US bets $400 million on rare earth champion; Should India rethink its industrial policy?

Economic Times

10 hours ago

Agencies MP Materials is not an American company that many would have heard of. It is the only integrated rare earth producer in the US, covering the entire value chain from mining to processing and magnet production. Last week, the US invested $400 mn in it, an attempt to use industrial policy to counter China's might in rare earths. Economics 101 frowns on the use of industrial policy - that is, government 'picking winners'. But it can work if used judiciously. India can learn, particularly from the US experience.
In the current mood of de-globalisation and associated economic nationalism, industrial policy has become a global buzzword. But there is a great danger in applying it indiscriminately, particularly in a country like India, which has a long history of largely unsuccessful industrial policy. The fact is that India still does not have a global champion.
The key to success lies in three principles: use only for select sectors, front the private sector, and ensure that the supported firms are competing globally. India has often flouted all three. In the most strategic sectors, it is usually the public sector that gets preference. India's industrial policy is oriented towards protection, creating firms or industries that serve the domestic market but are not competitive globally. In the US context, Trump's tariff bluster and blitzkrieg are not industrial policy. They represent a mercantilist strategy to reduce America's trade deficit. They are a political strategy to address key political constituencies. But it's not industrial policy. What the US is doing with MP Materials is. The US government has, for long, supported sectors that are hi-tech or inputs to hi-tech (critical minerals and rare earths in today's world).
America's defence manufacturing industry (all of it privately owned) is what it is because of state procurement, an underrated instrument of industrial policy. The rise of SpaceX also owes a great deal to procurement by Nasa. The development of the internet also happened courtesy of R&D spending committed by the US. In India, this is another aspect of industrial policy that is under-recognised and under-funded. Direct state investment in firms is another method.In MP Materials, the US government is now the largest shareholder with a 15% stake, but it allows the company to remain in private hands and function independently. And, in most cases, the goal is to create best-in-the-world companies/industries that can dominate all markets, not just the US.India has a legacy of central planning, like China. While much has changed post-1991, the legacy of central planning lives on - most tellingly via 250-plus PSUs. These are usually given preferences, particularly in strategic sectors. GoI has not moved ahead with privatisation, but at least in defence, there is now a deliberate, welcome attempt to encourage private sector participation. But a challenge remains.As long as PSUs exist, GoI will always have to give them business, even when private sector companies are more efficient. In natural resources, GoI gives preference to PSUs (they don't always have to compete in auctions, for example). Even in the race to acquire overseas mineral assets, GoI prefers PSUs.In this un-level playing field, PSUs don't have an incentive to be efficient, while the 'competing' private sector bears the cost. GoI also spends resources propping up PSUs with little future, like BSNL, instead of supporting productive firms and R&D.GoI also overextends itself. PLI, for example, is a good scheme. It trusts the private sector and has worked well in electronics. But there is less evidence of it working in other sectors. It's better to focus on one or two sectors than spread thin.Perhaps the greatest challenge for India is to change the mindset from creating firms that produce for India to firms that sell to the world. For this, reliance on protectionist measures like trade barriers must go. GoI should insist that it will only support firms that will be global winners.
The writer is chief economist, Vedanta.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.) Elevate your knowledge and leadership skills at a cost cheaper than your daily tea. From near bankruptcy to blockbuster drug: How Khorakiwala turned around Wockhardt
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