Why Indian economy is less susceptible to external shocks

Moody's further said, 'We expect FDI inflows to continue to rise.'

Low commodity prices and better foreign direct investment inflows have reduced India's vulnerability to external shocks which is ‘credit positive’ for India, Moody's Investors Service said on Thursday.

"We do not expect a significant renewed widening of India's current account deficit. “Our assumption that commodity prices will remain low in 2016 and 2017 supports this view, while FDI inflows are likely to climb in response to government measures," it said.

In a report it said that India's external financing needs have diminished significantly over the last three years.

"These trends are credit positive, as they lower India's susceptibility to external shocks at a time when capital flows to emerging markets are volatile, and weak economic conditions globally and in particular in the Gulf may dampen remittances," it added.

It said low commodity prices will keep imports in check and gradual pick up in domestic demand could push up import volumes.

"With commodity prices -- particularly oil -- likely to remain depressed, we do not expect a marked renewed widening of India's trade deficit," Moody's said.

A lower energy import bill and policies to curb gold demand are contributing to keeping the trade deficit at relatively low levels.

The announcement in the Budget of an excise tax on gold is likely to dampen overall gold imports, it said.

The value of oil imports decreased by 37.5 per cent or Rs 3 lakh crore (Rs 3 trillion) in the 12 months to February 2016 compared with the previous year.

"Consistent with our assumption that commodity prices will remain low for several years, India's energy import bill is unlikely to increase significantly. Moderate gold and energy imports will help to offset any pick-up in imports related to strengthening domestic demand," it said.

Rising FDI will continue to cover CAD.

Net FDI inflows hit an all-time high in January 2016, at $3.0 billion, more than financing the CAD for the first time since 2004, it added.

Moody's further said, "We expect FDI inflows to continue to rise.

“It provides a stable source of financing that will help to mitigate India's external financing risks."

Higher inflows suggest that government policies, such as efforts to liberalise foreign investment limits in several sectors and the 'Make in India' campaign, are bearing fruit.

The development of industrial corridors, investment and manufacturing zones and 'smart cities' will further bolster investment inflows, it added.

Moody's, however, said that weakening remittances and services exports could weigh on current account deficit and moderating services exports could add to these pressures.

"Against the backdrop of subdued global economic activity -- in particular in the Gulf, the origin of more than half of remittances to India -- remittance inflows could weaken further in the coming months," it said.

Image: A villager carries a basket of coal scavenged illegally from an open-cast mine in the village of Jina Gora near Jharia, India. Photograph: Daniel Berehulak/Getty Images