Domestic Demand vs Export Growth: India’s Manufacturing Dilemma in a Shifting Geopolitical Landscape

India’s manufacturing sector is undergoing a notable revival. In July 2025, manufacturing growth reached 5.4%, and the HSBC Manufacturing Purchasing Manager’s index (PMI) climbed to 59.3, marking its highest level in 16 months. This momentum is largely driven by strong domestic consumption, recent GST rate reductions, and renewed investment optimism. However, merchandise exports grew only 2.52% year-on-year between April and August 2025, despite a rise in overall orders. This paradox, where factories are active but foreign demand remains ‘silent’, raises important questions about India’s long-term manufacturing strategy.

This imbalance between domestic demand and export momentum becomes more significant in light of recent global developments, particularly the October 2025 meeting between U.S. President Donald Trump and Chinese President Xi Jinping in Busan.

Why Exports are Important

Even when we look into history, we can see that India grew through trade with foreign lands. The products from this soil were so valuable that they attracted traders from the corners of the world, thus helping this land to become rich. Thus, domestic demands provide short-term economic buoyancy, and exports are essential for achieving scale, improving competitiveness, and reducing production costs.

Export-led growth exposes firms to international standards, encourages innovation, and helps absorb surplus output. Without a strong export engine, India risks becoming a consumption-driven economy that is dynamic but inward-looking.

Geopolitical Undercurrents- The Trump-Xi summit

The Trump-Xi summit markets a temporary truce in ongoing U.S.-China trade tensions. The United States agreed to reduce tariffs on Chinese imports from 57% to 47%, while China eased restrictions on rare earth exports. This relaxation has the potential to reshape the global supply chains and trade flows.

For India, the implications are two-fold:

• Competitive pressure: as US-China trade normalises, Indian exporters may lose the relative advantages they gained during the tariff war.

• Strategic opportunity: India can position itself as a neutral and reliable manufacturing hub, particularly in sectors like electronics, pharmaceuticals, and auto components.

Sectoral implications

India’s manufacturing sector presents varied dynamics across key industries shaped by the interplay between domestic demand and export performance. 

In the electronics sector, rising demands within the land, driven by digitalization and growing tech adoption, have spurred production, yet export growth remains moderate. To compete globally, this sector requires greater scale and stronger branding.

Pharmaceuticals, on the other hand, benefit from a robust domestic base, especially in generics, and hold high export potential. However, to fully realise this, regulatory harmonisation with global standards is essential.

The automotive industry is witnessing large domestic sales, but exports continue to lag due to intense international competition. Electronic vehicles (EVs), however, offer a promising niche for export expansion.

The textiles, on the other hand, maintain stable domestic demands but face declining exports. Reviving its global competitiveness will require innovation and a deeper commitment to sustainable practices.

Together, these sectoral trends underscore the need for targeted strategies that balance internal growth with global integration.

Strategic recommendations

To sustain manufacturing momentum and balance the domestic-export dynamics, India should consider the following:

• Diversify export markets: Focus on Africa, Latin America and ASEAN countries to reduce the dependence on  US-China trade corridors.

• Strengthen trade diplomacy: leverage free trade agreements and strategic dialogues to open new export trade channels.

• Boost MSME competitiveness: provide technological and financial support to small manufacturers to help them integrate into global supply-value chains.

• Align with Global Standards: invest in quality certification, intellectual property protection, and regulatory compliance to meet international norms.

• Monitor geopolitical shifts: use platforms like G20 and BRICS to anticipate trade realignments and position India accordingly.

The Road Ahead

India’s manufacturing story is evolving. It is no longer just about increasing production; it is about strategic positioning. As global powers recalibrate their trade strategies, India must avoid the trap of domestic complacency. A balanced approach that nurtures internal demand while actively pursuing export competitiveness is essential.

The Trump-Xi summit may have eased tensions, but it also reaffirmed the dominance of G-2. For India, the challenge is to remain relevant, not just as a market, but as a maker.