India must urgently adapt to seismic shifts in global supply chains for rare earth magnets, semiconductor chips, and critical minerals, according to the Finance Ministry’s July 2025 economic report. The ministry’s first official comment on the issue underscores the strategic challenge and opportunity as China’s export ban on rare earths disrupts global markets, threatening India’s automobile industry with potential production cuts. With automakers sounding alarms over shortages, India’s integration into high-value global networks is critical for medium-term growth.

The report highlights a stable economic outlook for FY26, bolstered by robust domestic demand and a strong agricultural sector, fueled by an above-normal southwest monsoon. Tax revenues are growing in double digits despite recent rate cuts, and government capital expenditure continues to drive fiscal consolidation. However, global headwinds, including a 0.5% contraction in the US economy in Q1 2025, sluggish exports, and tariff uncertainties, pose significant risks. Subdued credit growth and weak private investment further cloud the horizon, with deflationary trends in wholesale prices potentially understating nominal GDP growth.

Despite these challenges, domestic indicators shine. The early monsoon has boosted kharif sowing and rural demand, while core inflation remains low, with headline inflation below the Reserve Bank of India’s 4% target. The RBI forecasts Q2 FY26 inflation at 3.4%, with the full-year rate likely under 3.7%. The ministry emphasized that India’s economic stability hinges on navigating these global disruptions, particularly in securing rare earths critical for electric vehicles, wind turbines, and electronics.

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The report calls for strategic investments in domestic rare earth mining and processing to reduce reliance on imports. India’s reserves in states like Rajasthan and Odisha could be leveraged, but scaling up infrastructure and technology remains a hurdle. The ministry also urged collaboration with allies like Australia and Japan to diversify supply chains, warning that failure to act swiftly could hamper India’s ambitions in advanced manufacturing and green energy.

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