Pradhan Mantri Fasal Bima Yojana: Exploring Opportunities to make Agriculture a Less Risky Business

Participants at the conference
Participants at the conference

This blog was first posted on the India Food Security Portal

Agriculture is undoubtedly risky, and the risk of a bad year discourages farmers from investing in high-yielding activities. By building resilience, agricultural insurance can help farmers improve their productivity and provide food security. The Indian government has therefore implemented a new agricultural insurance scheme, the Pradhan Mantri Fasal Bima Yojana (PMFBY). On December 21, the International Food Policy Research Institute (IFPRI) and Swiss Agency for Development and Co-operation (SDC) jointly organized a workshop on the PMFBY. The workshop brought together policy-makers, experts from the insurance industry as well as academics to identify innovative approaches and technologies to strengthen India’s agricultural insurance sector.

Workshop participants were provided with an overview of the PMFBY, expectations from the insurance industry, and an introduction to insurance in the context of a broader portfolio of risk management strategies. The PMFBY is improving on the former insurance scheme in various ways, but still faces a number of challenges, including low participation rates among farmers who are not automatically enrolled by taking a loan, no clear guidelines on how to settle disputes between yield estimates from crop cutting experiments versus remote sensing technologies, and payments being made too frequently for insurance products to be sustainable.

The participants discussed new technologies to improve loss assessment and reduce basis risk (the risk that a farmer experiences a loss but the insurance product does not pay out), including geo-referenced photography through smartphones, unmanned aerial vehicles (UAVs), and satellite data, which were applied as part of the PMFBY by the RIICE project in Tamil Nadu.

The workshop discussed the need for insurance to cover only extreme risks, and hence presented opportunities for the PMFBY to link with resilience technologies such as paddy residue management. In particular, IFPRI noted that conditioning insurance premium subsidies on farmers not burning their paddy residues helped reduce burning in several districts in Punjab and Haryana. Participants further discussed how to use technology to improve the sampling for crop cutting experiments (CCEs), which are used to establish the area yield index, the backbone of the PMFBY. Finally, experts expressed a need for joint efforts in integrating technology into the PMFBY, and IFPRI will coordinate a proposal in understanding the use of technology in PMFBY.

The workshop yielded a number of key outcomes and conclusions including the following:

  1. Technology can contribute to the sampling and transparency of CCEs. A large portion of PMFBY coverage is based on an area-yield index. To estimate the yield in a given area, the PMFBY samples several sites and carries out a crop cutting experiment (CCE). The data from these CCEs needs to be accurate and available to insurance companies and farmers alike; technology can help improve the transparency of data collection and the real-time availability of the data, for instance by posting videos of the CCE online. Remote sensing technologies can further improve the sampling of CCEs and reduce the number of CCEs to be conducted while improving accuracy at the same time. At the same time, there is a need for guidelines on how disputes are settled in case satellite-based yield estimates are different from those obtained through CCEs.
  2. Yield estimates on the basis of technology should not be a black box.  For technology to be used in loss assessment on a large scale in a program like the PMFBY, it is important that all stakeholders know how the loss assessment is done, and that there is standardization in doing so. This requires proper documentation of how the technology is being used in loss assessment, and it is important that technologies are being validated and replicated.
  3. It should be clear that farmers will not receive money every year.An insurance product that pays farmers every year is not sustainable. Farmers are not sufficiently aware that they cannot receive a payment every year, and there is a role for policy-makers to communicate this. Insurance is not a welfare scheme that can pay a small amount every year; insurance is meant to provide larger payments to help farmers cope with losses in years that have seen unexpected shocks.
  4. Insurance should explore linkages with other risk management strategies.Insurance is a tool to help farmers cope with extreme risks. Smaller risks can often be mitigated by good agricultural practices and technologies, and for risks that cannot be mitigated, savings and credit instruments provide farmers with a way to cope. To encourage farmers with insurance coverage to keep managing their risk also in other ways, subsidies on insurance premiums could be conditioned on farmers adopting better practices and technologies. Agro-advisories provided along with insurance could play an important role in advising farmers how to mitigate their risks.
  5.  Technology can help improve products beyond sampling for CCEs.The PMFBY aims to also cover losses related to other aspects than crop yield, for instance pre-sowing risks, mid-season adversaries and post-harvest losses. There is a need to explore how technologies can help in providing coverage for such risks. In addition, technology can help transition from block-level to village-level and ultimately even individual-level insurance coverage in order to reduce basis risk.
  6.  There is a need for longer-term notification.Insurance companies need to be notified – meaning that the insurance company is the main insurance provider in a district – every year. Due to the short duration of an insurance companies’ presence in a district, insurance companies cannot invest as much in their relation with farmers and the insurance infrastructure on ground as they would if the duration of a notification in a given district were longer.
  7.  There is a need for more coordinated pilot projects.The final conclusion of the workshop was that there is a need for a more coordinated approach, in which the different organizations who participated in the workshop join forces, and standardize the use of technologies across a number of pilot projects, thereby leveraging each other’s activities. IFPRI can potentially play a coordinating role in this joint effort to improve the use of technologies in the PMFBY.

