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Introduction
India experiences enormous losses every year due to extreme weather events, natural calamities, pests and diseases. In the last 20 years, around 7,000 natural disasters occurred worldwide. In total, 40% of it happened in Asia. It affected 4.2 billion people worldwide, and the damages caused were estimated to be US$ 2.2 trillion (Hess and Hazel, 2016). The losses due to climate change have increased over time and are likely to affect South Asia and South Africa more than Europe or North America (Ranganathan et al., 2019). Agricultural yields in India saw a decline of 4.35 and 9.75 % due to extreme temperature and rainfall shocks, respectively, in the past decade (GoI, 2018). Unseasonal rainfall and hailstorms destroyed 24 million hectares of crop area between 2013 and 2015. The losses from it were INR 260 billion (Bhushan et al., 2015). As more than half of its cropped area is still rainfed and three-fourth of farmers being small and marginal, India is likely to be more vulnerable to climate change (Gulati et al., 2018).
Farmers mainly encounter two types of risks: yield and price risks. In India, around one-third of the agricultural households are exposed to yield risks (Birthal et al., 2019). The erratic rainfall is the major cause of the yield risk which alters the demand–supply equilibrium causing high price volatility (Gulati et al., 2018). Minimum support prices (MSP) are announced for 23 commodities by the government to cover the price risks. But the implementation is limited mainly to rice and wheat, which also fails to protect the farmers adequately in all the states. For instance, in 2017–2018, prices of agricultural commodities like soya bean, tur, urad, groundnut, etc. were lower than MSP resulting in widespread losses to farmers (Gulati et al., 2018). Risk-averse farm households choose low-return enterprises while those having the capacity to bear costs of risk choose high-return enterprises (Birthal et al., 2019). Therefore, assurance of compensation for the losses could change farmers' attitude and encourage them to take up risky enterprises which yield high returns. Crop insurance is one of the effective ways to ensure regular cash flow in times of distress. It acts as a shield to farmers' income during bad years. Thus,...