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Govt Raises Agri Credit Target to ₹28 Lakh Cr, But Efficiency Concerns Remain
Equities, Markets - January 29, 2025

Govt Raises Agri Credit Target to ₹28 Lakh Cr, But Efficiency Concerns Remain

Govt Raises Agri Credit Target to ₹28 Lakh Cr, But Efficiency Concerns Remain

Overview
The government raises the agriculture credit goal for banks each year, usually when the Union Budget is unveiled. The government set the agriculture credit target for FY 25 at 27.5 lakh crores, which was 11% higher than the previous year, in the Union Budget 2024 as well. About 75% of the total loan allocated for farmers is given by commercial banks, with cooperative and regional rural banks providing the remaining portion. The government is expected to raise the banks’ agriculture lending objective in the next Union Budget as well, raising the total aim above Rs 28 lakhs.

Agri Credit Target set in 2024-25
Due to a greater formalization of the rural credit system, commercial banks’ and regional rural banks’ lending to the agriculture sector is expected to surpass Rs 28 lakh crore in the current fiscal year, setting a new record, Shaji KV, chairman of Nabard, stated on Sunday. The flow of agricultural finance has grown by 13% annually on average during the past ten years. In the current fiscal year, we will surpass Rs 28 lakh crore in loan flow, Shaji informed FE.

A record Rs 27.5 lakh crore was set as the agri-credit disbursement target for 2024–2025, 31% more than the FY24 objective of Rs 21 lakh crore. In 2023–24, banks disbursed Rs 25.49 lakh billion in term and crop loans, a 15% increase over FY23. This year’s growth is predicted to reach about 10%.

Government Initiatives gear up for Agri Credit
The informal sector’s percentage of credit disbursements is decreasing as agri-credit flows increase. On the sidelines of Grameen Bharat Mahotsav, which Nabard is organizing in partnership with the Department of Financial Services, he stated that this signifies the formalization of rural credit, which will guarantee many margins with the rural populace.

The finance ministry has set aside Rs 11.5 lakh crore for term loans and Rs 16 lakh crore for short-term crop loans, which will be paid out in 2024–2025. Seventy-five percent of the total credit, or Rs 20.62 lakh crore, will come from commercial banks. Rs 4.2 lakh billion of the entire agri-credit flow has been set aside for short-term loans to the dairy, fishery, and poultry industries.

The agriculture ministry’s Agri Stack effort, which would generate a farmer registry, village land maps, and crop sown data, would be used by the National Bank for Agriculture and Rural Development (Nabard) to digitize farmers’ credit records in order to rectify this imbalance in loan flow, Shaji stated.

At Rs 4.39 lakh crore, or 17.6% of the total credit disbursal in the country, Tamil Nadu received the largest credit disbursal in the previous fiscal year. Andhra Pradesh came in second with Rs 2.96 lakh crore, or 12% of the total. According to Shaji, Nabard wants to introduce the second phase of the Rs 1,000-crore Nabventures fund, which is intended for entrepreneurs in the agricultural and related industries. A Rs 750-crore agri fund for start-ups and rural businesses was introduced last year by Nabard in partnership with the agricultural ministry.

To satisfy their working capital needs, farmers with Kisan Credit Cards can receive loans up to Rs 3 lakh at 7% annual interest under the modified interest subvention scheme. The program lowers the effective interest rate to 4% by offering an extra 3% interest subvention for timely repayment.

Trend in Bank Credit to Agriculture
Banks are already heavily involved in agriculture and related fields. From an outstanding balance of Rs 13.3 lakh crores in FY21 to Rs 22.2 lakh crores in FY24, bank credit to agriculture has soared in recent years. That amounts to around 13% of the entire bank credit. According to the most recent data, bank lending to agriculture increased 15.3% year over year through November of last year, compared to 18.1% during the prior similar period. Nonetheless, the growth is significantly higher than the average loan growth, even at 15.3%. There are currently 22.2 lakh crores in outstanding agri-loans.

