Defying a Hostile World

While India’s consumption-led economy is holding the fort against a hostile world, the ongoing trade war will test the depth of that resilience.

The year 2025 was not kind to the world economy. War, tariffs and geopolitical one-upmanship tore through supply chains and spooked capital. Yet India, buffeted though it was by these storms, sailed on with surprising steadiness. Services exports kept surging, merchandise trade expanded in patches, and, most importantly, the vast engine of domestic consumption kept humming. If India’s growth story has a single protagonist, it is no longer the foreign buyer but the Indian consumer.

Private Final Consumption Expenditure, or PFCE, remains the best barometer of that consumer’s mood. The two years after Covid saw a frenzy of ‘revenge shopping’ as households splurged on everything from appliances to air travel. Economists expected that sugar rush to fade. It did flatten for a while in early FY 2025. But by the final quarter of that year, consumption growth was running again at around seven percent, a pace repeated in the first quarter of FY 2026 and then exceeded in the second, which clocked a robust 7.9 percent. Three forces explain the revival. Cooling inflation lifted real incomes. New tax slabs introduced in April 2025 put more cash in middle-class pockets. And goods and services tax cuts announced in September fattened disposable incomes further.

Not Uniform

The recovery, however, has been anything but uniform. Rural India has been doing the heavy lifting. Strong harvests, generous minimum support price announcements and healthy kharif output, coupled with encouraging rabi sowing, have bolstered farm incomes. That has translated directly into demand for fast-moving consumer goods, where rural volumes are now outpacing urban ones. Even quick-commerce platforms are spreading into smaller towns and villages, amplifying the effect.

Urban India, by contrast, spent much of mid-2025 in the doldrums. Wage growth lagged the rise in housing and food costs, sapping discretionary spending. Only when tax relief, GST cuts and easier monetary policy coincided with the festive season did city shoppers return to showrooms.

This pattern matters because India’s headline growth numbers in the first half of FY 2026 - quarterly expansion of about 8.2 percent even as the world economy convulsed - were powered overwhelmingly by demand at home. That carries big implications. It suggests India is completing a structural shift away from export-led growth towards a consumption-driven model more typical of large emerging economies. It gives policymakers room to cut rates and offer tax relief without immediately stoking inflation. And it means that, up to a point, external shocks can be absorbed without wrenching domestic adjustment. The caveat is obvious. If tariffs and trade wars start destroying jobs, consumption will not stay insulated for long.

The contradictions of India’s external sector were on full display in 2025. Merchandise exports between April and November rose a modest 2.62 percent year-on-year to USD 292.07 billion, but November alone surged by over 19 percent. Electronics led the charge, with shipments in September jumping by more than 50 percent and November recording close to 39 percent growth. Drugs and pharmaceuticals grew by about 21 percent, helped by explicit American tariff exemptions for medical products. Even petroleum products rose by around 12 percent, reflecting both global prices and India’s growing role as a regional refining hub.

Imports, however, ran even faster. They grew 5.7 percent to USD 515.21 billion, pushing the trade deficit to USD 223.13 billion, about 43 percent of total goods trade. October was spectacular, with imports hitting a record USD 76.06 billion, largely because gold purchases soared to USD 14.72 billion, nearly three times the previous year. That frenzy reflected both record global prices and domestic efforts to hedge against a weakening rupee.

Structural Dependencies

The import bill also reveals India’s structural dependencies. Petroleum still accounts for roughly 27 percent of imports, with crude oil covering almost 80 percent of consumption. Precious metals and stones make up about 14 percent. Some of the recent surge also owed to inventory-building ahead of American tariff hikes in late August.

Against this backdrop, services exports were the star performer. From April to November, they rose 8.65 percent to USD 270.06 billion, while services imports were only USD 135.93 billion, leaving a hefty surplus of USD 134.13 billion. November alone saw exports jump nearly 12 percent. India’s edge in information technology, business-process outsourcing, finance and professional services remains formidable, providing a steady stream of foreign earnings that cushions the volatility of goods trade.

That cushion is badly needed. In one of the harshest geopolitical blows in years, the United States slapped a sweeping 50 percent tariff on Indian goods in 2025, making India the hardest-hit major American trading partner. Because the move was framed around India’s purchases of Russian oil rather than simple trade balances, it is politically harder to unwind. Roughly 55 percent of India’s exports to America have been affected. Textiles have been devastated, with volumes to the United States worth USD 10.3 billion down by about 70 percent as buyers switch to cheaper Southeast Asian suppliers. Leather is in similar trouble. Pharmaceuticals, electronics and engineering goods, blessed with lower tariffs, have fared much better.

India has tried to compensate by pivoting to other markets. Free-trade agreements with Britain, Switzerland and New Zealand, and expanded pacts with the United Arab Emirates and the European Free Trade Association, offer new outlets. The UK deal alone, signed in July 2025, could add USD 6.4–7 billion in annual trade, helping textile exporters tap Commonwealth markets. But none of these can fully replace lost American demand.

Hence a hefty domestic response. On November 12, the government unveiled an export-support package worth Rs 45,000 crore, or about USD 5.1 billion, spread over six years. At the same time, it is accelerating trade diplomacy, even seeking to coordinate with China and members of the Regional Comprehensive Economic Partnership.

The full pain of America’s tariffs has yet to be felt. Pre-tariff stockpiling softened the initial blow. But as 2026 unfolds, job losses in vulnerable sectors may start to bite. India cannot simply shrug off the threat, nor can it accept trade terms dictated from Washington. How the coming Union Budget deploys relief, stimulus and reform will go a long way towards deciding whether the country’s domestic defiance can outlast a very unfriendly world.

(The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)