Finance ministry raises questions over PLI plan for rare-earth output

Says these subsidies could leave bidder with little incentive to improve efficiency or cut costs

The Department of Expenditure (DoE), under the Union Ministry of Finance, has raised questions on the Ministry of Heavy Industries’ (MHI’s) ₹7,350 crore production-linked incentive (PLI) scheme to boost the domestic manufacturing of rare-earth permanent magnets (REPM). 

It has said while it (the MHI) aims to reduce dependence on magnets imported from China, this could leave India dependent on rare-earth oxides from abroad and provide subsidies so generous that the winning bidders may have little incentive to improve efficiency or cut costs. 

The DoE also said the scheme could set a precedent of launching PLI schemes each time there is a crisis in automotive components, a field dominated by China, and questioned why a separate scheme was needed instead of leveraging the National Critical Mineral Mission (NCMM), Business Standard has learnt. 

Since April, China has restricted imports of REPM to India, affecting automobile output in the country. 

One of the key concerns flagged by the DoE is that a significant number of automotive components are not manufactured in India, with China enjoying “hegemony” in many of them. 

The department has, therefore, asked the MHI whether it intends to propose a PLI scheme for “each such crisis” that arises with other automotive components, officials stated. 

China remained the largest source of India’s auto-component imports in 2024-25, raising its share from 29 per cent to 32 per cent as imports rose to $22.4 billion, according to the data released by the Automotive Component Manufacturers Association of India (Acma) in July. 

Another question the DoE has raised is that China has a “stranglehold” not only on the production of REPM but also on the refining of rare-earth elements used to make them.  Therefore, the DoE has sought clarity on the long-term strategy on securing critical minerals, since the proposed scheme is limited to setting up plants that convert rare-earth oxides into REPM, even though India does not have sufficient oxide supplies for these plants. 

The PLI scheme proposes financial incentives — capital subsidy and sales-based incentives — for winning bidders (private players) that will set up five manufacturing plants with a combined REPM production capacity of 6,000 tonnes per year.

According to the MHI’s calculations, around 1,500 tonnes of rare-earth oxides would be required to produce the 6,000 tonnes of REPM. 

In India, only Indian Rare Earths Ltd (IREL), which operates under the Department of Atomic Energy, produces rare-earth oxides and can supply no more than 500 tonnes to the winning bidders under this scheme. 

The DoE has flagged this as a key concern, noting that while the scheme may reduce India’s dependence on imported rare-earth magnets, it could merely shift the country’s dependence to rare-earth oxides sourced from other countries to meet the shortfall of 1,000 tonnes, officials said. 

The proposed PLI scheme plans to cover the cost difference between producing rare-earth magnets in India and importing them from countries like China through subsidies. 

According to the government's calculations, the cost disadvantage for Indian companies comes to 35-43 per cent, primarily during the processing phase (converting rare-earth oxides into REPM). The DoE has raised questions on this approach, pointing out that if the full cost gap is compensated, private players may have little incentive to improve efficiency or cut production costs. On top of this, companies would benefit from a large captive market in India, reducing pressure to innovate. While the scheme aims to boost domestic production, it could end up encouraging reliance on subsidies rather than competitiveness, the DoE indicated. 

The MHI and the DoE did not respond to queries sent by Business Standard regarding this scheme. 

According to officials, the DoE has questioned how the proposed PLI scheme for REPM aligns with the NCMM and why REPM manufacturing cannot be incentivised under it. 

The NCMM, which comes under the Ministry of Mines, was approved by the Union Cabinet in January with a financial commitment of ₹34,300 crore over seven years. This includes an expenditure of ₹16,300 crore by the government and an expected ₹18,000 crore investment from public-sector undertakings (PSUs) and other entities. 

The NCMM focuses on the exploration, mining, beneficiation, processing, and recycling of these minerals, along with acquiring critical mineral assets abroad. 

The DoE has told the MHI that the industry globally is looking for alternatives to REPM. According to research by United Kingdom-based market research firm ID TechEx, nearly 30 per cent of the global electric-vehicle market could switch to rare-earth-free motors by 2035. 

This suggests that dependence on REPM may decrease over time. 

European countries, in particular, are developing alternative technologies. Companies like Niron Magnets, backed by automakers such as Volvo, Stellantis, and General Motors, are working on iron nitride magnets, which nearly match the strength of traditional REPM. 

In addition, the European Union’s “Passenger Project” is experimenting with new alloys like strontium-ferrite and manganese-aluminium-carbon to produce permanent magnets without relying on rare earth elements.