The recent decision by the Pentagon to take a direct investment stake in MP Materials, the foremost US producer of rare earth minerals, is a striking signal of the lengths modern states are willing to go to secure their industrial and strategic interests. In the contest for control over materials as fundamental as lithium, cobalt, and rare earths - ingredients now almost as vital as oil during the twentieth century - countries are shedding any reticence about government involvement in markets.
The move is not just economic but also geopolitical: critical minerals underpin everything from smartphones and electric vehicles to the components inside precision-guided missiles and fighter jets. The United States, realising that simply relying on market forces for supply security is risky in a multipolar world dominated by complex dependencies, is embracing a new flavour of industrial policy reminiscent both of wartime mobilisation and Silicon Valley venture capital.
But this raises a host of questions: How effective is this kind of intervention? Does it correct market failures or merely substitute government preferences for market forces? And, pivotally, does the model have resonance for other democracies - especially for a rising power like India that faces some of the same anxieties over strategic autonomy, technology transfer, and industrial capacity?
Classic economic dilemmas
To understand the rationale, it's useful to revisit the classic dilemma at the heart of industrial policy. Free market purists, armed with Adam Smith and Friedrich Hayek, argue that governments have neither the information nor the incentives to “pick winners,” and that intervention inevitably breeds inefficiency and rent-seeking. Instead, prices and profits are the best signals for where resources should go.
Critics of laissez-faire, drawing on the empirical failures of awkward market solutions (especially in “infant industry” and “public goods” contexts), highlight how the market on its own often under-invests in strategic sectors, especially those fraught with uncertainty, network effects, and scale economies. Investments in sectors like rare earth mining or defence technologies are costly, risky, and marked by long time horizons that most private capital finds unpalatable.
Moreover, when a single country (like China, which controls roughly 60% of global rare earth production and even more of processing capacity) dominates, the risk is not merely commercial, but existential.
This is where the Pentagon’s action, alongside the even more discreet investments of the CIA’s venture arm, In-Q-Tel, become instructive. By providing not only capital but implicit political and procurement backing, governments can “de-risk” investments for private players - making it possible for companies to develop new deposits or advanced technologies that might otherwise remain academic curiosities.
Rare earths mining and magnet production, capital-intensive and highly sensitive to price fluctuations, would likely go underfunded if left purely to private actors facing a global market distorted by opaque Chinese subsidies. In-Q-Tel, for instance, has seeded companies that pioneered data analytics, cybersecurity, and quantum technologies, giving the intelligence community a head start on tools critical for twenty-first century competition. The US goal is not just self-sufficiency in some narrow sense, but a resilient, innovative ecosystem with broad spillover effects - ensuring that breakthroughs advance not only military goals but also civilian technology leadership.
By standing behind a firm or offering long-term price guarantees, state intervention can build domestic capacity, crowding in private finance where the risk-return profile is otherwise unattractive.
Consider also the public good aspect: a secure minerals supply chain has spillover benefits for national security and technological sovereignty that far exceed any single firm’s private balance sheet.
Legitimate concerns about market distortion
Despite this, there are reasonable concerns about distorting the market. When a government implicitly or explicitly backs an industry, it can warp investment decisions, shield incumbents from competition, and incentivise rent-seeking. Some of the world’s costliest white elephants - uncompetitive steel mills, failed microchip fabs, a surfeit of regional airports - bear witness to the risks of poorly directed industrial policy.
Externalities - both positive and negative - loom large as well. The most obvious positive externality is the creation of supply chain resilience for the entire country, not just the supported company.
Yet, negative externalities deserve a hard look, too: picking winners can crowd out more dynamic private actors, induce inefficiencies, and in some cases provoke retaliatory barriers by competitors abroad, fragmenting markets further.
The legitimacy of such interventions also hinges on transparency and public interest - not always a given, as even the US record on venture investing can attest. Moreover, certain forms of state support - such as broad-based R&D grants or public-private consortia - tend to yield more robust innovation outcomes precisely because they focus on positive externalities: knowledge spillovers, infrastructure, and pre-competitive research.
Where does this leave India?
Can New Delhi, often as skeptical of statism as it is wary of total laissez-faire, successfully borrow from the Pentagon-In-Q-Tel model? The short answer is: it could - provided it recognises both promise and pitfalls.
A more contemporary solution - similar to In-Q-Tel or the Pentagon's recent investments - would be for the Indian government to set up a quasi-autonomous Strategic Industries Venture Fund, which would be invested in companies and startups in areas of recognised national interest. Backing could take the form of minority equity, guarantees, and R&D grants, always tied to outcomes and time-bound to prevent open-ended subsidies.
The key, as global experience shows, is design: governance structures must be insulated from day-to-day politics, staffed by technocrats, and linked closely with both downstream buyers (like DRDO or ISRO) and private venture funds to leverage expertise and co-investment.
Lessons from institutions like the Technology Development Board (TDB), which has funded hardware startups, or the National Investment and Infrastructure Fund (NIIF), which mobilises long-term capital, can be adapted and scaled for new industrial priorities.
There is also the question of externalities. Used judiciously, government investment could build entire clusters of suppliers, open up R&D spillovers, and create high-wage jobs far beyond the core sector. It could also foster “learning by doing” and technology diffusion - much as Japanese and Korean industrial policy did in an earlier era. But the risk of negative externalities - regulatory capture, misallocation, and resource wastage - remains real and must be actively mitigated through transparency, competitive bidding, regular review, and partnerships with credible private actors, including India’s growing pool of venture capitalists.
One can consider two critical factors: the severity of market failure and the sector’s strategic national importance. When both are low, letting markets operate freely is generally best, avoiding unnecessary public involvement. If strategic importance is high, but markets mostly function, governments should take a watchful, standby approach, ready to intervene only if conditions worsen. In situations where market failures are significant but strategic importance is low, limited state support targeting specific bottlenecks or catalysing private activity may be justified. However, when both strategic value and market failures are high - such as in critical minerals, advanced battery manufacturing, or cybersecurity - robust state action, including public-private investment funds or long-term guarantees, is most defensible.
Ultimately, as the global race for critical minerals and advanced manufacturing intensifies, governments have little choice but to revisit old dogmas about state-market boundaries. The success of these hybrid strategies - whether in Washington, Beijing, or New Delhi - will depend less on ideology and more on execution: designing nimble, accountable, and learning institutions, responsive to both the imperatives of security and the discipline of the market, and harnessing the best of both worlds - state-backed risk capital and private sector dynamism.
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