Because it is required by law, banks are increasing their financial flows to the farm sector. Banks are required to lend 18 percent of their adjusted net bank credit to agriculture under the priority sector lending (PSL) standards. This includes lending for agricultural infrastructure and auxiliary operations as well as farm finance, which covers agriculture and related industries.

Agriculture Sector’s efficiency unlikely to improve
According to the report, unpredictable weather patterns and an unequal monsoon spatial distribution in 2023 caused Gross Value Added (GVA) in the agriculture sector to grow more slowly even with this rise in credit. To put it another way, greater funding isn’t always translating into greater efficiency. The monsoons are one of several factors that affect the sector’s success. The issue cannot be resolved by money alone.

Banks, primarily state-run lenders, will have a lot to worry about in the coming days about their farm loan books if these loans go bad. Investors may therefore find it beneficial to closely monitor the agribook performance of banks, particularly state-run banks.

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Role of upcoming budget to enhance economic growth

Role of upcoming budget to enhance economic growth

Overview
Following the Covid-19 pandemic, many countries in the world suffered from aggressive contractionary monetary policy, high inflation levels, and constant geopolitical issues. In the midst of this scenario, India’s growth was a silver lining. The reason for this robust growth was government expenditure on the country’ infrastructure was unparalleled. It resulted in India recording the highest growth levels for each quarter compared to other major countries in the world. This trend went on for many quarters till the second quarter of the financial year 2025.

India recorded a 5.4 percent growth on a year-on-year basis in the September quarter of the financial year 2024-25. It was the most moderate growth in the period of the last two years. The Finance Ministry of India and Reserve Bank of India stated that the slump in growth is just temporary in nature and not a long-term shift of the economy towards moderate growth levels. Despite this, the scenario shown by the earning reports of the third quarter of non-financial firms was falling for the third quarter in a row. The only exception to this pattern was some of the big companies.

Due to this gloomy situation prevailing in the market, different segments in the economy are expecting a thrust from the Union budget for the economy of the country.

Factors needed for the economic growth
To boost economic growth, a country needs to fulfill the four factors of GDP which is investment from both public and private sector, net export levels (difference between exports and imports) and consumption.

After the Pandemic, the economic growth in India is strongly pushed by government expenditure. However, channels of government expenditure have crossed way beyond their capacity. In recent times, government expenditure is declining which has resulted in a decline in growth levels. In the second quarter of financial year 2025, the growth in investment by the government was just 4.4 percent. Looking at this situation, it is time for private sector investment to step in to promote economic growth in the country.

The export levels in the country are suffering from moderate growth. In the second quarter of the financial year 2025, the export growth fell to 2.8 percent year-on-year which is the most significant hindrance to economic growth. In contrast to this, the growth of consumption level in the same quarter was 6 percent year-on-year increasing. Also, the anticipated household consumption growth for this financial year is about 7.2 percent. In India, household consumption levels have more than half of the share in the growth of its GDP.

Despite this good situation in consumption levels, it certainly has its own issues too. After the Covid-19, the urban demand was high for a long period of time and now it has lost its breath. While, the major part of consumption level is contributed by increasing rural expenditure levels in the latest quarters. The rural expense has increased due to factors such as some government schemes (like MGNREGA) and favorable monsoon season.

To have robust economic growth in India, the government needs to encourage private investment, a push to export levels and strong urban demand.

Role of Budget
Tax relief is one of the important measures that the government of India is anticipated to take in order to encourage urban demand in the country. The contribution of personal income tax was about 53 percent in the total direct tax collection of the government in the financial year 2024. It showed that people pay more taxes compared to tax paid by companies. It is also important to consider the truth that about three percent of the population in the country gives taxes. It is quite concerning in terms of tax pressure on the people paying taxes. Taking this scenario in consideration, it is anticipated that the government will raise the exemption limit on earnings, providing high standard deduction, adoption of medical insurance deduction (Section 80D Deduction) in new tax policy, increase the limits on investments and saving on which tax deduction is allowed (Section 80C Limit), and make income tax brackets fairer.

