Domestic and external shocks are usually the result of poverty and deprivation in developing countries. Indian Economy was influenced by the following four types of major shocks in the past which are:
fiscal profligacy of the government hike price of oil,
stagnation in world trade and
sudden capital outflow.
This paper discusses the sectors where shocks originated; intermediate variables affected by these shocks; equilibrating variables that adjust to the disequilibrium due to these shocks; quantification of all these effects that originate in one sector and then spread to the rest of the economy through multiple channels; differentiation between the short term and long term effects of these shocks; worst-case scenarios in the eventuality of multiple shocks affecting the economy simultaneously and assessment of the ability of public policy interventions in mitigating these shocks.
The author concludes that there is need for need for liberalization in reforms. The lack of reform in the fiscal sector has lowered the long run growth prospects and all major domestic and external shocks must be countered through contra-cyclical fiscal and monetary policies.