Beating China's mineral dominance requires more than removing bottlenecks

Stealth aircraft, drones, computer chips, electric motors, batteries, surveillance equipment, and mobile phones all rely on a class of minerals we now call critical minerals.  Unfortunately, India has limited domestic critical mineral resources and processing expertise; together, these gaps compromise the realisation of our manufacturing ambitions.  

 

The challenge is not a small one, for it will affect almost every part of the economy — manufacturing, services, and even agriculture. Take, for instance, our path towards greater electrification of the economy, where combustion-based energy steadily gives way to electricity.  This requires greater electricity storage, both for utilities and for mobility. Therefore, be it automobiles, drones, robots, shipping & aircraft, or utility-scale power storage, batteries and motors will become central to the Indian economy.   Given current trends, lithium, cobalt, nickel, manganese, and a few others will steadily become more important.

 

Or take the move towards greater computing and digitalisation, the growing trend of surveillance and monitoring, the  artificial intelligence revolution, and possibly quantum computing, etc.  All are intimately dependent on a variety of electronic products.  Given their criticality — and China’s proclivity to put up export controls —India is rightly attempting to enhance its manufacturing prowess in these areas.  A range of minerals will therefore need to be accessed, ranging from gallium, germanium and indium for image sensors and optical equipment,  to tantalum, niobium for chips, and to rare earths like europium, yttrium and terbium for magnets, etc. 

 

And we must also consider defence needs.  Within a short period, and with a distinct change in government policy, a dynamic military-industrial complex has taken root in India. The manufacture of missiles, guns, aircraft, submarines, among others, is only expected to grow.  Minerals like titanium and tungsten have been used for some time, but with the increasing use of space equipment and missiles, beryllium and rare earths, among others, will be needed at significant levels.

 

This is where I would be expected to write about what the government is doing.  And indeed, there is much. Critical minerals have been identified for India; mineral resources are being tied up globally through its joint venture KABIL; incentives for building mineral processing capacities have been proposed; private participation in critical mineral blocks is being encouraged; and international efforts appear to be yielding fruit, with a Critical Minerals Partnership involving like-minded countries, including the United States, Japan, and Australia.

 

So then, why am I penning this essay?  Rightfully, the Indian government is shifting its approach to a more ecosystemic level. However, the government's current reduce-the-bottlenecks strategy does not by itself create the right conditions for firms to invest — whether in mining or in processing.  But since the future of Indian manufacturing — and consequently the economy — rests on the mining and processing of critical minerals, we cannot afford to get it wrong.

 

The underlying problem here is the time mismatch in creating the critical minerals value chain.  To simplify: It takes about a decade and a half for a mineral to be identified and for a mine to become fully operational.  On the processing side, it takes  five to 10 years to obtain permissions, align the factors of production, and put up a unit, whereas, on the manufacturing side, a unit typically takes around three years —  give or take a bit. 

 

The point is, to set up a facility, upstream mining takes the longest, midstream processing takes less time, and downstream manufacturing takes the least. There is a time mismatch: No upstream unit can be planned properly without a sufficiently large domestic market, and downstream units’ viability is compromised in the absence of a domestic supply of critical inputs.  In other words, the temporal mismatch within the value chain causes a market failure that prevents the spontaneous growth of the sector, and this necessitates some government intervention.

 

Government policy, therefore, needs to address this market failure emanating from the differing time horizons of mining, processing, and manufacturing units in the critical minerals value chain. Merely facilitating licences or subsidising investment or enabling research & development (R&D), for that matter, will be too little for something that is, literally, so critical.

 

Policy can work on two fronts simultaneously. If mining and processing are better aligned, then the overall risk is reduced, and the elements of market failure diminish. First, it would do well to address the mismatch in time horizons.  One possibility is to work and delay the manufacture of some items until the requisite processing capacity arises.  So, for instance, it could (hypothetically) delay the growth of some types of defence equipment and rely on imports until the rare earth value chain is ready.  Or it could reduce the time horizon in mining, facilitating pre-clearance of various permissions and licences that would otherwise take many years. This would reduce the time required to operationalise mines, lower costs, and mitigate risks for private investment.

 

Second, it can directly enter the critical minerals value chain in the midstream segment, that is, at the processing stage.  The objective would be to (a) ensure critical minerals are available on tap for downstream manufacturers, and (b) the domestic upstream mining and processing industry gets the right environment to grow through a readily available market for their produce. Many possibilities exist on how such an intervention may be structured.

 

One method could resemble the minimum price-Food Corporation of India-public distribution system approach, where the government announces a purchase price, buys and stores the processed minerals and sells on demand. An alternative is the MMTC-plus-price-stabilisation approach, where a critical minerals trading entity is mandated to purchase first from domestic processing units, and then sell to domestic firms, adjusting for surpluses and shortages through global market interventions. The key here is the mandate: The responsibility to ensure processed minerals are available lies squarely with this entity. Yet another approach would involve the government identifying a few “chosen” private players, but regulating them strictly. After all, oligopolies in critical sectors often tend towards profiteering.

 

The larger objective is to ensure price and quantity stability in the critical minerals supply for manufacturing to prosper in key product lines.  Recall that the Western world had dominance in this space at one point, but its dependence on profit at every stage of the value chain forced it to shut down its facilities.  It yielded to China, which achieved global dominance because it focused on the benefits downstream in manufacturing and not on upstream mining or processing.

 

 

The author is an economist. The views are personal