India is considering easing its automotive localization norms in response to the ongoing crisis involving Chinese rare earth magnet exports. The government is assessing the implications of this potential relaxation, particularly concerning the Production-Linked Incentive (PLI) scheme for the auto sector. This move comes as China's restrictions on rare earth exports, which began in April 2025, have disrupted the supply chain for critical components used in electric vehicles (EVs) and other vehicles.
Rare earth elements are essential for manufacturing permanent magnets, which are key components in EV traction motors. China dominates the global rare earth market, processing over 90% of the world's magnets, making these export restrictions a significant concern for Indian automakers. The restrictions require special licenses for exporting seven types of rare earth materials and related magnets.
The Indian government's initial response has been to advise automakers to temporarily import fully-built motors or sub-assemblies to avoid production bottlenecks. However, this workaround increases costs. Shipping a motor by sea could add around ₹2,000 per unit, while air freight could increase costs by as much as ₹5,000 for smaller EVs like two-wheelers.
The potential easing of localization norms is a significant shift from the government's initial push for self-reliance in EV manufacturing through the PLI scheme. The scheme incentivizes domestic manufacturing by requiring EV makers and suppliers to source 50% of their components locally. However, with the rare earth supply chain disrupted, meeting this target has become challenging.
This situation poses a dilemma for Indian auto part suppliers who have invested in local manufacturing facilities for EV components like Permanent Magnet Synchronous Reluctance Motors (PMSRM). These suppliers risk missing out on PLI benefits if they cannot meet the localization requirements due to the scarcity of rare earth materials.
The Automotive Component Manufacturers Association of India (ACMA) has urged the government to develop a national strategy to secure critical materials for EV manufacturing. This includes exploring alternative supply chains and promoting domestic extraction and processing of rare earth elements. India has begun seeking rare earth partnerships with countries like Australia and Vietnam.
Several Indian companies are awaiting approval from the Chinese government to import rare earth magnets, including Uno Minda, Bosch, Mareli, TVS Group, Motherson Sumi, and Sona Comstar. However, no approvals have been granted yet, causing uncertainty in manufacturing schedules. While European manufacturers have received approvals, their Indian counterparts are still waiting, highlighting the strained political and commercial relationship between India and China.
Relaxing localization norms, even temporarily, could have long-term implications. Automakers may be hesitant to revert to more expensive local options once cheaper imports are approved, potentially slowing down domestic innovation in high-value EV components. Despite these concerns, policy experts suggest that some flexibility is necessary to maintain the EV sector's momentum until India develops alternative rare earth supply chains. Testing agencies will assess the implications of these changes on localization levels and production-linked incentives for manufacturers.
