Source: The post How to mitigate external shocks has been created, based on the article “How to Respond to External Shocks” published in “Business Line” on 2 September 2025. The External Shocks and A Way Out for India.
UPSC Syllabus Topic: GS Paper- 2- Effect of policies and politics of developed and developing countries on India’s interests
Context: In the backdrop of the United States imposing steep tariffs on Indian exports in 2025, it has raised concerns about the vulnerability of India’s economy particularly MSMEs and labour-intensive sectors to external shocks such as trade protectionism, global slowdowns, and liquidity disruptions.
Challenges posed by external shocks
- Disruption of trade flows due to tariffs and protectionist measures.
- Disproportionate impact on MSMEs with low resilience and limited access to credit.
- Pressure on employment in labour-intensive export industries.
- Increased uncertainty leading to lower investment and consumption.
- Risk of inflationary pressures if global commodity markets are disrupted.
Measures to respond effectively
- Diversification of trade: Expanding trade across multiple countries to reduce overdependence on one market.
- Credit support for MSMEs: Providing credit guarantees, interest subsidies, and restructuring of loans to maintain liquidity and prevent closures.
- Domestic reforms: Simplifying regulations, improving land and labour markets, and encouraging infrastructure investment to boost competitiveness.
- Counter-cyclical fiscal measures: Using targeted government spending to stimulate demand during slowdowns.
- Monetary policy flexibility: Ensuring adequate liquidity while avoiding excessive credit misallocation.
- Sustained infrastructure investment: Enhancing long-term productivity, job creation, and resilience against global headwinds.
- Promoting R&D and innovation: Strengthening India’s technological capabilities to move up the global value chain.
Question: India’s economy is increasingly vulnerable to external shocks such as tariffs and global slowdowns. Discuss the challenges posed by such shocks and suggest measures India can adopt to mitigate their impact.
