Microsoft's denial to Nayara Energy shows India's overlooked weaknesses

United States President Donald Trump’s angry outburst and the immediate application of 25 per cent tariffs on all goods from India have once again brought into focus our economic vulnerabilities, despite being the fourth-largest economy in the world. But the Trump tariff tantrums also tend to divert attention from two other threats to the Indian economy that briefly caught some media attention.

 

The first involved China putting the brakes on rare earth and rare earth magnets exports, which have thrown our automobile industry in a tizzy. The second was the sudden denial of services by Microsoft to Nayara Energy, 49 per cent owned by Russia’s Rosneft, ostensibly because the EU has sanctioned Russia and its companies. Nayara Energy, which bought and operates the erstwhile Essar Refinery in Vadinar, Gujarat, also operates over 6,500 petrol pumps in India. Microsoft backed down and restored services once Nayara filed a case against them in India, but the event did bring into the spotlight one of our economic vulnerabilities — our sheer dependence on the US and others in many key areas.

 

While our vulnerability to oil shocks is well known, other vulnerabilities often get less attention. Take, for example, our dependence on China for critical raw material supplies — such as electronic chips, active pharmaceutical ingredients (APIs), and rare earths, as well as minerals such as lithium and cobalt. Our weakness in new emerging technology areas such as artificial intelligence models, apart from our dependence on US companies for the operating system and data centre services like Amazon Web Services (AWS) and Microsoft Azure, are also areas we need to address as a rapidly growing economic power.

 

We have allowed these vulnerabilities to grow over the decades because of inaction. Neither our governments nor our highly profitable big companies and business groups have focused on the problems that put us at the mercy of certain countries.

 

In some cases — oil, lithium, and cobalt — we do not have enough proven reserves. China doesn’t either, but its economy is far less vulnerable today to supply shocks because it had the foresight to build and protect its supply lines.

 

In lithium and cobalt — crucial requirements for electric vehicle (EV) batteries — China has spent years forging deep relationships with countries where these minerals can be sourced, and then built processing capacities while even the US and Europe were content to depend on imports. It was also the first country to recognise the importance of rare earths and develop its own mines while building rare earth processing capacity. India has enough supplies of rare earths, but there is just one public sector company mining a small quantity of it — and even this used to go to Japan for processing.

 

Then there is the area of pharmaceutical APIs — critical ingredients that we need to ensure our pharma industry keeps humming. Over the years, we have let China become our main supplier, while our domestic capacities have withered. Lately, we are trying to get back into the API game, but it will take much longer before we can say we are completely immune to production shocks because of raw material supply problems.

 

Ditto for electronic chips — which are crucial for our automobile, consumer electronics, and durable goods industries. We are now belatedly trying to build up integrated circuit (IC) manufacturing capacity in the country, but it will take time — and probably a decade or more — for us to build competence and reduce our dependence on a handful of suppliers.

 

There is also the weakness of our overall manufacturing competence and efficiency — which lag behind the really good manufacturing nations such as China and Vietnam. Some of this is because industry did not build up competence, but much of it is due to bureaucratic red tape, an inefficient judicial recourse system, poor infrastructure, and corruption at many levels, particularly at the local level.

 

Finally, there is the artificial intelligence (AI) race, which will determine winners and losers in the decades to come. Here the US, China and a couple of small Western players have been locked in a race for supremacy while we have largely focused on building applications and integrating AI into our IT services. While building applications and integrating AI into services are important, it is even more important to build our own AI models that will keep us from being dependent on the US and other players. Unless we build our own AI models and catch up in the global race with the US and China (and with Europe to an extent), we could end up becoming a techno-colony, as I have written in a previous column.

 

China recognised that it needs to be more than just a manufacturing hub long ago — and started building competence in a range of technology research areas such as AI, genetics, and quantum computing. Today, it is either at a par or very close behind the US in most areas of technology research. India needs to build its own competence in these areas as well.

 

None of these can be achieved overnight — it will require sustained action, good policymaking, and a certain degree of harmony between the Union and state governments. A lot of it will also depend on just political will to remove the problems of corruption, inefficiency, and bad regulations. But these can be done if the government takes a longer-term view — instead of focusing on just the next year’s economic growth.  

 

The author is former editor of Business Today and Businessworld, and founder of Prosaic View, an editorial consultancy