All presentations from the meeting are available here.

How microfinance has reduced rural poverty in Bangladesh

Cross-posted from the website written by Sara Gustafson and Shahidur Khandker

A woman at a market in Bangladesh. A new book shows that the growth of microfinance institutions over two decades in Bangladesh has helped the rural poor diversify their economic activities and boost incomes, lifting some 2.5 million people out of poverty.
A woman at a market in Bangladesh. A new book shows that the growth of microfinance institutions over two decades in Bangladesh has helped the rural poor diversify their economic activities and boost incomes, lifting some 2.5 million people out of poverty.

As microfinance institutions (MFIs) grow in many countries worldwide, debate continues over whether such programs truly benefit the poor. Proponents emphasize the need for innovative ways to provide poor populations access to financial services. Critics argue any successes may be temporary because microfinance programs require training and entrepreneurship skills, which many poor populations lack. In addition, some fear that beneficiaries may be charged high interest rates or become dependent on MFIs, borrowing more than they can pay back and becoming further trapped in poverty.

Beyond Ending Poverty, a new book published by the World Bank and authored by Shahidur Khandker of IFPRI, Baqui Khalily, and Hussain Samad, examines this debate in the context of Bangladesh, finding that microfinance institutions there have had sustained benefits over two decades in reducing poverty and increasing incomes. Microcredit accounted for a 10 percent reduction in rural poverty in Bangladesh over that time—meaning MFIs lifted some 2.5 million Bangladeshis from the ranks of the poor.

When Bangladesh’s microfinance sector was first established in the 1970s, its main goal was reducing rural poverty by providing microcredit loans for non-crop activities such as trading, and raising livestock and poultry. These loans were funded mainly by the government of Bangladesh and bilateral donors through group-based savings and lending programs.

Today, Bangladesh’s MFIs cover some 32 million members and give out more than $7.2 billion annually. Instead of relying on the savings of borrowers, MFIs now have access to institutional funds, including commercial banks. Modern microfinance in Bangladesh has expanded its scope from home-based activities and self-employment to include savings and insurance, microenterprises, and productive employment.

Microcredit also helped to diversify borrowers’ economic activities, boosting incomes in the process. Household income grew over the study period, driven by rising non-farm income. For households diversifying into non-farm activities, income growth was almost 29 percent higher than that of their counterparts who stuck exclusively to farming. The reduction in moderate and extreme poverty for this group was almost 8 percent higher. Better access to credit was found to be a key factor in promoting this shift.

