit to the village panchayat level The insurance unit under NAIS was taken on the basis of homogeneous area, and the insurance unit were Mandal/ Taluk/ Block or equivalent unit, in most instances. Since these are large administrative units, considerable differences in yield and level of impact of natural calamities arise. Reducing the unit for determining claim to level of village in the case of large villages and to cluster of villages in the case of small villages, will help in increasing

the popularity of the scheme. However, the most ideal approach is individual approach which would reflect crop losses on a realistic basis, and has been regarded most desirable. b) Threshold yield/ guaranteed yield Under the scheme, the Guaranteed Yield, on which indemnities are calculated, are estimated based on the moving average yield of the preceding three years for rice and wheat, and preceding five years for other crops, multiplied by the level of indemnity. In areas where there are consecutive adverse seasonal conditions, it pulls down the average yield. Therefore, the best suggested method is to consider the best five, out of the preceding ten years yield. c) Extending risk coverage to prevented sowing/planting in adverse seasonal conditions In many instances, sowing/ planting is prevented due to adverse seasonal conditions and the farmer not only loses his initial investment, but also loses the opportunity value of the crop. The NAIS does not cover such loses which comes under crop related seasonal risk. Pre-sowing risk particularly prevented/ failed sowing/ re-seeding on account of adverse seasonal conditions should be covered, wherein up to 25 per cent of sum insured could be paid as compensation, covering the input cost incurred till that stage. d) Coverage of post-harvest losses Post-harvest losses include the crops getting damaged by cyclones, floods, etc., when left in the field for drying after harvest which is practiced for some crops like paddy. Under NAIS, the coverage of risk is only upto harvesting, and such post-harvest loss are not compensated. Extending the insurance cover for a specific time period after harvest will help to help the farmers deal with such risk. e) On-account settlement of claims One of the most important set back in NAIS was the long gap between the occurrence of loss and actual claim payment, which was around 8-10 months. Claims settlement usually has to wait for the results of the Crop Cutting Experiments (CCEs) and the release of requisite funds from the central and state governments. It has been suggested to introduce on-account settlement of claims, without waiting for the receipt of yield data, to the extent of 50 per cent of likely claims, subject to adjustment against the claims assessed on the yield basis. f) Increasing awareness among non-loanee farmers For loanee farmers, the premia is deducted at the time of loan disbursement and claim settlements being credited to the farmer s loan account. In most of the cases, an illiterate or poorly educated farmer is hardly aware of the existence of the scheme, let alone its benefits. The awareness and participation of non-laonee farmers is worse. Initiating, major pilot studies to develop good communication with the farmers and increasing the awareness 14

among the farmers, is hence very important; to enhance the knowledge of the farmers regarding crop insurance and at the same time, increase its penetration rate. MODIFIED NATIONAL AGRICULTURAL INSURANCE SCHEME (MNAIS) The Government of India has modified the NAIS and launched Modified National Agricultural Insurance Scheme (MNAIS) with some additional features which were lacking in the NAIS, in addition to those available under NAIS, in selected States / districts from Rabi 2010-11. The features of the pilot MNAIS launched is discussed below: FARMERS COVERED: All farmers including sharecroppers, tenant farmers growing the notified crops in the notified areas are eligible for coverage. The Scheme covers following groups of farmers: a) On a compulsory basis: All farmers growing notified crops and having sanctioned credit limits for Seasonal Agricultural Operations (SAO) loans from Financial Institutions for notified crop (s) i.e. Loanee Farmers. b) On a voluntary basis: All other farmers growing notified crops (i.e., Non-Loanee farmers) who opt for the Scheme. These farmers could be: (i) Individual owner-cultivators (ii) Farmers enrolled under contract farming, directly or through promoters / organizers (iii) Groups of farmers / societies serviced by Fertilizer Companies, Pesticide firms, Crop Growers associations, Self Help Groups (SHGs), Non-Governmental Organizations (NGOs), and Others (iv) Corporate farms INSURANCE UNIT (IU) For a major crop like paddy, the IU will be village or Gram panchayat, while for Minor crops; the IU would be between Gram panchayat and block / tehsil. To facilitate implementation of this Scheme at village level, the requirement of minimum number of CCEs to be conducted at village / village panchayat level has been brought down from 8 to 4 CCEs for all crops except groundnut. LEVELS OF INDEMNITY & THRESHOLD YIELD Three levels of Indemnity, viz., 90%, 80% & 70% corresponding to Low Risk, Medium Risk & High Risk areas shall be available for all crops. The Threshold yield (TY) or Guaranteed yield for a crop in a Insurance Unit shall be the average of seven years [excluding a maximum of two years in which a calamity such as drought etc. was declared by the concerned authority of Government], multiplied by the level of indemnity. 15

