Finance ministry to take a relook at crop insurance plan

The Finance Ministry's decision to re-evaluate the 'cup-and-cap model' within the Pradhan Mantri Fasal Bima Yojana (PMFBY) marks a critical juncture for India's agricultural insurance landscape. This review is not just a bureaucratic exercise; it delves into the core mechanics of how risk is managed for millions of farmers and the financial sustainability of a flagship government scheme. Understanding this move requires a deep dive into its background, implications, and connection to India's broader development goals.

**Background Context: The Evolution of Crop Insurance in India**

India's journey with crop insurance schemes has been long and often challenging. Prior to PMFBY, schemes like the Comprehensive Crop Insurance Scheme (CCIS, 1985), National Agricultural Insurance Scheme (NAIS, 1999), and Modified National Agricultural Insurance Scheme (MNAIS, 2010) aimed to provide financial protection to farmers against crop losses. However, these schemes faced issues such as low farmer penetration, high premium rates for certain crops, delayed claim settlements, and actuarial challenges, often failing to adequately cover widespread losses. Recognizing these limitations, the government launched the Pradhan Mantri Fasal Bima Yojana (PMFBY) in January 2016. PMFBY was designed to be a more robust and farmer-friendly scheme, offering comprehensive risk cover from pre-sowing to post-harvest, utilizing technology for faster assessment and payout, and significantly reducing the premium burden on farmers to 1.5% for Rabi crops, 2% for Kharif crops, and 5% for commercial/horticultural crops, with the remaining premium subsidized by central and state governments.

**What Happened: The 'Cup-and-Cap' Model Under Scrutiny**

The 'cup-and-cap' model, introduced as an operational guideline within PMFBY, essentially limits the liability of insurance companies and also caps their profits. Under this model, if the claims paid out by an insurer exceed a certain percentage (the 'cap') of the net premium collected, the government (Centre and State) bears the additional burden. Conversely, if claims are significantly lower than a certain percentage (the 'cup'), the insurer must return a portion of the excess profit to the government. This mechanism was intended to make the scheme more attractive to private insurers by mitigating their risk in years of widespread crop failure, while also preventing excessive profiteering. However, recent trends show a decline in the crop insurance business, with premium collections expected to fall significantly. This decline is partly attributed to large states opting for the 'cup-and-cap' model. While it limits insurer risk, it also limits their potential profitability, leading some insurers to become less enthusiastic about participating or to demand higher administrative fees. The Finance Ministry's review is a direct response to concerns about the scheme's long-term sustainability and its effectiveness in providing comprehensive and timely coverage to farmers, especially when insurer interest wanes.

**Key Stakeholders Involved**

Several key players are directly impacted by and involved in this review. **Farmers** are the primary beneficiaries; their access to affordable and effective crop insurance is at stake. The **Finance Ministry** is leading the review, reflecting its role in fiscal management and ensuring the financial viability of government schemes. The **Ministry of Agriculture & Farmers Welfare** is the nodal ministry for PMFBY and is deeply invested in its success. **State Governments** are crucial stakeholders as they co-finance the premium subsidy and are responsible for scheme implementation at the ground level; their adoption of the 'cup-and-cap' model has influenced the current situation. **Insurance Companies** (both public and private) are critical implementers, and their willingness to participate depends heavily on the scheme's profitability and risk-sharing mechanisms. Finally, policy think tanks like **NITI Aayog** often provide recommendations for policy reforms.

**Why This Matters for India**

The effectiveness of PMFBY has profound implications for India. Agriculture, contributing significantly to India's GDP and employing a large portion of its workforce, is highly vulnerable to climate change and market fluctuations. A robust crop insurance scheme is vital for **farmer welfare**, providing a safety net against income shocks and preventing rural distress, farmer suicides, and migration. It directly contributes to **food security** by stabilizing agricultural production and protecting farmers' livelihoods. The scheme's financial health also impacts **fiscal stability**, as the government bears a substantial portion of the premium subsidy. Any changes will influence **Centre-State relations** due to shared financial and administrative responsibilities. Ultimately, a sustainable PMFBY is crucial for achieving the broader goal of **doubling farmers' income** and fostering inclusive economic growth.

**Constitutional & Policy References**

While there isn't a specific constitutional article dedicated to crop insurance, the government's efforts fall under broader constitutional mandates. **Article 38** of the Directive Principles of State Policy (DPSP) directs the State to secure a social order for the promotion of the welfare of the people, striving to minimize inequalities. **Article 46** mandates the State to promote the economic interests of the weaker sections, including farmers. Furthermore, **Article 48** calls for the organization of agriculture and animal husbandry on modern and scientific lines. The subject of 'Agriculture' falls under Entry 14 of the State List in the Seventh Schedule, while 'Social security and social insurance' is under Entry 23 of the Concurrent List, highlighting the shared responsibility between the Centre and States in such schemes. The **Insurance Act, 1938** and the **IRDA Act, 1999** provide the regulatory framework for the insurance sector, under which PMFBY operates. This review is also aligned with the broader policy push for agricultural reforms and farmer empowerment.

**Future Implications**

The outcome of this review could lead to significant changes in PMFBY. Possible scenarios include a modification of the 'cup-and-cap' model, a re-evaluation of premium subsidy sharing between Centre and States, introduction of new risk-sharing mechanisms, or even structural changes to enhance competition among insurers. There might be a greater emphasis on technology-driven solutions for accurate yield assessment and faster claim settlement, alongside efforts to improve farmer awareness and enrollment. The aim will be to strike a balance between making the scheme financially viable for insurers, sustainable for the government, and most importantly, effective and accessible for every farmer, ensuring that India's agricultural backbone remains strong and resilient against unforeseen adversities.