But MFIs, despite their traditional focus on non-farm activities, have also aided farmers. Borrowing from an MFI raised farm income and reduced reliance on wage income, producing significant positive effects for women and marginal farmers. A 10 percent increase in women’s credit use was found to increase crop income by 3.5 percent, non-crop income by 2.8 percent, and total farm income by 0.7 percent. In addition, borrowing by both men and women has had important impacts on income, labor supply, household assets and net worth, and children’s schooling.

The book’s findings are based on data from household long panel surveys covering the period 1991-92 to 2010-11. This 20-year study period matters, the authors argue, because the benefits of microfinance programs—such as increased income generated through new self-employment schemes—take time to realize; in addition, given the growing complexity of the microfinance sector in Bangladesh, this broad range of data was useful in untangling the true effects of MFIs on the country’s rural poor.

The authors compared the operational efficiency data for Bangladesh’s leading MFIs with comparable data for MFIs in India, Indonesia, Mexico, Thailand, and Vietnam, finding that two of Bangladesh’s top MFIs (Grameen Bank and BRAC) are among the world’s most efficient microfinance institutions.

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Who Wants To Quit Agriculture And Why?

Farmer in Nalanda District, Bihar. Source: Divya Pandey, IFPRI
Farmer in Nalanda District, Bihar. Source: Divya Pandey, IFPRI

Agriculture the backbone of Indian economy that engages more than 50 percent of the country’s workforce, is losing its preference as the most desired profession. Research shows that more than 40 percent of farmers dislike farming as a profession because of low profits, high risk, and lack of social status, yet they continue with it owing to a lack of opportunities outside agriculture.

A recent study on “Farmers' Preference for Farming: Evidence from a Nationally Representative Farm Survey in India” identifies factors that underlie farmer’s reasons to move out of agriculture.

Farmers who express a preference for moving out of agriculture are mostly those with small landholdings, poor irrigation facilities, fewer productive assets including livestock, and follow a cereal-centric cropping pattern. They also have relatively lower access to credit, insurance, and information, and are weakly integrated with social networks such as self-help groups and farmers’ organizations. Within caste group, the dislike for farming moderates with larger landholdings.

If look in the past, over the year’s Indian agriculture faced the challenge of stagnation in arable land, rise in population with increase in demand, changing consumer preference and growing small land holder with an average size of 0.38 ha. According to the latest decennial population census 2011, for the first time in the last four decades, the absolute number of farmers in India fell by 9 million, from 127 million in 2001 to 119 million in 2011. However, a commensurate decline in the agricultural workforce did not occur. The share of agricultural workforce in the total employment declined extremely slowly from 74 percent in 1972-73 to 60 percent in 1993-94 and further to 52 percent in 2009-10.

The author’s highlights that lack of profitability, high risk, and lack of social status in farming and others in that order are few of reasons for moving out. About 67 percent disliked farming due to low profits, 18 percent due to high risk factors and remaining 15 percent based it on the low social status attached to the profession and other factors. Across the different farm land classes, low profitability remained the prominent denominator but it is relatively more pronounced among smaller farmers. Risk was directly in proportion with landholding sizes.

Study reveals that by comparing the net returns on the farms of potential quitters (those who don’t like farming as a profession) and willing stayers (those who like farming as a profession). It is as high as 25 percent in the medium (2.0-4.0 ha) farm class and 18 percent in small (1.0-2.0 ha) farm class. Importantly, the probability of quitting does not seem to be much influenced by social identity as the proportion of farmers disliking agriculture as a profession is almost similar across social classes.

The authors identifies number of pull and push factors underlying farmers’ decisions on agriculture. Pull factors mostly relate to the income opportunities outside agriculture for eg. access to non-farm business activities, higher education, income from labour/salaried jobs, while push factors are a reflection of the constrained livelihood opportunities in agriculture, forcing farmers to seek avenues outside agriculture for eg. lack of access to irrigation, farm credit, crop insurance, information on crop agronomy and modern technology. On the other way around access to irrigation and diversification of production structure towards high-value crops and livestock production make farming attractive to stay in agriculture.