RISKS COVERED (A) STANDING CROP (Sowing to Harvesting) Comprehensive risk insurance is provided to cover yield losses due to non-preventable risks. If the Actual Yield (AY) per hectare of the insured crop for the defined area [on the basis of requisite number of Crop Cutting Experiments (CCEs)] in the insured season, 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. The Scheme seeks to provide coverage against such contingency. Indemnity shall be calculated as per the following formula: Shortfall in Yield Threshold yield X Sum Insured for the farmer [Shortfall = Threshold Yield - Actual Yield for the Defined Area] ON ACCOUNT PAYMENT OF CLAIMS In case of adverse seasonal conditions during crop season, claim amount up to 25 percent of likely claims would be released in advance subject to adjustment against the claims assessed on yield basis. The on account payment will be considered only if the expected yield during the season is less than 50 percent of normal yield. The criteria for deciding on-account payment of claims shall be based on agro-meteorological data / satellite imagery or such other indicators to be decided by the Insurer, and will be implemented in States and for crops for which such proxy indicators can be established. (B) PREVENTED SOWING / PLANTING RISK In case farmer of an area is prevented from sowing / planting due to deficit rainfall or adverse seasonal conditions, such insured farmer who failed to sow / plant (but otherwise has every intention to sow / plant and incurred expenditure for the purpose), shall be eligible for indemnity. The indemnity payable would be a maximum of 25% of the sum-insured. The eligibility for payment would be decided at IU level, and the insurance cover gets terminated once the unit qualifies for the prevented sowing / planting risk. (C) LOCALISED RISKS In case there is loss due to localized calamities i.e. hailstorm and landslide, the loss would be assessed on individual farm basis and compensation so paid shall be adjusted from the losses payable due to loss in yield on area approach basis. 16

(D) POST HARVEST LOSSES Coverage is available only for crops like paddy, which are allowed to dry in the field after harvesting, against specified perils of cyclone in coastal areas, resulting in damage to harvested crop. The coverage is available upto a maximum period of two weeks from harvesting. Assessment of damage will be on individual basis. PREMIUM RATES & SUBSIDY Premium rates are to be worked out on actuarial basis. However, the premium paid by the farmer is subsidized on the following lines: S. No Premium slab Subsidy to Farmers 1 Up to 2% Nil 2 >2-5% 40% subject to minimum net premium of 2% 3 >5 10% 50% subject to minimum net premium of 3% 4 >10 15% 60% subject to minimum net premium of 5% 5 >15% 75% subject to minimum net premium of 6%. Premium subsidy shall be available to farmers up to Compulsory coverage or value of Threshold Yield, whichever is higher for loanee farmer and value of TY for non loanee farmers. The difference between the Actuarial (Gross) Premium and the Premium payable by the farmer is shared equally between the Government of India and State Government. SHARING OF RISK: All claims will be borne by the Insurance Companies. Why the product suits? The major yield losses in paddy are caused by drought and floods, against which indemnification is provided under this insurance product. The product also gives on-account payment during the season, upto 25% of likely claims, which is very useful to farmers and provides quick liquidity. Apart from these, there are instances of sowing failure due to late onset or failure of monsoon. This product provides for losses due to sowing failure. There are also instances of loss to harvested crop lying in cut & spread condition in the field due to cyclonic rains in coastal areas. The MNAIS provides for compensation in such cases on assessment of individual fields. Similarly, losses due to hailstorm and landslide are assessed and settled on inspection of individual field. 17

