India’s terms of trade have fallen sharply due to a global decline in commodity prices. As a policy maker, propose a comprehensive policy mix that could mitigate the negative impact on national output and employment. Justify each component of your proposed policy mix.

Step-by-step solution

1. Recognise that a falling terms of trade reduces national income through lower export earnings and higher import costs.
2. Propose expansionary fiscal policy (increase govt spending or cut taxes) to boost domestic demand and compensate for the loss of export revenue.
3. Suggest monetary easing to lower domestic interest rates, encouraging borrowing and investment to sustain output.
4. Advise targeted export promotion and diversification to reduce reliance on price‑sensitive commodities, thereby improving terms of trade resilience.
5. Recommend temporary reduction in import duties or provision of subsidies to shield domestic producers from higher import costs.
6. Finally, outline structural reforms (improving infrastructure, education, and technology) to raise productivity, making the economy less vulnerable to external shocks.

Concept tested: Policy mix for mitigating terms‑of‑trade shock

Published 7 October 2026 · How this solution was prepared and checked