A mechanistic understanding of the highly variable effects of herbivores on plant production in different ecosystems remains a major challenge. To explain these patterns, the compensatory continuum hypothesis (CCH) predicts plants to compensate for defoliation when resources are abundant, whereas the growth rate hypothesis (GRH) makes the opposite claim of high herbivory tolerance under resource-poor conditions. The limiting resource model (LRM) tries to reconcile this dichotomy by incorporating the indirect effects of herbivores on plant resources and predicts that the potential for plant compensation is dependent upon whether, and how, herbivory influences limiting resources. Although extensively evaluated in laboratory monocultures, it remains uncertain whether these models can also explain the response of heterogeneous and multi-species natural plant communities to defoliation. Here we investigate community-wide plant response to defoliation and report data from a field experiment in the arid and primarily water-limited Trans-Himalayan grazing ecosystem in northern India involving clipping, irrigation and nutrient-feedback with herbivore dung. Without nutrient-feedback, plants compensated for defoliation in absence of irrigation but failed to compensate under irrigation. Whereas, in the presence of nutrient-feedback plants compensated for defoliation when irrigated. This divergent pattern is not consistent with the CCH and GRH, and is only partially explained by the LRM. Instead, these pluralistic results are consistent with the hypothesis that herbivory may alter the relative strengths of water and nutrient limitation since irrigation increased root:shoot ratio in absence of fertilization in unclipped plots, but not in the corresponding clipped plots. So, herbivory appears to increase relative strength of nutrient-limitation for plants that otherwise seem to be primarily water-limited. Extending the LRM framework to include herbivore-mediated transitions between water and nutrient-limitation may clarify the underlying mechanisms that modulate herbivory-tolerance under different environmental conditions.