How can rainfall insurance help dryland farmers uri icon

abstract

  • About 65% of the cropped area in India is dependent onrains. Because most of the rains in India are received duringthe monsoon months, the crop growing seasons are quiteshort. Any aberrations in the amount of rainfall or in itsdistribution can adversely impact the crop yields. Yield andprice uncertainties often reduce the incomes of the farmhouseholds and, consequently, their consumption levels andinvestments. Many of the farmers in the semi-arid tropics(SAT) of India live close to subsistence level, and shieldingthem from the weather-induced shocks in agriculturalincome is vital for their survival. The SAT accounts for 37%of the country?s geographical area as well as population,46% of the net cultivated area, 59% of the coarse cerealsarea, 53% of the pulses area and 60% of the oilseeds area.Even 60% of the commercial crops are grown in the SAT.If rainfed agriculture in the SAT is to remain as a means oflivelihood, ex-ante risk management is a critical first step toex-post risk coping.Weather-related risks are co-variant as they typically impactall farm households in the affected region at the sametime. Local risk sharing arrangements are largely ineffectivein these situations. When the probability of weatherrelatedrisks is high, farmers diversify and adopt low riskand often low return production practices, which involvetrading expected profits for lower risk. Like in many otherdeveloping countries, rural financial markets in India arefragmented and formal credit markets are, at best, emerging.Although credit is an important means of consumptionsmoothing, it tends to be complimented by an array of otherex-post risk coping strategies, such as asset sales, remittancesfrom family members and other risk-sharing arrangements.When many farmers are in distress and seek to liquidateassets, their prices are likely to fall, making it hard foraffected families to smooth consumption and to recoverfrom the stress in the future.Households can also reduce their exposure to weather riskex-ante. This could occur through precautionary saving,or by income smoothing strategies such as implementingmore conservative agricultural production strategies. Infact, rainfed farmers were earlier focusing on low risk foodcrops to keep down risks although it meant sacrificing highexpected returns from cash crops such as cotton, castor,vegetables, among others. But over the years, the returnsfrom food crops such as millet and sorghum declinedrapidly due to declining demand and falling prices. Farmersincreasingly shifted to cash crops as their incomes from nonfarmsources and seasonal migration enabled them to accepthigher risks. However, in the absence of effective incomesmoothingmeasures during drought, farmers often fall shortof their consumption needs, leading to chronic indebtednessand, in some cases, even to desperation and suicide. Inthe absence of risk insurance, traditional ex-ante riskmanagement strategies and ineffective ex-post risk copingsystems lock the SAT farmers in poverty and subsistenceproduction. Insurance is one of the important ex-post riskreduction strategies (Figure 1)

publication date

  • 2006