OB Cover Story: India Must Break China’s Rare Earth Chokehold to Escape Industrial Checkmate

India’s largest carmaker, Maruti, had only just begun to test the waters of electric mobility when it quietly scaled back its electric vehicle (EV) manufacturing targets for the year. The decision made internally and with little fanfare, was less about market appetite and more about material reality. At the heart of the issue lay India’s precarious position in the rare earth magnet supply chain—an Achilles heel for any serious EV or high-tech ambition.

The country remains almost entirely dependent on China for these crucial components, and when Beijing, in a strategic gesture aimed at the United States and its economic partners, tightened its grip on rare earth exports, the message was unmistakable. Supply, as it turns out, can be a geopolitical weapon too.

Maruti is not alone. For much of the past month, India’s automobile industry has been on tenterhooks, grappling with the looming threat of production halts—not due to labour unrest or flagging demand, but because of a shortage of rare earth magnets, the unsung enablers of electric mobility. Without them, EVs cannot function the way they are meant to function. And without EVs, the industry’s future feels less certain.

The stakes are high. The automotive sector, which contributes 7.1% to India’s GDP and almost half to its manufacturing GDP, has long been a cornerstone of India’s industrial success. It is arguably one of the country’s most tangible Make in India stories, long before the phrase became a political slogan. That slogan now forms the backbone of Prime Minister Narendra Modi’s vision of self-reliance in an age tilting away from globalisation.

Chinese Chequers

China’s rare earth export restrictions targeted the very elements that power the technologies of tomorrow and so, the Make in India dream. These elements are critical to the production of everything from EVs and semiconductors to missiles and submarines. But they are also overwhelmingly sourced from China, which accounts for 90% of global rare earth processing and 70% of its production, establishing a near-monopoly.

To make matters worse, China holds an absolute grip when it comes to heavy rare earths, which are less common and more geopolitically loaded due to their critical role. And the restrictions, though not an outright ban, applies to seven medium and heavy rare earths: samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium.

“They are critical to the four pillars of any modern economy,” says Danish Faruqui, chief executive of Fab Economics, a semiconductor value chain economics consultancy. “Semiconductors, automotive, defence and security—from fighter jets to submarines—and commercial aviation. All of that requires rare earth components.”

In other words, if a nation wants to build things that move, fly, compute or defend, it needs rare earths.

Indeed, Modi and his cabinet have reasons to worry. Just two months back, India delivered a pointed message to Pakistan by striking terror camps across the border. The full-fledged aerial confrontation, which lasted four days, may have seemed like a bilateral flare-up to many. But to geopolitical observers, Islamabad appeared merely a proxy in Beijing’s strategic playbook. The dragon is uneasy.

The West’s growing strategy to position India as a counterweight to China—by shifting parts of the global supply chain away from Chinese shores to India and Southeast Asia—has not gone unnoticed in Beijing. For China, this is more than economic competition; it’s a direct challenge to its long-held ambition of overtaking the US as the world’s largest economy.

Beyond Rare Earths

Just as India is striving to climb up the value chain in high-tech manufacturing, China has played what increasingly looks its trump card, and it is turning out to be far more disruptive than Washington, DC’s talk of reciprocal tariffs. “Currently, the value addition happening domestically is a small fraction of the overall value. Deepening the value chain is critical. Without it, even the assembly industry could move to lower-cost destinations,” S Krishnan, secretary at the Ministry of Electronics and IT, had earlier told Outlook Business.

India hopes to raise domestic value addition in electronics from the current 18–20% to 35–40% in the coming years. But China’s rare earth restrictions have exposed just how difficult that goal would be, especially if India gets locked out of the very materials that enable advanced manufacturing.

Despite a decade of policy push, incentives and high-profile schemes, the share of manufacturing in India’s GDP has remained stubbornly flat around 15%, well short of the targeted 25%. The Modi government believes this sector holds the key to safeguarding India’s national interests and unlocking its true growth potential by generating the kind of high-quality, large-scale employment needed to harness the country’s demographic dividend. To preserve that vision, India must play the long game on rare earths. All of India’s investments, industrial ambition and job creation hope risk collapsing like a house of cards.

One solution gaining momentum within the discussions between the industry and the government is the push to design technologies that don’t rely on rare earths at all. But the idea is far from new. In 2010, when China abruptly unofficially halted rare earth shipments to Japan following a flare-up near the Senkaku Islands and the arrest of a Chinese trawler crew, it became clear that these obscure-sounding elements had stepped into the global power play.

