India’s automotive sector could be headed for a bumpy ride, with CRISIL Ratings warning that a shortage of rare earth magnets, crucial components for electric vehicles (EVs) and hybrids, may disrupt production and dent growth. The shortage stems from China’s recent export restrictions and shipment delays, creating a supply-side risk that may have cascading effects across the industry.
“The supply squeeze comes just as the auto sector is preparing for aggressive EV rollouts,” says Anuj Sethi, senior director of CRISIL Ratings. “Over a dozen new electric models are planned for launch, most built on PMSM platforms. While most automakers currently have four–six weeks of inventory, prolonged delays could start affecting vehicle production, with EV models facing deferrals or rescheduling from July 2025.”
Rare earth magnets, though contributing less than 5% to a vehicle’s cost, play an essential role in high-torque, energy-efficient electric motors such as those in permanent magnet synchronous motors (PMSMs) used in EVs. Hybrids also depend heavily on these magnets, while internal combustion engine (ICE) vehicles use them in systems like electric power steering.
In April 2025, China, the world’s dominant supplier of rare earth elements, tightened controls on the export of seven rare earth elements and finished magnets. The new rules mandate detailed end-use declarations, including confirmation that products will not be used for defence or exported to the United States. This has significantly delayed shipment clearances, which now take at least 45 days, leading to backlogs and tightening global supply chains.
India is particularly exposed, having sourced more than 80% of its approximately 540 tonnes of rare earth magnets last fiscal from China. According to CRISIL Ratings, by the end of May 2025, nearly 30 import requests from Indian companies had received clearance from the Indian side, but none had yet been approved by Chinese authorities, with no shipments delivered.
In the financial year (FY)25-26, domestic passenger vehicle (PV) volumes are expected to rise by 2%–4%, with electric PVs projected to grow at a much faster clip of 35%–40% from a low base. Electric two-wheelers (2Ws) could see growth of around 27%, compared to 8%–10% for the overall 2W segment. But this bullish momentum may taper off if the supply disruption persists.
Poonam Upadhyay, director of CRISIL Ratings, says, “Despite contributing less than 5% of a vehicle’s cost, these magnets are indispensable for EV motors and electric steering systems. Automakers are actively engaging with alternative suppliers in countries such as Vietnam, Indonesia, Japan, Australia and the US, while also optimising existing inventories.”
During the pandemic, rare earth magnet supplies remained stable, in contrast to semiconductor shortages. This reinforced the industry's preference for just-in-time inventory systems without strategic buffers. However, unlike semiconductors, which have a globally diversified supply chain, over 90% of rare earth magnet processing is concentrated in China, leaving few alternatives in the short term.
In a constrained supply environment, CRISIL Ratings warned that manufacturers might prioritise internal combustion engine (ICE) models, which require fewer magnets, over EVs, further slowing the electrification drive.
Recognising the growing risk, both, auto-makers and the Indian government, are taking steps to mitigate the impact. In the short term, the focus is on building strategic inventories, securing alternative suppliers, and fast-tracking local assembly under the production linked incentive (PLI) scheme.
Over the longer term, reducing dependency on imports will require speeding up rare earth exploration projects, scaling up domestic processing capacity, and investing in recycling infrastructure.
“A prolonged supply squeeze could disrupt production of PVs and 2Ws, making this low-cost component a potential high-impact bottleneck for the sector,” Ms Upadhyay added.
The situation continues to evolve as automotive players race to secure supply chains. However, the pace of China’s export approvals remains the most immediate concern.
