In October 2025, unseasonal rains hit Maharashtra’s Palghar district, destroying the entire paddy crop of a farmer named Baburao Patil. He had promptly filed the insurance claim. Yet, a few days later, the agricultural insurance company credited just Rs 2.30 to his account despite his entire crop area being flooded (National Herald India, 2025). The reason cited was “insufficient loss” based on satellite imagery. It caused the farmer a loss of Rs 80,000 in investment and a potential Rs 1.5 lakh in earnings, along with a premium of Rs 1,500. It is not an isolated case; it points to deeper structural issues in India’s Pradhan Mantri Fasal Bima Yojana (PMFBY): a government crop insurance scheme that provides comprehensive financial security to farmers who lose their crops due to unavoidable natural risks.
Asymmetric information is inherent in crop insurance schemes where the insurers depend on the farmers to report the losses accurately, while they have systems in place to verify the claims. It is a classic example of the principal-agent problem where the misaligned incentives and the limited monitoring affect loss assessment and compensation. To deal with the higher costs of verification at scale, the insurers rely on satellite-based imagery and area-yield models, which help assess the extent of crop damage at the village or taluk level rather than individual farms (Ministry of Agriculture and Farmers Welfare, 2018).
The PMFBY scheme also suffers the problem of adverse selection. Post-2020, as the enrollment was made voluntary (PIB Press Release, March 2024), the risk was borne by only farmers whose land was prone to floods or droughts and such farmers registered under the scheme, highlighting the skew towards high-risk cultivators. High risks always lead to higher premiums, while under the scheme the farmers’ contribution remains capped at 2 per cent and the difference between this and the actuarial premium is shared by central and state government which is estimated at around 15-20 per cent. Due to this, the annual subsidy burden for the government was found to be roughly Rs 25,000-30,000 crore for the 2022-24 time period.
The scheme was implemented eight years ago, and it was noticed that of the 56.80 crore enrolled, only 23.22 crore got the claims settled (PIB Press Release, Ministry of Agriculture and Farmers Welfare, March 2024). Between 2016 and 2023, the insurers collected Rs 1,97,657 crore in premiums (including subsidies) and paid out Rs 1,40,038 crore in claims, leaving a substantial gap between the premiums received and claims disbursed. The gap is not directly translated into profit, but raises important concerns about the risk assessment, pricing and compensation with the scheme.
The financial structure of the scheme says that the farmers contribute two per cent of the sum insured for kharif crops and 1.5 per cent for the rabi crops, and the rest of the premium is covered by the government as a subsidy (PMFBY Operational Guidelines, February 2016), which further complicates the outcomes of the scheme. States like Bihar, Jharkhand and West Bengal have opted out of the scheme, citing fiscal unsustainability where there are an absence of a strong accountability mechanism or penalty-based settlement ratios, creating an incentive within the system to limit payouts.
India needs a carefully redesigned crop insurance rather than its complete withdrawal. As the coverage of the scheme has expanded, more emphasis has to be laid on public-private partnership in solving the structural concerns of measuring the risks and distribution of incentives. The structuring of the government subsidies would assist in timely and fair claim disbursal, regaining trust in the system. In order to strengthen accountability, measures have to be taken to link insurer compensation to claim settlement outcomes rather than just enrolment.
Encouraging participation by regional insurers expands competition, and employing newer parametric models boosts efficiency and responsiveness. At the same time, addressing exclusion, particularly of tenant farmers, remains critical to ensuring that the scheme reaches those most vulnerable to agricultural risk. Without such reforms, crop insurance risks falling short of its core objective: providing reliable financial protection to farmers in times of distress.
Lehar Jain is a student at the Department of Economics, Christ University, Bengaluru
Kshama A V is an assistant professor at the Department of Economics, Christ University, Bengaluru
Views expressed are the authors’ own and don’t necessarily reflect those of Down To Earth