In the case of private investment, the investment levels are quite inconsistent. Despite this, many new technology industries are growing with the help of government actions. This kind of support is anticipated to remain in future as well. However, government stimulus is constantly changing. For instance, initially the government of India was focusing on incentivising swapping of batteries but now it is focusing on creating more charging infrastructure. It is difficult to identify which incentive will perform well in the economy. However, it is important to understand that all the attempts of the government are focused on promoting these new technology industries.

Apart from this, many industries in the country are anticipating a fall in interest rates in the month of February and also rise in demand levels. In present times, these industries are working with high production capacity. They have high cash levels but not using it to invest in new plans. The reason for high cash is raised through various channels, particularly through IPOs in the year 2024. When consumption levels in the country will be raised then companies will start to use their cash. Also, they will go for loans in case of favorable stock market situations and fall in interest rate in the economy. However, these actions of the industries rely on the condition that consumption demand needs to rise.

Focus on fiscal consolidation
The government of India needs to focus on fiscal consolidation. In the current financial year, it should keep the fiscal deficit in the range of 4.9 percent and below 4.5 percent in the upcoming financial year. It would lead to financial reliability in the current situation of uncertainty.

In conclusion, the government of India needs to focus on tax reliefs and investment leading to creation of economic growth in the long term, along with focus on fiscal consolidation.

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India's Debt-to-GDP Ratio: Balancing Growth and Fiscal Prudence

India’s Debt-to-GDP Ratio: Balancing Growth and Fiscal Prudence

Overview
Since governments in both developed and emerging nations provided varying degrees of fiscal stimulus following the Covid epidemic, sovereign debt as a percentage of GDP has been a hot topic of discussion worldwide. In developed countries like the US, the debt-to-GDP ratio has risen to unmanageable levels notwithstanding the rollback of stimulus measures. India’s ratio needs to be watched even though it is low when compared to its immediate developing market rivals.

FRBM Act target not achieved
According to Barclays, since the peak of the pandemic year, the central government debt to GDP ratio has remained at about 60%. That is significantly more than the 40 percent threshold set by the Fiscal Responsibility and Budget Management Act (FRBM) to be met by FY25.

The goal set by the FRBM Act was for the total debt of the central and state governments to reach 60% of GDP by 2024–2025, with the central government’s debt standing at 40%. Following the pandemic, the FRBM targets were halted, necessitating an increase in government spending to bolster the economy.

Fiscal Deficit to reduce Debt
In her budget address last year, Finance Minister Nirmala Sitharaman stated that starting in 2026–2027, the fiscal policy will aim for a fiscal deficit that would assist in the debt’s downward trajectory. Although no specific goals were stated, the idea is that the amount of government debt must decrease. After all, the current administration has repeatedly emphasized the importance of economic restraint and prudence.

To reduce debt to 40 percent of GDP from the present 57 percent is a tall task and is unlikely to be achieved in a handful of years. Indeed, the need to boost spending, be it capex or revenue towards slowing sectors, has emerged yet again. With the economy facing a cyclical slowdown, the pressure of the government has increased to lift consumption through measures that would force the government to forgo tax revenue.

External Debt on the rise
According to the Finance Ministry, India’s external debt increased 4.3% from June 2024 to $711.8 billion as of September of this year. The external debt was $637.1 billion at the end of September 2023.

According to India’s Quarterly External Debt Report, the country’s external debt was $711.8 billion in September 2024, $29.6 billion more than it was at the end of June 2024. Further the report highlights that the external debt to GDP ratio was 19.4% in September 2024 compared to 18.8% in June 2024. With a proportion of 53.4% of India’s external debt as of the end of September 2024, the US dollar-denominated debt was still the highest, followed by the Indian Rupee (31.2%), Japanese Yen (6.6%), SDR (5.0%), and Euro (3.0%).

It stated that both the general government’s and the non-government sector’s outstanding external debt rose from June 2024 to September-end 2024. According to the report, loans accounted for the highest portion of foreign debt (33.7%), followed by currency and deposits (23.1%), trade credit and advances (18.3%), and debt securities (17.2%). Further, debt servicing (principal repayments plus interest payments) accounted for 6.7% of current receipts at the end of September 2024, up from 6.6% in June 2024.

