Context

Flagship Crop insurance schemes of Central government are:

• RWBCIS -Restructured Weather Based Crop Insurance Scheme 
• PMFBY – Pradhan Mantri Fasal Bima Yojana

Centre decided to restrict its premium subsidy in PMFBY and RWBCIS to 30% for unirrigated areas and 25% for irrigated areas (from the existing unlimited)

Also, it decided to make enrolment of farmers in these schemes as voluntary from the 2020 Kharif season.

About PMFBY

• Launched in 2016 after rolling back the earlier insurance schemes viz. National Agriculture Insurance Scheme (NAIS) and Modified National Agricultural Insurance Scheme (MNAIS).
• Premium: Farmers need to pay uniform premium of only 2% of insured amount for Kharif crops, 1.5% for Rabi crops and 5% for horticulture crops. 
• The remaining part of actuarial premium (charged by insurance companies) will be shared equally between Central and State government (with no upper limits)
• The scheme is mandatory for farmers who have taken institutional loans from banks. 
• It’s optional for farmers who have not taken institutional credit.

If a farmer’s Kharif crop was insured for Rs 1,00,000 and the rate of actuarial premium was 40%, then the 

Old Regime: 

• Premium paid by the farmer was 2% – Rs 2,000
• Premium paid by the Centre was 19% -Rs 19,000
• Premium paid by the Centre was 19% -Rs 19,000

Under New Regime – the Centre will give subsidy for premium rates up to 30%. 

This means that the Centre will have to pay premium at the rate of 14% (out of 30%, the farmer’s share is 2%, and the Centre’s and state’s 14% each)

The state has to bear the entire burden of the premium subsidy in cases where the rate of premium goes beyond the threshold of 30%.

• Premium paid by the farmer was 2% – Rs 2,000
• Premium paid by the Centre -Rs 14,000
• Premium paid by the State – Rs 14,000 + remaining Rs 10,000

A second interpretation is that the Centre may stop supporting insurance of certain crops in certain areas where the rate of premium is more than 30%

Why the changes to restrict the premium subsidy?

• While the average premium rate under PMFBY and RWBCIS at the national level was 12.32% for 2018-19, for some crops in certain districts, the rate of premium has been higher than 30% in recent years. 
• For example: the rate of premium for Kharif groundnut has reached 49% in Rajkot of Gujarat, and the rate for Rabi paddy crop Ramnathapuram (Tamil Nadu) has reached 42%.
• By capping the subsidy for premium rates up to 30%, the Centre wants to disincentivise certain crops in such areas where growing these crops involve high risks in terms of crop insurance premiums.

Implications of Capping premium amount

• Increased States Share: After the new changes come into effect, the share of the states is expected to go up in those states in which such crops are cultivated.
• Additional Financial burden on States: The states are already defaulting on their share of premium, and the Centre’s new cap will increase fiscal pressure on them 
• Delay in claim settlement: For example Madhya Pradesh has not paid its share of premium even for Kharif 2018, which comes to Rs 1,500 crore. As a result, farmers have not got their claims.

Implication on making insurance schemes voluntary

• Making the scheme voluntary is expected to increase the disposable incomes of farmers which will help in fuelling rural demand.
• The area covered under insurance and the number of enrolled farmers are expected to come down significantly as it is now made voluntary
• In such a scenario, the rate of premium of certain crops in some areas may go beyond 30%.

• It will further make farmers vulnerable to crop failures thus impacting their income security.

The other changes in crop insurance schemes

• The government has given flexibility to states/UTs to implement PMFBY and RWBCIS
• It also gives States the option to select any number of additional risk covers/features like prevented sowing, localised calamity, mid-season adversity, and post-harvest losses. Earlier, these risk covers were mandatory. 

Impact of these changes

• This may bring down the rates of overall premium as the state governments now will not be required to invite bids factoring these risks.
• It will make these schemes less attractive for farmers.

Do You Know?

• During 2018-19, about 5.64 crore farmers are enrolled with PMFBY for an insured sum of Rs 2,35,277 crore, and 30% of the gross cropped is insured.
• During 2018-19, an amount of Rs 29,105 crore was collected as gross premium under PMFBY and RWBCIS, which included farmers’ share of Rs 4,918 crore and share of Rs 12,034 crore each by Centre & States.