Author - Dhruv Sood
Despite the gradual increase in irrigation, almost 65% of
the Indian agricultural sector still depends on erratic and unpredictable monsoons.
Cropping decisions- like which crop to plant, time of sowing, which inputs to
use- generally depend on the advent of the monsoon season as well as on farmer
expectations of rainfall. Owing to the more unpredictable nature of monsoons in
recent years, when there is little (droughts) or too much rainfall(floods)
farmers face serious risks and stand to lose a large portion of their produce.
Further, informal risk-coping mechanisms do not work well with such covariate
risks which generally affect most people in a given cropping area at similar
levels.
Several government agencies and development institutions
have offered formal yield-based crop insurance to farmers in the past to
protect them from risks faced during cultivation. Although these yield based
schemes aim to insure farmers from all risks faced during cultivation, and not
only rainfall, they also have some inherent disadvantages. There are huge
monitoring and selection problems here as well as a lack of transparency on how
the ideal yield for a crop should be assigned, leading to high administration
and implementation costs for such a
program.
Rainfall Index insurance, is an innovative financial
instrument that can help farmers hedge against agricultural losses due to
erratic monsoons, which is often cited as the largest risk to agrarian households. Such a product pays-out to farmers
when rainfall exceeds or falls below pre-determined triggers which are based on
historical rainfall data as well as crop and soil considerations. One advantage
of such a product is that payouts are easier to calculate as rain-data is
readily available and hence can be transparently distributed to purchasers of
the policy. Another advantage is that since farmers have no control over the
level of rainfall, they have no incentive to alter their behaviour/production
patterns, which is a common problem with yield-based crop programs. Thus, in an
ideal world, such a product would be a reasonably cheap, transparent and incentive-compatible
method to cover farmers from risks faced by the vagaries of the monsoon.
Despite its inherent advantages over yield-based products,
before advocating unconditionally the use of such products, it is important to
consider the infrastructure required to ensure that it remains transparent,
quick and effective. Investments have to be made to try and minimize basis
risk- by setting up uniform weather stations across localized administrative
units. Although, this may require large initial outlays, it is imperative as
rainfall levels may vary substantially across villages/talukas and hence
weather station measurements may not accurately reflect rainfall patterns on the
insured land.
Another area where focus is required in order for such a
product to be successful is financial education. Given the complicated nature
of such policies, farmers may be unable to attach any value to the product as
they fail to understand it. This is a bigger problem for poorer households, as
for them at the time of making the decision to buy rainfall insurance (prior to
the kharif season) , the opportunity cost may be very high. A household with
meagre resources may prefer to spend their money on more seeds, fertilizers or
even consumption rather than on a product which they do not comprehend . There
is no short-term solution to get around such a problem. However, I feel it is
important to combine concerted and focussed training on financial products,
while at the same time maintaining continuity within the structure of the
policy over a few years such that households are given the time to
‘learn-by-doing’.
Thus far, we have only focussed on key bottlenecks in the marketing
of rainfall insurance based on our experiences in Rural Gujarat over the past 7
years. However, currently we are also analysing
other factors that may affect the take up of the product like behaviours
towards risks, uncertainty and trust patterns. We are also trying to elicit the
Willingness to Pay for the product amongst farmers in attempt to assess its
potential demand, which may have further policy implications.
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