Market Opinion
Speaking about the impending Union Budget and India’s overall economic prospects, Nadir Godrej, Chairperson of Godrej Industries Group, says that although a budget deficit may appear worrisome in the near term, it need not be detrimental if it fosters growth. In an interview with Siddharth Zarabi, Editor of Business Today, at the World Economic Forum in Davos, he stated that the debt-to-GDP ratio is the most important indicator to keep an eye on since it shows the nation’s total debt in relation to its economic production.

According to Godrej, India’s debt-to-GDP ratio would improve and worries about the sustainability of its debt would be allayed if the country’s economic growth rate rose from the anticipated 6.7% to 9%. According to him, if a budget deficit is properly employed to spur growth, then a certain amount of it is acceptable.

Godrej emphasizes the value of government capital spending, despite the fact that it could seem excessive at first. According to him, even if these expenditures may appear high up front, they produce worthwhile assets (such as public facilities, energy infrastructure, and roads) that will pay off later on, increasing productivity and stimulating the economy. Government investment on infrastructure and other long-term initiatives that support the expansion of the economy in the future is referred to as capital expenditure.

Conclusion
What is heartening is that fiscal deficit is likely to reduce to 4.5 percent of GDP for FY26 but that is a job half done. Financing this deficit in a way that does not require the government to borrow large amounts from the bond market is critical towards reducing the debt load. This is where it gets tricky for the budget.

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Weak Capex result in lesser centre’s spending

Weak Capex result in lesser centre’s spending

Overview
India’s remarkable economic expansion appears to have encountered a roadblock. Along with other factors including the global downturn and geopolitical concerns, the decrease in central government spending is now commonly seen as the primary cause of the weak growth at home.

Further, the government is battling economic issues such as slower domestic growth, rising welfare spending, and the need for consistent capital investment, even as the country approaches the date of the budget presentation, with Finance Minister Nirmala Sitharaman scheduled to present the Union Budget in the Lok Sabha on February 1. A declining rupee, muted economic growth, and increased global geopolitical uncertainty—especially with Donald Trump taking the helm as the 47th US President—will all be factors in the Budget.

Capex over the years
The total amount spent by the center has been declining since FY2021, when it reached a decadal high of 17.7% of GDP. Motilal Oswal Securities Financial Services notes in its study that the Center’s spending is expected to fall to a six-year low of 14.3% in FY2026. Keep in mind that revenue expenditures and capital expenditures (capex) make up the majority of government spending. Even after the general elections, government projects and capital expenditures have not improved, which has worried economists in recent years. As of November 2024, the overall expenditure was 56.9 percent of the Budgeted Estimate (FY2025), which is a two-decade low, down from 58.9 percent in FY2024. Regretfully, even the Center’s overall spending growth in FY2024 has fallen into the single digits (7.7%).

Key Reason for lowered government spending rate
The Center’s capex shortage is the reason for the lower spending. The government has used less than half of the Budget Estimates for capital expenditures between April and November, according to statistics made public by the Controller General of Accounts. Economists emphasize that in order to reach the FY2025 objective of INR 11.1 trillion, the Center’s capital expenditures must increase by 65% year over year between December and March. According to the Motilal Oswal estimate, FY2025’s capital expenditures will be short by almost INR1 trillion.

Budget Expectations
Motilal Oswal believes that capital expenditure loans to the states ought to be connected to their performance indicators, like the welfare-to-capex ratio and capital expenditure accomplishment in relation to budgetary goals. For example, states that prioritize welfare programs (such as monthly stipends) ought to be closely examined prior to being granted interest-free loans. It said that this will assist solve the Rs 1 trillion capex shortage projected in FY25 and guarantee fiscal prudence.

Simplifying GST slabs and lowering these burdens will increase disposable incomes, as indirect taxes make up over 60% of total tax receipts. According to Motilal Oswal, corporations should either make dividend income tax deductible or go back to previous methods in order to avoid double taxation. Investors may benefit from these actions, which may also increase tax compliance.

