Can crop insurance work? The case of India

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Abstract
This article assesses the performance of the Indian Comprehensive Crop Insurance Scheme from 1985 to 1993 in relation to a recent critical literature which argues that comprehensive agricultural insurance is subject to insuperable moral‐hazard obstacles. The Indian scheme has made heavy financial losses; on the benefit side, sample data from Andhra Pradesh suggest that some farmers have converted to yield‐raising techniques as a result of the presence of the insurance scheme, but that the scheme has not brought about any improvement in loan repayment performance, even though that was the scheme's explicit objective. We conclude that, to work properly, the scheme requires an increase in premiums and a reduction in the range of risks covered. A possible alternative design, in which individual farmers are insured directly against drought rather than against a shortfall in yields, is sketched out.