Supply crunch: India needs a proactive strategy for rare earth security

Like many other countries, India is suffering collateral damage in the United States-China trade war. In April, responding to various trade restrictions and tariff impositions from American President Donald Trump, Beijing announced that certain heavy and medium rare earths and related magnets would be subject to export licences. Given the difficulty of obtaining licences and the complexity of demonstrating the end use of any particular shipment, this has in many cases amounted to an effective ban, which has affected Indian manufacturing. Beijing controls about 50 per cent of officially recognised reserves, 70 per cent of extraction capability, and 90 per cent of processing capacity. The minerals, in turn, are vital for products ranging from automobiles to solar panels. Thus, a large number of Indian sectors have to look elsewhere.

 

It is unfortunate that Indian industry is in this position, given that China’s weaponisation of this supply chain was inevitable. In fact, it has been done before — supply was cut off to Japan and Japanese companies more than a decade ago during a period of mutual tension between Japan and China. Since then, Japan has built up a strategic store of minerals to allow it to ride out temporary disruption and also set up alternative supply chains, including through the Philippines and Australia. India should have been similarly preparing — at least since 2020, when relations with its northern neighbour deteriorated following the clashes at Galwan. That said, the beginnings of an effort, even if uncoordinated, can be discerned in recent moves by the Indian government and private sector. The government has set up a public-sector company called KABIL, which is supposed to intervene in the supply chain of rare earths to achieve economic security. Meanwhile, some large players, such as Vedanta, as well as relatively small concerns — such as Hyderabad-based Midwest Advanced Materials — have begun to make substantial investment in this supply chain. 

 

None of this, however, amounts to a real strategy, which would target both extraction and processing within the supply chain, and work in coordination with both the public and private sectors, as well as trustworthy foreign partners like Japan. The problem with New Delhi’s strategic thinking is often that it focuses solely on internal markets and thus has insufficient vision and scope. There is no reason why Indian companies cannot become leading players in the processing and extraction industry, while Indian engineers provide the human capital required for scaling up processing. But this would require the appropriate signals and coordination from the government. It would also require a suitably pragmatic approach to foreign policy. For example, much of the mineral wealth that is supposedly extracted in China is actually imported from northern Myanmar, which is a hotbed of resource extraction. India has chosen to ignore the potential on its very doorstep, while China has not. India must also recognise that future value chains for critical minerals will be constructed, taking into account the demands of the host nations. Indonesia might well demand that processing be built in that country, not in India. This should be acceptable to New Delhi, given the purpose of any strategy is primarily derisking the supply chain.  Finally, a strategy should take into account that India be part of a broader supply chain that includes other countries dependent on China. A Japan seeking to derisk, for example, can be a source of financial investment for Indian efforts to participate in this supply chain.