Product illustration Assumed yield of Rice for the last 7 years is given for insurance unit area of X in District Y : SUM INSURED (Rs / Ha.) : 20,000 Year 2004 2005 2006 2007 2008 2009 2010 Yield in kg/ha 2200 2600 1450 2400 1350 2750 2800 Threshold Yield Calculation The years 2006 and 2008 were declared natural calamity years, and as per the Scheme yields of 2006 & 2008 would not be considered for calculating the Threshold Yield. Average Yield of remaining 5 Years (out of 7) is 2550 Kg/Ha. Assuming Indemnity Level of 80%, the Threshold Yield is 2040 Kg/Ha. If only 2008 was declared natural calamity year, the TY would be based on remaining 6 years. If none of the years declared calamity year, the TY would be based on all 7 years. On-Account Settlement of Claims District A with 100 Insurance Units for Crop B has been affected by floods Of 100 insurance units under Crop X, 50 insurance units were severely affected and as per the weather indicators / agro-met data, it has been assessed that 30 insurance units could have yield loss of more than 50% (compared to the normal yield) Out of these 30 insurance units, estimated yield loss (compared to normal yield) for 5 units is 80% (Category-I), for another 10 units, it is 70% (Category-II) and remaining 15 units, it is 60% (Category-III), due to which likely yield may be in range of 20%, 30% and 40% The likely claims for the above units (compared to TY) may be 65%; 56% & 48% As per declarations received, if sum insured for notified areas in Category-I, Category-II and Category-III is Rs. 1 crore, Rs. 2 crore, and Rs 3 crore, respectively. Likely final claims will be Rs. 65 lakh, 112 lakh and 144 lakh respectively. Hence on-account claims upto 25% will be Rs. 16.25 lakh, 28 lakh and 36 lakh, which will be released during the season. Prevented / Failed Sowing Benefits Maximum benefit is upto 25% of Sum Insured Insurance Cover gets terminated once an Insurance Unit is paid prevented / failed sowing benefit 18

District B with 100 insurance units has been affected by dry-spell, consequently about 80% of the area could not be sown in about 50 insurance units Per hectare sum insured is Rs. 20,000 As per SLCCCI slab of payment for prevented sowing, is say, 75% Benefit payable is: Sum Insured * 75% * 25%, which on a sum insured of Rs. 20,000 works out to Rs. 3,750. In case the slab decided by SLCCCI is 100%, benefit payable is: Sum Insured * 100% * 25%, which on sum insured of Rs. 20,000 works out to Rs. 5,000. Post-Harvest Benefits As against a Sum Insured of Rs. 50,000, post-harvest losses are assessed at 50%, i.e. Rs. 25,000 Subsequently the IU is also qualified for claims with shortfall in yield of 60% Claims based on area approach, works out to Rs. 30,000 The farmer gets higher of the two claim amounts, i.e. Rs. 30,000 In case post-harvest loss claim (Rs. 25,000) is paid immediately, balance claim estimated based on area approach of Rs. 5,000 (being the difference between the two estimates) will be paid at time of payment of area approach claims Assuming there was no shortfall in yield (based on CCEs) at IU level, the claim paid / payable is Rs. 25,000 Localized Calamity Benefits As against a sum insured of Rs. 30,000, loss due to operation of hailstorm is assessed at 40%, i.e. Rs. 12,000. Subsequently at IU level there was shortfall in yield to the extent of 60% Claim estimated based on area approach at IU level, is Rs. 18,000. The farmer is eligible for higher of the two claim amounts. In case loss, due to operation of localized calamities, Rs.12000/- is paid immediately and the balance claim of Rs. 6,000 (being the difference between two estimates) will be paid at the time of payment of area approach claims If there is no shortfall in yield at IU level, the total claim paid / payable to the farmer is Rs. 12,000. CONCLUSION Agricultural technology developed over the years in the country but the heavy dependence of the agricultural system on seasonal condition and the impact of vagaries of weather condition has on the food production is still very high. The agricultural insurance since its inception during the 1970s has been launching many insurance products and modifying them from time to time. Though much effort has been put in by the government in the form of variety of policy measures and comprehensive agricultural risk management measures, agricultural 19

