India's Resilient Domestic Demand Amid US Tariff Headwinds

India’s economy has long been a paradox: a nation grappling with structural challenges while maintaining one of the world’s fastest growth rates. As U.S. tariffs under President Donald Trump threaten to disrupt trade flows, the question arises: Is India still a compelling long-term investment? The answer lies in its resilient domestic demand, strategic policy reforms, and surging foreign direct investment (FDI) inflows—factors that suggest the country’s fundamentals remain robust despite short-term headwinds.

The Pillars of Domestic Demand

India’s domestic demand has proven remarkably resilient, accounting for 61.4% of GDP in 2025 [1]. Rural demand, bolstered by favorable monsoons and rising wages, has offset urban consumption slowdowns. Inflation, now at 2.1%—its lowest since 2019—has further supported consumer spending [2]. The government’s Goods and Services Tax (GST) reforms, which reduced tax rates on essential goods, are projected to boost private consumption by 1.6% of GDP [3]. These measures have insulated the economy from the full brunt of U.S. tariffs, which are estimated to impact only 0.9% of India’s GDP [4].

Navigating Tariff Challenges

The U.S. tariffs, particularly on textiles, gems, and pharmaceuticals, have created uncertainty. For instance, the textile sector—employing 45 million people—faces a 50% tariff on key exports, with 34% of its shipments directed to the U.S. [5]. Similarly, the pharmaceutical industry, which exports 35% of its goods to the U.S., now contends with potential tariffs despite current exemptions [6]. However, analysts argue the impact is manageable. The PHD Chamber of Commerce and Industry estimates that tariffs will reduce total exports by just 1.87% and GDP by 0.19% [7]. India’s strategic diversification into markets like the EU and Southeast Asia, coupled with domestic manufacturing upgrades, is mitigating these risks.

FDI: A Vote of Confidence

Despite the trade tensions, India’s FDI inflows hit $50.01 billion in FY2024–25, a 13% increase from the previous year [8]. The services sector alone attracted 19% of equity inflows, while manufacturing saw a 18% rise to $19.04 billion [9]. This growth is driven by India’s Production-Linked Incentive (PLI) schemes, which have spurred investments in semiconductors, defense, and electronics. For example, the electronics manufacturing sector’s value addition has surged from 30% to 70%, with projections to reach 90% by 2027 [10]. Even as U.S. tariffs push companies to rethink supply chains, India’s business-friendly reforms—such as 100% foreign ownership in manufacturing and agriculture—have made it a preferred destination [11].

Structural Reforms and Long-Term Potential

India’s long-term appeal lies in its structural reforms. The government’s “Swadeshi” push to boost domestic consumption and its aggressive pursuit of trade agreements with the UK and EU are diversifying export markets. Meanwhile, initiatives like the National Manufacturing Mission aim to increase manufacturing’s GDP share to 25% by 2025 [12]. These efforts, combined with a young, skilled workforce and a growing middle class, position India to absorb short-term shocks and emerge stronger.

Conclusion

While U.S. tariffs pose near-term challenges, India’s economic resilience—rooted in strong domestic demand, strategic diversification, and robust FDI—makes it a compelling long-term investment. The country’s ability to adapt to external pressures, coupled with its demographic and policy advantages, suggests that the current turbulence is a temporary detour, not a dead end. For investors with a multi-year horizon, India’s story remains one of opportunity.

Source:
[1] India's economy resilient but US trade policies a downside risk [https://www.reuters.com/world/india/indias-economy-resilient-us-trade-policies-downside-risk-central-bank-bulletin-2025-08-29/]
[2] India's Resilience on Display – Trump Tariffs Have Negligible Effect: PHDCCI [https://www.phdcci.in/2025/08/07/indias-resilience-on-display-trump-tariffs-have-negligible-effect-phdcci/]
[3] India seen staying among Asia's fastest growers as ... [https://m.economictimes.com/news/economy/indicators/india-gdp-growth-gst-rate-cuts-india-seen-staying-among-asias-fastest-growing-economy-as-trumps-tariff-meets-pm-modis-goods-and-services-power-move-fitch-bmi-says/amp_articleshow/123554764.cms]
[4] India's Resilience on Display – Trump Tariffs Have Negligible Effect: PHDCCI [https://www.phdcci.in/2025/08/07/indias-resilience-on-display-trump-tariffs-have-negligible-effect-phdcci/]
[5] India's nearly $87 billion exports to U.S. under threat due to Trump tariffs [https://www.cnbc.com/2025/08/07/indias-nearly-87-billion-exports-to-us-under-threat-due-to-trump-tariffs.html]
[6] U.S. tariffs take effect on India, threatening $48.2B in exports [https://www.npr.org/2025/08/27/nx-s1-5518809/india-us-tariffs-trump-modi-exports]
[7] India's Resilience on Display – Trump Tariffs Have Negligible Effect: PHDCCI [https://www.phdcci.in/2025/08/07/indias-resilience-on-display-trump-tariffs-have-negligible-effect-phdcci/]
[8] India's Foreign Direct Investment Tracker 2025 [https://www.india-briefing.com/news/india-fdi-tracker-2025-38140.html/]
[9] India's Foreign Direct Investment Tracker 2025 [https://www.india-briefing.com/news/india-fdi-tracker-2025-38140.html/]
[10] Manufacturing Industries in India & its Growth [https://www.ibef.org/industry/manufacturing-sector-india]
[11] India's Foreign Direct Investment Tracker 2025 [https://www.india-briefing.com/news/india-fdi-tracker-2025-38140.html/]
[12] India pushes for further reforms amid US tariffs [https://www.fdiintelligence.com/content/6a0ae806-353f-47f2-8b88-ba8af87039c7]