For the first time, rare earths were no longer a footnote in the periodic table, they were a geopolitical lever, and Beijing had shown the world just how easily it could be pulled.

Since then, a steady trickle of innovators has been trying to engineer the way out of the rare earth trap. Among them is Sterling Gtake E-Mobility, or SGEM, a Gurgaon-based firm that makes motor control units.

SGEM has recently announced a technology partnership that will allow it to manufacture magnet-free motors in India.

“This was something which at least some of us in the industry expected at some time that China would play the rare earth card,” says Jaideep Wadhwa, managing director at SGEM. “Though, the timing comes as a surprise. We did not expect it in 2025.”

SGEM had not faced supply disruptions. They simply saw the writing on the wall. “What happened with Japan 15 years ago…we remembered that,” Wadhwa recalls. “Prices had shot up. There was chaos. We did not want to be in the same boat.”

The Self-Reliance Mantra

And yet, for all the early successes, the road to a rare earth-free future is still lined with technical limits. “Based on the available research, we see that there are already some companies who are able to produce a product [free of rare earths],” says Chetan Kumar, associate vice-president at EV manufacturer Numeros Motors, which signed a memorandum of understanding with IIT Bhubaneswar in April to develop such technology. “But there is always a performance gap. You cannot really match that [performance of a rare earth magnet].”

There may be promising long-term bets, but scaling up new technologies takes years, a luxury that not every sector can afford. In civilian applications like EVs, rare earth usage ranges from 50 to 200 pounds per unit. But in the world of military hardware, the stakes are far higher.

According to data compiled by Fab Economics, fighter jets, missile destroyers and submarines can each require anywhere from 1,000 to 14,000 pounds of rare earths. In these cases, substitutes are not just costly, but rather remain, for now, a kind of fantasy.

It is little surprise, then, that India has begun to sweat. Operation Sindoor may have showcased the country’s growing indigenous capabilities, but it does not change the uncomfortable truth that India remains the world’s second-largest arms importer. True self-reliance in defence is still a distant goal, and reaching it will require a steady, secure supply of rare earths.

Be it war veterans or defence economists, there is little disagreement that in an increasingly volatile world, and a hostile neighbourhood, India must build its own arsenal. They believe an economy is never safe when its security is sponsored by ambiguous allies. Even India’s much-celebrated victory in the Kargil War did not come without lessons. The country faced severe shortages after Western nations, led by the US, had imposed sanctions following its nuclear tests, creating a major chokepoint.

Crucial military imports were blocked and even supplies from traditional partners like Russia and South Africa were either outdated or insufficient. “That was when I strongly and publicly advocated for self-reliance,” General (retd) VP Malik, who served as Chief of Army Staff during the 1999 Kargil conflict, had told Outlook Business earlier.

Enter the Dragon

Even a military superpower like the US, for all its might, finds itself cornered when it comes to being self-reliant. Its most advanced defence systems, such as, the F-35 stealth jet, the Virginia-class submarine, the Tomahawk missile, are dependents of a material network anchored in Chinese soil.

Nine hundred pounds of rare earths go into a single F-35. A destroyer needs 5,200 pounds while a humungous 9,200 pounds is used in the Virginia-class submarine.

So rather than imagining a world without rare earths, experts argue that India must focus on building a secure supply chain free of China because its consumption of these elements is only set to rise. But the more difficult question follows close behind: can India learn from the Dragon?

China has spent decades building this dominance. Throughout the 1970s and early 1980s, it was the US that led the world in rare earth production and produced more than two-thirds of the world’s rare earths annually. But China, then a minor player, saw something others did not. It viewed rare earths not just as some elements to trade for money, but as critical building blocks of future technologies.

And so, beginning in the 1980s, Beijing invested heavily in geological exploration, refining technology, academic research and state-subsidised processing infrastructure. Over the decade, that bet paid off. From 1985 to 1995, China’s annual rare earth mining production leaped from 8,500 tonnes to almost 50,000 tonnes. During the same time, the US rare earth production declined.

While the US left its rare earth industry largely in the hands of private enterprise, China took a markedly different path. As early as 1980, Beijing began laying the foundations for a state-directed rare earth strategy, according to a paper titled “Reimagining US Rare Earth Production: Domestic Failures and the Decline of US Rare Earth Production Dominance”, published by researchers at Stanford University’s Centre for International Security and Cooperation. “The investments and strategically aligned efforts from both the government and private sector quickly advanced China’s REE [rare earth element] industry,” the authors wrote.