insurance has served a very limited purpose. Under the NAIS, the total farmers covered in 2007-08 was only 15.95 per cent (Raju and Chand, 2009) of the total farmers in the country and the total are covered was 14.58 per cent of the total Gross Cropped Area (GCA) during the same year. Moreover, as observed from the present study, the area covered for major food grain crops like paddy and wheat were still very low. Though the MNAIS has been launched which takes into account the set backs of the NAIS for higher penetration among the farmers, bringing the private sectors into the arena of agricultural insurance and providing support to them by the government will help improve the spread and viability of the insurance schemes. Taking up projects and studies to reach out to the farmers to increase their awareness of agricultural insurance, to study their problems relating to risk in agriculture and adoption of agricultural insurance will help both the parties i.e. farmers in knowing the benefits of the schemes and the insurance agency, to understand the ground realities and in devising effective insurance products. The MNAIS has included various features like the pre planting/sowing losses, on account payment of claims, post harvest losses in the field, individual farm approach for localised risk assessment, inclusion of more years in the guaranteed yield estimation, etc. but one important type of risk which needs to be covered is the market risks. Price fluctuations in the market highly affect the farmers income significantly. Implementing market insurance to cover price risk is much easier than yield insurance. This can be done by acquiring the interested farmers to register their marketable surplus with insurance agency or market committee at the time of sowing of crop (Raju and Chand, 2009). The high claims ratio is also one issue that has to be addressed since it threatens the economic viability of the scheme. In the present study, except for cotton, in all the other crops during the last ten years, the claims amount is higher than the premium collected. A balanced has to be brought to facilitate both the parties i.e. farmers and the insurance agency, for enhancing the viability of the insurance schemes. Under NAIS, the premium paid by the small and marginal farmers is subsidised at the rate of 50 per cent which is shared equally by the Government of India and the concerned state/union territory. The premium subsidy was to be phased out over a period of five years, and this is important to reduce the burden on the budget of the central and state government. Linkage between banks and insurance companies is significant for success of agricultural insurance but other linkages which will be fruitful are cooperatives, trade associations, suppliers of inputs such as fertilizers, pesticides, seeds and farm equipments, processors of the produce, marketing organizations, extension services of the government, research institutions and universities concerned with agriculture (Jain, 2004). Developing these linkages will help establish a strong network of agricultural insurance across the country for aggressive service delivery. Addressing all the complexities of the Indian agricultural system is and will be a difficult and challenging task. A multi-pronged strategy is required to address the critical issues of stagnant agricultural growth, rural indebtedness and farmers suicide (Nair, 2011) and agricultural insurance is one among the plethora of risk management tools. Agricultural insurance scheme in India has evolved over the years but a gap seems to exist among the entities involved. Though, changes and modifications are required to come to a viable insurance scheme 20

and insurance penetration a gradual process but then it is important that the coverage of the farmers and crop area be improved as soon as possible. References Agricultural Statistics at a glance, (various issues), Directorate of Economics and Statistics, Ministry of Agriculture, Government of India, New Delhi. Economic Survey of India,(various issues), Ministry of Finance, Government of India, New Delhi. Jain, R. C. A. (2004) Challenges in implementing agricultural insurance and re-insurance in developing countries. The Journal. January-June, 14-23. Nair, R. (2011) Risk mitigation and crop insurance in India: A performance analysis. Journal of Social and Economic Development, 13(1): 67-86. Planning Commission (2007) Report of Working group on Risk Management in Agriculture, XI Five Year plan, 2007-12. Raju, S. S. and Ramesh Chand (2009) Agricultural risk and insurance in India: Problems and prospects. Published by Academic Foundation, New Delhi 110 002, India Raju, S. S. and Ramesh Chand (2009) Problems and progress in agricultural insurance in India. Policy Brief (Number 31), National Centre for Agricultural Economics and Policy Research (NCAP), DPS Marg, Pusa, New Delhi 110 012. 21