Modi’s Rural Challenge: Balancing Poverty and Inflation
March 13, 2016
Having seen his party take a hit in elections in Bihar last November, India’s Prime Minister Narendra Modi is working to regain the people’s confidence. In particular, the prime minister has recently turned his attention to rural areas, especially since villagers comprise approximately 70% of India’s population. Just two weeks ago, Modi released a budget reflecting his goal to help farmers with their financial troubles, and Arun Jaitley, the Finance Minister of India, announced that the government “plans to double farmers’ income in five years.” But if Modi’s government is to fulfill this high expectation, it will have to successfully juggle several competing priorities, including the risk of inflation, crop microinsurance for farmers, and sustainable government spending.
Learning from the Past
As D. Jayaraj, professor at Chennai’s Madras Institute of Development Studies, explains, the Indian government can increase farmers’ incomes either by raising crop prices or by raising the subsidies that cover farmers’ input costs. The first method would evidently impact the non-agricultural portion of India’s population, who are consumers of this agricultural output. In fact, empirical evidence confirms that Modi would assume a great deal of risk if he were to select this route. His predecessor, Manmohan Singh, decided to raise crop prices during his time in office and saw agricultural wages grow 13 percent annually on average. This was counterbalanced by a rapid rise in inflation, causing public backlash against Singh’s party. Thus far Modi has made sure to keep crop prices low, with the result that inflation has been contained—but, agricultural wages have grown a meager 2.4 percent annually under his policy. Nevertheless, if manageable inflation is to remain a priority for Modi’s administration, as it must if Modi’s Bharatiya Janata Party (BJP) is to regain momentum among the people, he will not be able to rely on increasing crop prices as a vehicle to promote wage growth among farmers.
Fixing Crop Microinsurance
The only alternative is to subsidize the farming business, and to this end, one of the components of the $5.2 billion agricultural plan laid out by Modi and Jaitley focuses on improving crop insurance. In spending more on crop insurance, the government will need to address many logistical concerns with the existing microinsurance structure rather than simply increasing current subsidies, while simultaneously ensuring that the government’s insurance expenditures are sustainable. Indeed, in 2011, under the National Agricultural Insurance Scheme, the ratio of annual insurance claims to the farmers’ premiums exceeded 100%, implying that heavy government subsidies already in place. However, this system is far from perfect, as evidenced by numerous farmer suicides and low agricultural incomes. Also, Jaitley’s objective of decreasing the fiscal deficit to 3.5% of India’s GDP contrasts with the large agricultural spending campaign. As a result, the government will need to be hawkish with respect to overfunding crop insurance.
One of the problems with the crop microinsurance system is immense fraud. In one case in Gujarat, a group of farmers had claims that indicated a groundnut yield of 32 quintals per acre, yet an investigation by the state government found that the yield was actually close to 450 quintals per acre. Doling more money out to farmers without a higher level of scrutiny could exacerbate the problem of fraud. Another problem is that insurance coverage is too low. Some states such as Haryana, Madhya Pradesh, and Punjab do not receive the same level of benefits that other states such as Maharashtra, Tamil Nadu, and Gujarat enjoy. The Economist reports that even in areas of India where weather-related crop microinsurance is available, only 5% of farmers opt into the plan. Modi’s government would do best to research solutions to these problems in order to improve the effectiveness of the crop insurance program in keeping farmers.
To solve the problem of fraud, one possible solution is to shift the metric used for evaluating the weather-related damage to a more objective measure. As per the current National Agricultural Insurance Scheme, insurance claims are computed using crop-cutting experiments done on the output of the farms and comparing the calculated yield to a threshold. While this method may seem the most accurate due to its direct measurement of crop yield, the problem is that the process of visiting a farm and performing the experiment relies heavily on a human (i.e. the government official who is charged with the task). One official with field experience in crop insurance reports that in some areas, farmers bribe government assessors in order to obtain unwarranted payments. The key, then, is to remove human error and selfishness from the evaluation process. EARS Earth Environment Monitoring, an organization in the Netherlands, conducted a study on agricultural microinsurance in Africa and found that the metric of relative evapotranspiration (RE), which describes the amount of water that is used by crops, has a strong positive correlation with crop yield. Moreover, in the study, RE is computed from a satellite (Meteosat), so the assessment of insurance claims does not necessitate communication between farmers and government officials. The EARS report also cites a study by the Agricultural Economic Institute that validates the sustainability of microinsurance based on the satellite RE metric. Therefore, the Indian government should research the use of a satellite metric such as RE for evaluating insurance claims, as such a regime could diminish the problem of fraud while also contributing to a more sustainable insurance program.
Modi should also invest funds into expanding the infrastructure of the insurance program to reach more farmers in regions that currently see little benefit. In order to increase interest in the program in areas where insurance is offered, the government should aim to target groups of farmers rather than individuals. According to a study by experts at Oxford University, providing information about the reasons to buy into crop insurance against the weather to Ethiopian farmers who were members of social and financial groups increased the “take-up … from just 2% to 36%.” Modi should devote a portion of funds to research and implement a similar strategy, which could be effective in India as well.
The economic challenge of reconciling the goal of doubling farmers’ incomes in the next five years with concerns about inflation and over-expenditure is far more complex than the rhetoric of Modi and Jaitley would suggest. If the Indian government is to be successful in its venture to improve crop insurance, it must focus its efforts and resources primarily on addressing the problems of fraud and insufficient coverage by leveraging existing studies and conducting further research. By heading in this direction, Modi would maximize the chance of a positive outcome for both poor farmers and the BJP.
Kumar, KP Narayana. “Why Crop Insurance Schemes Fail Poor Farmers When They Are Needed the Most.” The Economic Times. April 26, 2015. Accessed March 05, 2016. http://articles.economictimes.indiatimes.com/2015-04-26/news/61542788_1_crop-insurance-scheme-insurance-fraud-kisan-credit-card/2.
“A Hard Sell.” The Economist. January 04, 2014. Accessed March 05, 2016. http://www.economist.com/news/finance-and-economics/21592653-new-research-suggests-insurance-can-be-made-more-attractive-poor-farmers-hard.
“National Agricultural Insurance Scheme (NAIS).” Dept. of Financial Services, Ministry of Finance, Government of India. Accessed March 05, 2016. http://financialservices.gov.in/insurance/gssois/nais.asp.
Rosema, Andries, Jolien Van Huystee, Steven Foppes, Joost Van Der Woerd, Erik Klaassen, Jacqueline Barendse, Marcel Von Asseldonk, Mathieu Dubreuil, Sabrina Regent, Sebastien Weber, Anaar Kara, Gary Reusche, Rose Goslinga, Michael Mbaka, Frank Gosselink, Richard Leftley, Juliet Kyokunda, Joseph Kakweza, Ryan Lynch, and Kees Stigter. “FESA Micro-insurance - Crop Insurance Reaching Every Farmer in Africa.” EARS - Satellite Data for Climate, Water and Food. Accessed March 5, 2016. http://www.ears.nl/user_files/FESA Micro-insurance - reaching every farmer in Africa.pdf.
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