Between 1978 and 1995, Chinese rare earth production surged at an astonishing rate of 40% per year, buoyed by state subsidies, an abundant and inexpensive labour force and environmental standards that were, at the time, far more permissive than those in the West.

“Even if they are mined somewhere else, they come to China for refining because many refineries in western countries were shut down because of environmental issues,” says Ajit Ranade, economist and senior fellow at Pune International Centre, a think tank. “The Chinese policy was to actively undermine any new refinery coming up. They would flood the market with below cost rare earth elements so no new competition came up.”

The India Story

And now, the time has come for China to fully weaponise its strategic gains. According to estimates, China holds about half of the world’s rare earth reserves, compared to India’s 8%. “We often talk about obvious geological potential or OGP. In India, less than 15% of OGP has been explored,” says Rajib Maitra, partner, Deloitte India, a consultancy. In layman’s terms, that means vast tracts of mineral-rich regions in India remain unknown and untapped.

India, under its National Critical Minerals Mission, has tasked the Geological Survey of India (GSI) with conducting 1,200 critical mineral exploration projects, including for rare earths, between 2024 and 2031. Yet it is one thing to discover a deposit. Extracting and refining at scale, especially in India, is another story altogether.

Take the much-hyped lithium found in Jammu & Kashmir. When the GSI announced 5.9mn tonnes of resources in early 2023, it was billed as a turning point. More than a year later, that promise curdled. The auctions that followed failed to draw bidders due to low exploration data. Assessments suggested that only a small fraction of the resources might actually be usable. As a result, the Ministry of Mines had to ask the GSI to go back and conduct more advanced rounds of exploration.

Then there is the terrain: ecologically fragile and politically fraught. In many ways, the lithium episode mirrors India’s broader critical minerals conundrum. “In India, the light rare earth component per se is very low,” says Maitra. “If you are processing 100 tonnes, your rare earth yield might be less than 0.5%. And for heavy rare earths like dysprosium or terbium, it is virtually non-indigenous; maybe three places of decimal percentage.”

Their complexity and opacity have kept most private players away, leaving a muddled government to navigate the space largely on its own. While China has spent decades investing in rare earth R&D—from extraction and separation to metal-making and magnet manufacturing—India is still taking baby steps.

It would not be before December that India produces its first commercial rare earth magnet. Hyderabad-based Midwest Advanced Materials (MAM), backed by India’s sole miner IREL, is expected to begin production of neodymium magnets for EVs, by the end of this year.

Unlike China, where state-run giants and provincial governments bankroll entire supply chains, India’s rare earth sector lacks serious participation.

Time to Dig

If the past decade had not already sounded the alarm, the recent crisis in India’s EV sector is proving to be a final wake-up call. A single policy move from Beijing has placed an industry, into which India has poured years of effort, at the mercy of Chinese supply chains. It is another grim reminder that without enlisting its private sector to help reduce this dangerous dependency, India’s ambitions of becoming a tech superpower and a self-reliant military force may remain just ambitions.

Sensing both the threat and the opportunity, Hindustan Zinc and its parent company, Vedanta, are already exploring bids for rare earth mineral blocks in India and overseas. But even they acknowledge that their efforts alone cannot replicate China’s decades-long head start. “India has the potential to become a significant player in the global rare-earth supply chain,” Arun Misra, executive director at Vedanta and chief executive of Hindustan Zinc tells Outlook Business. “In this context, greater private sector investment and supportive policy reforms can significantly reduce barriers to entry and accelerate growth in India’s rare earth sector.”

Sources confirm that the government is, indeed, considering a scheme to incentivise rare earth magnet production in India, though it is expected to have a gestation period like other such initiatives. “That will only be beneficial in the long term,” says a source familiar with the matter. But even with incentives, setting up the necessary infrastructure will be no small feat. Rare earth magnet production requires not only access to specific heavy rare earths, but also complex refining capabilities and skilled labour.

Mining executives estimate it would take at least 5–7 years for India to just move from basic rare earth processing to high-purity metal production. That too, assumes significant investments in R&D and partnerships with international technology providers. Building a full-fledged, end-to-end rare earth supply chain—from scaling up mining capacity to establishing advanced refining and magnet manufacturing infrastructure could take 10–15 years.

