How quality control orders are crippling India's trade competitiveness

Just when exporters are coming under threat from abroad, they are also apparently facing disability from within the country. They have been hit by Quality Control Orders (QCOs), a new instrument which combines the worst of policy’s protectionist, non-transparent, discretionary and micro-management instincts. This would be a costly combination at any time, but now is a particularly bad moment to make life more difficult for exporters. The QCOs must be eliminated urgently. 

 

A quick history: Following 25 years of slow but steady opening, India reversed course in 2018 and turned back towards protectionism. This was part of a new strategy (aatmanirbharta) to revive manufacturing, which included raising tariffs and granting industrial subsidies under the production-linked incentive (PLI) scheme. In 2022, the government again started to reduce input tariffs, giving rise to hopes that it was rejoining the path of openness. But QCOs, as highlighted by Mihir S Sharma in these pages too, have now crushed those hopes, so much so that in protectionist magnitude and interventionist texture India’s trade policy regime is now creeping back to that of the pre-liberalisation era.

 

As Figure 1 shows, there has been a veritable explosion of QCOs, with close to 775 of them having been notified, covering more than 100 sectors. In some sectors, such as man-made textile fibre and yarn (MMF), these cover nearly 100 per cent of imports. And this might just be the beginning. The government has apparently declared that many more QCOs are in the works. When the dust settles, we could be looking at around 2,600 products under QCO mandates — an astonishing expansion of bureaucratic control over trade. 

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QCOs are supposedly an innocuous instrument to make sure that Indian consumers are protected from low-quality foreign goods. In principle, domestic producers must also meet these standards, but in practice they are certified with alacrity. It is not so for foreign producers. When a QCO is notified, the Bureau of Indian Standards (BIS) must certify that foreign suppliers in the covered sectors meet Indian standards, meaning that officials must travel abroad to inspect every supplier’s factories, assess production processes, and conduct rigorous testing. Until this occurs and approval is granted, no imports are allowed. In some cases, it is not obvious why the new standards are better than international ones that imports typically comply with; in others, even what the new standards are is unclear. 

 

Note the many ways in which QCOs can be applied to foreign suppliers. Firms could be forced to wait long periods before officials come for a visit; they could be denied certification, which would lead to a broad import squeeze; and some might be certified but not others, like discriminatory tariffs. Indonesia recently officially raised a concern against India at the World Trade Organization (WTO) for not certifying its viscose exporters.

 

Consider the consequences of QCOs in the apparel sector. The most dynamic export segment in this sector is garments from man-made fibres, not surprisingly since most global brands use MMF; they are used in every Nike or Uniqlo product. Accordingly, Figure 2 shows imports of polyester and viscose, which are key MMF inputs in apparels. It is obvious that the shifts in the policy regime have had major impacts: Restrictions initially kept imports low, then a tariff reduction in 2022 finally allowed domestic apparel firms to start tapping foreign suppliers, but then the imposition of QCOs caused imports to collapse.

 

The cost of the renewed protectionism has been large: India’s share in global MMF apparel exports, which had been growing, fell by half after import tariffs were nearly doubled in 2017, driving up production costs and eroding competitiveness. The rollback of these tariffs in 2022 could have helped revive this sector, but this measure was offset by the imposition of QCOs, causing serious damage to the industry — as garment exporter associations have been explaining to anyone willing to listen.

 

The country pays for these QCOs by way of exports, growth — and jobs. After all, the garment sector is highly labour-intensive, in contrast to polyester and viscose production, which is capital- and energy-intensive. So, on balance, the current regime destroys jobs domestically. What it does is to create windfall gains for a few very large and influential business groups, which are near-monopoly domestic producers of MMFs.

 

QCOs affect far more than the garment industry. Most notably, they are pervasive in the footwear sector, where they are imposed on the final product rather than on inputs, and in the solar panel industry, where they serve to raise the price of renewable energy and set back India’s transition to renewables. At the current pace, no sector seems likely to be spared from QCOs.

 

The wise statesman C Rajagopalachari coined the term licence-quota-permit-Raj to describe the folly of policies in the planning era. QCOs represent a lapse back to those policies, as they fuse together economic nationalism, arbitrary interventionism, and crony capitalism.

 

India’s exporters are already under dire threat from the US. That only makes it more important that they should not be attacked from the domestic side. QCOs must be eliminated immediately. It literally is a matter of life or death for this vital sector of the Indian economy.

 

 

The authors are, respectively, with Madras Institute for Development Studies, Johns Hopkins University, JH Consulting, Peterson Institute for International Economics, and OP Jindal Global University