Protecting the small farmer

Protecting the small farmer

By Ananth Gudipati

Reviving the Farm Income Insurance Scheme could be the best tool for small and marginal farmers to fight falling prices in an increasingly globalised marketplace.

Data from the recently held National Sample Survey Organisation (NSSO) survey show that close to 60 per cent of rural households are dependent on agriculture for their livelihood. More than half of them are at risk of defaulting on their debts with either banks or informal moneylenders. Many reports have pointed towards the debt burden and its resulting vulnerability at the household level as the primary factor for farmer suicides.

In a recent case of farmer suicide, a rubber farmer from Kerala blamed falling rubber prices and the lack of government support in his suicide note. The unfortunate incident is not an isolated one in India. Many small and marginal farmers are getting low prices for their produce because of increased global production and lower demand for various commodities. Recent reports from the Food and Agriculture Organization (FAO) show the declining food price index in most common commodities such as sugar, cereals and meat. The NSSO report also highlights the increasing input costs in agriculture and the alarming increase in consumption expenditure vis-à-vis income, especially among households with less than two hectares of land holdings.

While minimum support prices (MSPs), announced by various State governments, have traditionally been the instrument used to fight declining prices, they have scarcely been effective at the farm level. For example, among rice and wheat farmers, more than half the produce is consumed at the household level and the rest mostly sold to traders at much lower prices. Other challenges such as the impact of climate change on agriculture and the World Trade Organization’s anti-MSP stress on reforms underline the need for a reliable mechanism to improve the resilience of small farm holders.

Reform agricultural insurance

The recent attempt by the Gujarat government to reintroduce the Farm Income Insurance Scheme (FIIS) can reform agricultural insurance and prevent farm-level distress. The government’s present National Crop Insurance Programme covers prevented/ failed sowing, post-harvest losses, and losses from natural calamities on an individual basis. It is an area-based approach that covers a wide variety of food, oilseed and horticulture crops. However, low literacy, the absence of infrastructure to measure data accurately at the farm level, and the limited penetration of formal financial credit have made the scheme inefficient, leading to reduced trust among farmers. Additionally, in the current globalised market with widely varying market prices, the scheme is unable to protect farmers against price fluctuations. In a true market economy, the government must resist from distorting market prices through instruments like MSP, and rely instead on other financial instruments to protect farmers.

The FIIS, originally introduced in 2003 and withdrawn the next year, has been revived in Gujarat. The scheme’s main thrust is that it tries to ensure guaranteed income by insuring the difference between the farmer’s predicted income and the actual income. It calculates the predicted income by using the product of unit area yields and prices at the district level. Any decrease in the predicted income due to yield fluctuations or market fluctuations is insured under the scheme. By only considering yield losses from natural perils, it also ensures that farmers are incentivised to produce more, and that inefficiency in farming is not rewarded. The success of FIIS will depend on whether the government is willing to move away from the current mundane system of manual inspection and data gathering to the new era of big data and technology. When the FIIS pilot was tried a decade ago, it proved to be premature, but the time is right now to correct some of the errors in the previous scheme and move ahead.

The concerns over reliable yield and price data in the earlier attempts can be largely eradicated using present technologies. The maturing of satellite-based yield monitoring systems, integrating agricultural markets in India, and ensuring the efficiency of commodity exchanges will remove most of the concerns that arise over the large amounts of data needed for such a revolutionary scheme. Additionally, leveraging mobile phone penetration levels and mobile-enabled technologies can ensure the availability of real time data, and reduce the moral hazard problems that afflict current insurance schemes.

Streamlining initiatives

FIIS also provides the government an opportunity to streamline some recently announced initiatives such as assessing soil health through soil health cards, and rationalising fertilizer and water usage by insuring only the efficient cost of production. It also incentivises farmers to use the available agriculture markets and engage with formal markets to take advantage of insurance in case of income dips. This will also bring in much-needed transparency in agriculture prices and bridge the gap between price discovery and realisation for the smallholding farmer.

FIIS might be the right instrument to integrate farm-level subsidies and remove leakages in the system. If implemented with the right intentions and rigour, it could act as a credible instrument to prevent farmer suicides and contribute to national food security.

(Ananth Gudipati is a consultant with the World Food Programme. The views expressed are personal.)