The Green Conundrum

India’s rare earth journey becomes more challenging when viewed through the lens of its net-zero ambitions and climate commitments. “Wherever rare earth processing happens, it is bound to have a significant environmental footprint,” says Vivek Chandran Shakti, director, Shakti Sustainable Energy Foundation.

Rare earth extraction and processing are notoriously energy intensive and environmentally taxing, often generating radioactive waste and heavy-metal pollution. For a country that has pledged to achieve net-zero emissions by 2070, the environmental cost of scaling up rare earth production presents a thorny dilemma.

“Even relaxing environmental regulations would not work in India. People are aware. If pollution causes deaths, water contamination or health issues, no lax regulation will shield the company or the government from the backlash. The social licence to operate will collapse,” adds Shakti.

Any roadmap India follows will have to be driven by cutting-edge technology. Without robust investment in green extraction methods, waste management and emission controls, both government and industry risk hitting a wall. Unlike China, which pursued rare earths with lesser regard for environmental damage, India must now chart a more nuanced path.

“China is a different case. It is a socialist market economy, which is a polite way of saying it is a communist country,” says Arvind Virmani, member of Niti Aayog and former chief economic adviser. “They can have one policy today and change it tomorrow. In contrast, we have to go through democratic procedure for everything.”

Even if India magically manages to exploit all its current rare earth reserves, it would still be facing its geological constraint. While light rare earths like neodymium are within reach, India is currently almost devoid of heavy rare earths that are linchpins of cutting-edge technologies and modern warfare and are under complete control of China.

Fighter jet engines and missileguidance systems rely on the very materials that India does not have. That puts India at a natural disadvantage like many other countries.

My Enemy’s Enemy

India has long walked a tightrope with China: a diplomatic adversary since 1962, a strategic competitor in Asia and a staunch ally of Pakistan. And while New Delhi does not rely on China for its weaponry, it is not immune to the ripple effects of China’s stranglehold on rare earths. China’s dominance can pinch India through second-, and third-order effects.

And in a case of conflict, all it would take is for Beijing to quietly extend its export licence restrictions to key intermediary nations, those that supply components and products to India. In essence, China does not need to sanction India directly; it can block the arteries that keep Indian industries alive. If India hopes to counterbalance China, it is left with little choice but to deepen ties with Beijing’s rivals.

“For India to safeguard itself from the monopoly of China over critical minerals like rare earths, it has to start making as many allies as possible,” says Rahul Ahluwalia, founder-director of Foundation for Economic Development, a policy advocacy organisation.  

That means building stronger diplomatic and technological partnerships with countries like the US, Australia, Japan and Latin American nations that have not only raised concerns over China’s resource nationalism but are also racing to build alternative rare earth supply chains. “India can leverage the Quad for a shared supply chain and tech support, along with deepening already existing partnerships in critical minerals and rare earth tech with Australia and Japan, respectively,” says Vedanta’s Misra.

No single country navigating China’s monopoly over rare earths can claim to be better off than the other either because of lack of resources or technology inefficiency. China’s recent restrictions disrupted operations not only in India, but across the world’s automotive and high-tech geographies. Automakers, aerospace giants, semiconductor firms and military contractors across the world now find themselves recalibrating production plans.

Even a country like Brazil, which possesses rare earth deposits that rivals nearly half of China’s in volume, is not much help to the world. In practice, Brazil’s capability remains tethered by the same bottlenecks that plague much of the non-Chinese world.

Come Together

Ranade of Pune International Centre suggests there may not be a one-shot solution to China’s monopoly over rare earths. Instead, he argues that a three-pronged approach needs to be followed. “First is to mine and refine rare earths in other parts of the world. Second is to develop substitutes where possible. And the third is to increase efficiency, so that if you had to use 100g of rare earths for instance, you can do with 70g or 50g maybe,” he says.

All of this would require countries to pool in their respective resources and expertise and move in sync. This, strategists believe, is the only way to escape the dragon’s pit.

India had so far escaped rare earth supply pressures because its manufacturing sector has not reached the same scale or technological intensity like of Beijing’s other rivals. But as India ramps up manufacturing, especially in high-tech industries dependent on rare earths, China’s leverage over these critical minerals could become a powerful tool to exert economic and strategic pressure on India.

The choices India makes now will determine whether it can write its own rules or remain entangled in the delicate dance of global resource politics. In the shadow of China’s quiet grip, independence is not a state, but a continuous negotiation, a story still unfolding.

(With inputs from Pushpita Dey)