Issues with the Working of the PMFBY – Explained, pointwise

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The Union Agriculture Ministry recently announced that Andhra Pradesh has decided to rejoin the crop insurance scheme Pradhan Mantri Fasal Bima Yojana (PMFBY) from the ongoing kharif season. Andhra Pradesh was one of six states that have stopped implementation of the scheme over the last four years. The States had opted out citing various issues with the design and implementation of the Scheme.

Agriculture insurance is vital to provide income security to the farmers, and to achieve the Government’s target to double farm incomes. However, since inception, the PMFBY Scheme has faced several issues; so much so that the Union Government had to undertake major revisions in the Guidelines in September 2018 and February 2020. Nevertheless, the Government has shown flexibility in its approach and has addressed the concerns of Andhra Pradesh and persuaded to join back. Other States may follow suit.

About the PMFBY Scheme

PMFBY is the flagship agriculture insurance scheme being implemented by the Union Government. It was launched in 2016 by the Ministry of Agriculture. The aim of the scheme is to provide comprehensive insurance cover to the farmers against failure of crops and help in stabilizing the income of farmers. The Scheme covers food crops, oilseed crops, commercial and horticulture crops.

According to the Union Government, PMFBY is the largest crop insurance scheme globally in terms of farmer participation and the third largest in terms of the premium.

The prescribed premium is 2% for Kharif Crops, 1.5% for rabi crops and 5% for commercial and horticulture crops. Balance of the actuarial premium (95%-98.5%) is shared equally between Union and State Governments. However, in 2020, the share of the Union Government was capped at 25% for irrigated areas and 30% for un-irrigated areas.

The Scheme was initially compulsory for the loanee farmers but has been made voluntary since 2020.

It is a yield-based index scheme and is implemented on an area approach basis. This approach is distinct form ‘individual farm’ based approach. Area based approach assumes that villages are homogenous from the point of view of crop production, whose annual yield and variability of crop production is similar. This approach is logical in the absence of granular level historical data of farm yields at individual farm levels.

The claims are worked out on the basis of shortfall in the actual yield vis-à-vis the threshold yield in the notified area e.g., if the long-term yield of rice in an area is 2.5 tonnes/hectare and a production has fallen to 1.5 tonne in a farm of 1 hectare due to drought, the claim will be on (2.5-1.5) tonne of rice.

The risks covered include: (a) Yield Losses (on standing crops) due to non-preventable risks like Natural Fire and Lightning; Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado etc.; Flood, Inundation and Landslide; Drought, Dry spells; Pests/ Diseases etc.; (b) Prevented Sowing due to adverse weather conditions; (c) Post-harvest losses; (d) Localized calamities like hailstorm, landslide, and inundation affecting isolated farms in the notified area.

Need for Agriculture Insurance PMFBY UPSC

What are the issues associated with the PMFBY?

Since the launch, 6 states have opted out of the scheme viz., Gujarat, Bihar, West Bengal, Andhra Pradesh (joining back), Telangana and Jharkhand while Punjab had never joined. There are several reasons:

First, Fiscal Burden on States: The Scheme limits farmer’s share of actuarial premium to 1.5-5%. The rest was to be shared equally by the Union and State Governments. However, in 2020 the Government capped its share to 25%-30% (irrigated and unirrigated areas respectively). This has increased the fiscal burden of States. Consequently, many States have opted out.

Second, Delayed Pay-outs and Denial of Claims: There are frequent disputes related to compensation. Farmers complain the compensation paid by insurance companies is less than the losses. There are long delays in payments, sometimes up to 18 months. Yield-related disputes, delayed transmission of yield data and delay in release of their share in premium subsidy by State Governments are the major reasons for delays in settlement of claims.

Farmers claim that the private insurers are not following the assessment by the government officials based on Crop Cutting Experiments (CCEs) and rejecting many claims on the basis of their own assessment.

Note: CCEs are conducted just before harvest to assess crop loss by estimating average yield for all notified crops in the notified insurance units. Insurance companies are bound to settle the claims within two weeks of receiving the yield data.

Third, Implementation Issues: Farmers face hurdles in uploading the documents and claiming damages as network connectivity is poor in rural areas.

Under the scheme, both Public and Private insurance companies bid their premium rates for a district in a State. The lowest bidder is awarded the contract to provide insurance under the scheme for one agricultural season only. This discouraged the companies from investing in that district in terms of awareness activities, assigning personnel or setting up offices. This led to farmer grievances.