These findings have two types of implications; one for the farm sector and the other for the nonfarm sector. The results point toward a tendency of possible decline in viability of agriculture as a profession. It was noted that farmers who practice integrated farming can be a signal for a greater policy emphasis for diversification toward these activities. Farmers need an improved availability of finances, inputs, information, and markets to benefit maximum from technological change and diversification. Since risk was identified as important reason for disliking farming, insurance agencies can target efforts to improve their outreach among smallholders.

Authors conclude that to improve viability of small-scale agriculture, investments and prioritization on climate smart agriculture interventions by the policymakers can be an important step towards improving the food security and rural livelihoods in addition to mitigating the climate impacts.

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40 per cent Indian farmers do not prefer farming as profession

Risk-Management Increases Resilience in the Face of Drought

Cross-posted from the FSP India website written by Jaspreet Aulakh

Nalanda District, Bihar Source (Flickr): Divya Pandey, IFPRI
Nalanda District, Bihar
Source (Flickr): Divya Pandey, IFPRI

Shocks of any form can be have a more pronounced effect in the developing countries like India where half of the population is engaged in agriculture, and the occurrence of droughts can deplete of productive assets, aggravate food insecurity, and entrench people further into poverty. During a drought year, studies show income falls by an estimated 25-60 percent while the per capita poverty rate rises by 12-33 percent.  In a new study to be published in October 2015, Pratap S. Birthal, Digvijay S. Negi, Md. Tajuddin Khan and Shaily Agarwal argue that drastic shifts in the drought management strategy from crisis management to risk management has improved the resiliency of Indian agriculture. Using rice, a water-intensive crop, to test risk-tolerance, the authors find a small decline (2.5 percent) in rice production in 2009-2010 over the previous level despite the rainfall deficit of more than 20 percent. They attribute this resilience to improvements in water management, technological advances in crop breeding, as well as the development of infrastructure and institutions engaged in delivery of advisory services, information, and inputs.

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Building Capacity under CSA

Farmer in Haryana. Credits: (Flickr) Divya Pandey/ IFPRI
Farmer in Haryana. Credits: Divya Pandey/ IFPRI

Agriculture is highly vulnerable to even short term weather change, therefore even a small shift in climate poses direct threat to farmers, who not only have to secure his livelihood but also need to produce sufficient food to feed the growing population. Despite significant achievement in food grain production, farmer’s today face the challenge of deteriorating land, water and soil, along with growing impact of climate change thus deepening the complexity for their sustainability.

With major presence of small holder farmers, who are vulnerable to the changing climate shocks need timely support to ensure their food security but they also need to be prepared for uncertain future. Efforts are needed to develop interventions on Climate Smart Agriculture (CSA) to counter climate change risks.  CSA brings in together improved technologies, value added advisory services, application of information and communication technology, and agricultural insurance, which improves the adaption capacity of farmers against climate change and also minimize the greenhouse gas emission. Overall, CSA (i) raises agricultural productivity and farm income, (ii) minimizes risk that arise due to climate change, and (iii) reduces Green House Gas emissions.

Signals of the shifting climate change are visible across the country, but the extent of damage differs, therefore government policies, new technologies and adaptive measures should blend together to reach farmers. Process such as, training of trainers to develop capacities of progressive farmers, NGOs working with farmers and the extension workers on Climate Smart Agriculture (CSA) is a step forward.

International Food Policy Research Institute (IFPRI) as part of  on-going research work with Climate Change, Agriculture and Food Security (CCAFS) and with collaborators Centre for Good Governance in Hyderabad and  DNS Regional Institute for Cooperative Management in Patna is organizing training workshop in July.  The three days training workshop will cover (i) orientation about climate change and its impact, (ii) the need for CSA as resilient mechanism, and (iii) financing opportunities in CSA. Trainees under such programs will be encouraged to disseminate the need based knowledge on CSA to a large number of farmers in their communities.



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