Why Do Few Farmers Insure Their Crops in India? A Choice Theoretic Explanation

ABSTRACT

The unit‐level data from various rounds of the National Sample Survey's (NSS) Situation Assessment Survey of Agriculture Households (SASAH) reveal that a negligible proportion (about 5%) of Indian farmers take up crop insurance, despite decades of government awareness programs. Seeking answers to this question, we develop a theoretical model to understand farmers' behavioral patterns, which explain the demand for crop insurance as an outcome of farmers' expected family utility‐maximizing process. The propositions derived from the choice‐theoretic model are examined empirically by estimating a crop insurance binary choice model through Instrumental‐Variable (IV) Probit regression models. The estimated results suggest that liquidity constraints dominate the wealth effect in shaping farmers' insurance decisions. Farmers belonging to socially marginalized communities (SCs, STs, and OBCs) exhibit a higher propensity to purchase crop insurance than upper‐caste farmers, reflecting greater risk aversion among disadvantaged groups. Crop insurance demand also increases with age, with middle‐aged and elderly farmers being more likely to insure their crops than younger farmers. Significant regional disparities are observed, with farmers in Southern, Western, and Central India displaying higher insurance uptake than those in the North‐Eastern region, indicating a pronounced regional divide. Based on these findings, it is argued that affordable, accessible, and inclusive crop insurance through expanded coverage, better credit access, and stronger institutional support for ensuring crop diversification of the marginal and small farmers, and people belonging to socially marginalized groups would help increase demand for crop insurance in India.