Why India must rethink its use of quality control orders in trade policy

QCOs should protect against irreversible harm, not shield big firms or suppress imports under the guise of standards, especially as India embraces global integration

India is on a path of increasing openness in its markets, and this heralds the start of a far more confident, less reactive, and more proactive import policy regime. This change in gear appears to have occurred sometime last year but has since been gathering momentum through the previous Budget and now with the various possible free-trade agreements (FTAs).

 

As is evident, there is a bully in town that Indian industry needs to be protected against. But as every parent knows, there is such a thing as too much protection. The child also needs to be left alone in the playground. Take that self-respect away from the child, and you will have to bear the burden of perpetual dependence and unending support. Let us work with that same analogy. Yes, there is a Chinese bully in the manufacturing town, but there are also mechanisms of addressing that challenge. We need to use the tools that protect Indian industry judiciously, too much of them, and we get relative stagnancy in manufacturing’s share of the total value at between 16 and 17 per cent. 

Of the various forms of protection, the more insidious ones go by the name “quality control orders” or QCOs. QCOs are requirements that a particular product achieve a certain quality for it to be bought and sold in the country. There are currently several hundreds of QCOs operating in the country and countless ones globally. When a QCO is imposed on a product, all sellers — domestic or international, large or small, old or new — need to meet that quality standard. Typically, the new, small, and international units bear the adverse effects much more, but all of this eventually flows back to impacting the Indian consumer. To appreciate the issue, let us differentiate between the imposition and implementation of QCOs. 

Implementation-related issues in the context of India’s QCOs relate to the cost of testing and evaluation, certification requirements, fuzzy or inappropriate specifications, complex evaluation processes, inadequate availability of facilities and personnel, delays, etc. Note that smaller units are affected more because of greater dependence on single products and a lesser ability to engage with the government; consequently they tend to suffer greater delays and bear greater costs relative to their size. 

Moreover, international units also require domestic certification when a QCO is imposed, and for products that have a small value, it’s rarely worth the effort. Many operate through Indian traders, who are also impacted adversely. Conversations with businesses — including micro, small and medium enterprises — reveal a host of issues ranging from the poorly resourced Bureau of Indian Standards, to poorly framed processes and rules,  etc.  As a consequence, they lead to not only a rise in costs and fall in the ease of doing business, but products previously available may also disappear after the imposition of QCOs. 

So why impose a QCO at all? There are two reasons. First, it is to ensure that good-quality products are not overwhelmed by cheaper, low-quality ones. That is, the government enforces a minimum acceptable quality standard to ensure good quality in the market. 

But here is the interesting part: In a dynamic, growing economy, a spectrum of price-quality combinations should exist in almost all product-market segments. Lower-quality items are as important as better-quality ones in any mature market, be it food, steel, chemicals, or toys. It is indeed critical to have a variety of such price-quality combinations available. This variety helps in manufacturing flexibility, innovation, choice for a range of customers, and also inclusion. Buyers and sellers in any market can typically differentiate between different types of quality and therefore don’t need a government department telling them what’s good enough or not. 

Moreover, even if they can’t observe product quality before purchase, once a bad-quality product is experienced by a buyer, the seller’s reputation and ability to sell are damaged. Therefore, even if poor quality is not observed by the buyer, we don’t necessarily need a QCO. It is required only when two criteria are met simultaneously: First, the buyer cannot make out the quality of a product, and second, the potential damage from its use is large and irreversible. Why only India? Compare any country’s QCOs against these criteria, and we will need to eliminate a large majority. 

But there may also be a second reason why QCOs are imposed in India. It is to protect a nascent sector or firm against imports. In fact, in almost all product segments where India has imposed QCOs, imports from China have been significant. If indeed that is the underlying problem, then it’s not necessarily quality that’s the challenge but price. (Industry participants can make out quality better than government laboratories do.) And therefore, the right tools for that are price-related tools, such as tariffs and anti-dumping measures. Therefore, before deciding to impose a QCO, the key question that needs to be assessed is: What is the need for it? Can buyers themselves not ascertain the quality of their purchase? 

And this gets to the one strange feature of protectionism as it operates in the world today. Typically, the various forms of protection, including QCOs, are meant to be used to support the weak and the small from being overwhelmed by the large and the powerful. Many, if not most, QCOs in operation tend to be on products manufactured by larger domestic firms. In effect, that leads to a perverse situation where the larger units are being protected, whereas it is the smaller downstream units and consumers who bear the consequences. This tendency is not necessarily by design but the political economy of industry. Larger firms will always be better resourced to engage with the government than smaller ones. If there is also a public sector in the same product segment, then the likelihood of protectionist tendencies further increases. 

As India matures as an economy and a manufacturing centre, our policy tools also need to be used judiciously. By all means, use QCOs when they are required, but not for price or strategic objectives because those harm India more than they benefit. India, therefore, must reassess all its QCOs and retain only a very few, not the hundreds operating currently.

 

The author heads CSEP Research Foundation