According to the brokerage business, increasing household income must come before increasing consumption. Supporting the nation’s second-largest employer, the construction industry, and giving MSMEs non-inflationary aid will help sustainably increase incomes. In order to help MSMEs stay competitive and integrate into the formal economy, Motilal Oswal fought for targeted aid.

Motilal Oswal stated that the government should aim for a fiscal deficit of 4.5% of GDP in FY26 while raising capital expenditures by 10% to 15%, even though revenue growth is slower. A capital expenditure surge is essential for economic momentum because FY25 spending is expected to fall to a six-year low of 14.3% of GDP. Based on CGA statistics, GoI’s capital expenditures decreased by 14.7% in the first seven months of the fiscal year. To achieve the 17.1% annual growth that was anticipated, GoI’s capital expenditures would need to increase by 60.5% in the remaining five months of the fiscal year.

Despite a significant tax cut in 2019, corporate capital expenditures climbed at a mere 8% CAGR from FY20 to FY24. According to Motilal Oswal, policymakers ought to concentrate on establishing an atmosphere that is conducive to sustainable investments, particularly when government capital expenditures are increasing at a 16 percent compound annual growth rate throughout the same time frame.

Conclusion
In the meantime, the private sector is also in a cautious attitude. Corporate concerns about growing input costs and geopolitical uncertainty are also reflected in the slowdown in domestic private investments during the third quarter of FY2025. Additionally, Indian corporations’ weak third-quarter results highlight declining consumption, which may subsequently reduce investor interest.

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No requirement of capital investment in state-run banks in the Budget 2025

No requirement of capital investment in state-run banks in the Budget 2025

According to the Reserve Bank of India (RBI) regulations, banks in India are required to maintain a Capital to Risk-Weighted Assets Ratio of atleast 11.50 percent. It aims to maintain capital adequacy in the banks in order to fulfill financial commitments as well as to mitigate financial losses. It is to give protection from various risks such as operational risk, credit risk, and market risk.

Most of the public sector banks in India not only fulfill the criteria but also have CRAR of around 16 percent and more as well.

Capital Adaquecy of Public Sector Banks
In the month of December 2024, the Bank of Maharashtra’s CRAR is about 18.71 percent which is the highest record in between all the public sector banks in India. While, the position of lowest capital position is held by Bank of Baroda. It has a CRAR of about 16.26 percent. Even the lowest CRAR fulfills the criteria of RBI’s capital adequacy regulations.

Overall, it indicates state-run banks are not in need of capital financing at this point of time.

Asset quality of Public Sector Banks
In recent times, asset quality of state-run banks is not risky. In the month of September, 2024, their ratio of gross non-performing assets fell to 2.6 percent of the total credits. As per the recent report of RBI’s Financial Stability, it is the lowest record compared to the records of the previous 12 years. While, the net non-performing assets ratio is close to 0.6 percent.

Financial health of Public Sector Banks
The macro stress tests conducted on Public Sector Banks indicates that these banks have the strong capability to tackle stressful situations. In the month of September, 2024, public sector banks’ capital adequacy was about 16.60 percent. It indicates their strong financial health. It also hints that it is improbable for the Union budget 2025 to provide capital financing for state-run banks in India.
Probability of Capital Investment in Public Sector Banks
In the past, the government of India has often taken an initiative of providing capital investment to state-run banks. In the previous 10 Union Budgets of India, the government of India has given capital investment to public sector banks for about three times. The total capital financing accounts to Rs. 3.35 lakh crore.

The main purpose of these capital investments in the state-run banks is to fulfill the regulations. It is also to maintain strong credit growth. It is important to maintain credit growth as it helps to expand the scope of lending to businesses and people. It results in boosting economic growth. This purpose of boosting credit growth is important in state-run banks compared to private sector banks.

Apart from the funding through the Union Budget, state-run banks were able to get capital financing from the Indian government. It got capital investment of about Rs. 20,000 crore in the financial year 2022. In this same financial year, four state-run banks in India got capital financing of about Rs. 14,500 crore in the month of March. This financing was done with the use of pure discount bonds.

The overall financial health of public sector banks indicates that the budget 2025 may not have new capital investment for public sector banks in India.

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