Budget 2026's rare earth push shows strategic industries need state support

The Economic Survey 2025-26 urged a comprehensive national policy for critical minerals and rare earth elements (REEs) to reduce import dependence, specifically from China. That became the strategic rationale behind the specific “Rare Earth Corridors” proposed in Union Budget 2026-27.

The survey’s recommendations, and the budgetary action that followed, is a reminder of the crucial role of government policy in every major industrial transformation. It’s legislative scaffolding behind Silicon Valley’s dominance in the US and Shenzhen’s electronics supremacy in China. They come at a pivotal moment with the world fragmenting into competing economic blocs and countries racing to secure strategic industries within their borders.

From the semiconductor subsidies in the US to the EU’s green technology push, governments worldwide are abandoning free-market orthodoxy, notwithstanding the spate of free trade agreements. The question is no longer whether the state should intervene, but how strategically it can do so.

Markets do not exist in a vacuum; they are shaped by the risks that governments are willing to take and the barriers they are willing to break. The internet itself emerged from funding by the Defense Advanced Research Projects Agency (DARPA), a US Department of Defense agency that funds high-risk, high-reward research to create revolutionary technologies for national security. China’s solar panel dominance—over 80% of global manufacturing capacity—stems from massive state support. In both cases, the government acted as an investor of first resort, laying the foundations on which the private sector could build.

India’s success stories follow the same pattern. The Software Technology Parks scheme’s tax exemption on software export profits in 1991—along with infrastructural improvements—turbocharged India’s IT services sector from approximately $110 million of exports in 1990 to nearly $240 billion by 2024. TCS, Infosys, Wipro and HCLTech didn’t just benefit from talented engineers; they gained from a tax holiday that made Indian IT services competitive globally.

Telecom tells a similar story. The National Telecom Policy of 1999, which shifted from fixed licence fees to revenue-sharing, reduced entry barriers dramatically. Teledensity soared from less than 1% in 1992 to nearly 86% today, creating the world’s second-largest telecom market and spawning an ecosystem of service providers, tower firms, handset makers, and app developers.

India’s digital revolution in commerce, payments, health, and entertainment rides on the shoulders of these telecommunications advances.

The Patent Act of 1970 provides perhaps the most striking example. By denying product patents for pharmaceuticals and granting only process patents, it became the foundation for India’s $50-billion pharma industry. The state prioritised indigenous learning over global rent-seeking, allowing Indian firms to reverse-engineer drugs and produce them at scale. Today, India supplies 40% of generic drugs consumed by Americans. Sun Pharma, Cipla, Dr. Reddy’s and Lupin became household names because policymakers in 1970 chose national health access over patent maximalism.

The geopolitical imperative has only intensified. China has weaponised its dominance over critical minerals, imposing export restrictions on gallium, germanium, and rare earth elements in response to Western technology controls. India remains dependent on imports for nearly all its lithium, cobalt, and nickel requirements, with China supplying approximately 60-80% of its rare earth needs.

Political pressure through tariffs, combined with supply chain vulnerabilities exposed by recent crises, is driving a transition from global to regional supply chains. Companies worldwide are reshoring production, investing billions of dollars to shift manufacturing closer home. In this new landscape, countries that moved first and moved boldly, securing critical supply chains and building domestic capacity, will hold decisive advantages.

There are clear lessons for India as it eyes emerging sectors like green energy and electric vehicles. The government isn’t merely a regulator or referee—it is a catalyst that determines which industries take root and which remain nascent. Strategic policy intervention at key inflection points creates decades of compounding advantage.

The lesson of the last fifty years is clear, but the urgency of the next decade is even clearer. Innovation doesn’t just happen; it has to be nurtured.

Successful entrepreneurs run on tracks that visionary policy has already laid down. As the world reorganises into competing economic spheres, countries that hesitate to deploy strategic industrial policy will find themselves dependent on rivals for the technologies that define the 21st century. The Economic Survey’s focus, and by extension the Budget’s, on critical minerals isn’t just about reducing import bills—it’s about securing India’s place in a world where economic sovereignty and national security have become inseparable.

In Company Outsider, Sundeep Khanna distills more than three decades of his experience writing on India Inc. into a thousand words of context and insights that few can bring to the table. Want this newsletter delivered in your inbox? Subscribe here.