In 2020, the Government has increased the contract duration to 3 years in one district (6 agriculture seasons). It is hoped that companies would set up help centres and employ more personnel to gather yield data and faster claim settlement.

Fourth, Absence of Grievance Redressal Committees (GRCs): Only 15 States and UTs have notified GRCs at both the State and District level, as mandated under the PMFBY scheme. Farmers are left with no resort in case of under-payment or delay in claim settlement.

Fifth, Opposition from States: States have cited multiple reasons for opting out e.g., Bihar Government wanted zero premium from farmers. Jharkhand left after the revised guidelines were issued in 2020 that mandated strict timeline for the State Government to pay their share of premium. Gujarat opted out because of high premiums quoted by the insurance companies. Telangana faced hurdles on payment of its share of premium which have been pending since 2018-19 season.

Sixth, Opposition from Farm Leaders: Farm leaders claim insurance companies have made windfall gains at the behest of the public exchequer and farmers. Data from Maharashtra show that Insurance companies often earn more in premiums than paid in claims. However, for some years the trend is opposite.

Premiums Collected versus Claims Paid under the PMFBY UPSC

Source: Indian Express. The premiums collected far exceeded the claims in 2016-17 and 2017-18. However, the situation was reverse in 2019-20. 

In several states, the claims have exceeded the gross premium. Between 2017-19, claims exceeded premiums collected in several state like Chhattisgarh, Haryana, Madhya Pradesh, Odisha, Kerala and Tamil Nadu. The Union Government replied in Rajya Sabha (July 2021) that, out of the total gross premium of INR 107,449 crore collected by the insurance companies in four years (2016-17 to 2019-20) about INR 92,426 crore (86%) has been paid to farmers to settle insurance claims.

Seventh, High Premiums: Insurance companies tend to charge high premiums in order to ensure that claims do not exceed premiums collected. This is more common in areas more prone to crop loss.

Data from the PMFBY dashboard show that since 2016, there has been a 62% decrease in farmers covered under crop insurance during kharif season to 15.1 million in 2021, and 46% decrease during rabi to 9.2 million in 2021. Area insured has also reduced — 57% under kharif crops and 22% under rabi crops.

What is the ‘Beed Model’ of Farm Insurance?

In March 2022, the Government of Maharashtra suggested the Union Government to adopt the Beed Model in the implementation of the scheme. Beed Model was first experimented in Beed district of Maharashtra in 2020.

Under this model, insurance companies provide cover to an extent of 110% of the premium collected. In case the claims exceed this amount, the State government will bridge the extra amount. In case the compensation amount is less than the premium collected, the company will refund 80% premium surplus (gross premium – surplus) to the State government and keep 20% for its administrative expenses.

Through this model, the windfall gains made by insurance companies can be checked. At the same time, in a particularly poor year, the Government will support by paying excess of claims over premium. This will ensure that Insurance Companies do not suffer from huge losses and remain interested in providing insurance coverage.

The profits of the insurance companies will be reduced and the State governments would access another source of funds. The reimbursed amount can lead to lower provisioning by the State for the following year. This will help in financing the paying the bridge amount in case of a year of crop loss.

Working of the Beed Model under IMFBY

What is the way forward?

First, the Union Government should consult with State Governments and explore the possibility of replicating the Beed Model in the PMFBY.

Second; The Parliamentary Standing Committee on Agriculture had given several recommendations on reforming the Scheme. These include: (a) Using technology and the coordination of all institutional mechanisms to ensure faster claim settlement; (b) Implementing timeline for settlement of claims by insurance companies; (c) Uploading the contact details of officials insurance companies on the insurance portal so that they are accessible to farmers; (d) Penalising defaulting insurance companies in a time-bound manner; (e) Ensure the formulation of GRCs in all States. Nominate local public representatives (including Members of Parliament) in the Committees to ensure accountability.

Third, the disputes related to yields should be addressed by enhancing quality of yield data and making it readily available. State Government should also be prompt in release of their share of premium subsidy

Farm insurance is critical to provide income security to the farmers.  The Union and State Governments must take appropriate steps to remove all the bottlenecks in the proper implementation of the scheme.

Syllabus: GS III, Issues related to direct and indirect farm subsidies.

Source: Indian Express, Indian Express, Hindu BusinessLine, Down to Earth

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