The run of rains in Indian agriculture
The increased probability of an El Nino weather pattern has already begun to rustle up fears about how a bad monsoon could hurt a sluggish Indian economy. The concerns are valid even though the economy is less dependent on agriculture than before and reservoir levels this summer are quite comfortable. The lessons of previous El Nino episodes in 2002 and 2009 tell us that farm production as well as food prices can take a knock in a country where barely a third of farm land is irrigated.
The harsh impact of unseasonal rains and hailstorms earlier this month across a number of states-imposing losses estimated at a billion rupees on insurers-has further added to the concerns. Add to this the suicide of 23 farmers in Maharashtra, which has once again exposed the abysmal state of existing procedures to shield them from exigencies. Interestingly, the Indian Meteorological Department has dismissed claims by Western scientists of the risk posed by El Nino, calling it a conspiracy to help speculators.
For long, unpredictable weather has remained one of the biggest threats to farmers. Naturally, voices in favour of a comprehensive crop insurance programme to protect farmers from the vagaries of nature have strengthened over time. However, the record of state assistance to distressed farmers has been far from satisfactory.
The comprehensive crop insurance scheme instituted in 1985, which turned out to be financially unviable with claims over-running premiums by almost six times, was one of the earliest attempts at state-sponsored cover that went berserk. Subsequently, the National Agricultural Insurance Scheme (NAIS), which sought to serve as a more viable alternative through the charging of higher premiums over time, met with a similar fate. Throughout, both the central and state governments footed the gap in funding by subsidizing crop insurance.
The justification for extending insurance support to farmers has emerged from concerns that extreme uncertainties associated with agriculture will make market premiums unaffordable to farmers. Protecting them through subsidized insurance programmes was seen as the natural way out. However, massive bailout of farmers by the government only managed to crowd out private firms from the market for insurance.
More importantly, the lack of competition in insurance cover has led to the stifling of much-needed innovation that is a prerequisite to better and cheaper insurance products. Also, under a state-sponsored insurance programme, the unintended effects of moral hazard and adverse selection have added to the cost of providing insurance. This is clearly reflected in the high claims ratio of over 300% even under the NAIS, which was supposed to set right the deficiencies of past relief programmes.
Deregulating the insurance market can only be part of a larger plan to mitigate the many risks of Indian agriculture. This is especially true given some risks cannot be covered by private insurance, or only at much higher prices. With extreme dependence on seasonal monsoons still remaining the norm in most parts of the country, the need for improving irrigation infrastructure cannot be stressed enough.
Meanwhile, commodity hedging remains perhaps the most underexploited risk-mitigating mechanisms as far as dealing with price risk goes. While India has exposed its farmers to the international market in a globalized world, Indian farmers still remain underserved by the services of the commodity derivatives market. Last year, according to the US department of agriculture and the Futures Industry Association, the ratio of open interest in hedging instruments to total size of maize and wheat market in India stood at a negligible 0.1%, compared to the world average of well over 20%.
Given the inefficiency of the current relief mechanism, and the minuscule size of the market for pooling risk, there could be no better reason to improve farmers' access to alternatives.