Quality control orders hit small businesses hard, pushed up costs: CSEP

QCOs enforced by BIS, were introduced in 2016 by mandating the already existing voluntary standards in Indian manufacturing

Manufacturing quality control orders (QCOs) rolled out in the country have hit small businesses harder than larger ones and have pushed costs up across the supply chain, according to a working paper released on Thursday by the Centre for Social and Economic Progress (CSEP), a think tank. 

Montek Singh Ahluwalia, former deputy chairman of Planning Commission — the precursor to public think tank NITI Aayog, and Distinguished Fellow at CSEP, said quality control orders on intermediate products hinder ease of doing business.

Speaking at a discussion organised by CSEP, Ahluwalia said quality control orders originated as protectionist measures disguised as quality regulations. He also urged the industry to engage more actively with the government before policies are finalised. 

Quality control norms covering the inputs used by small firms had no significant impact on production and gross value added (GVA), but they lead to a 47.6 per cent decline in their profitability due to high-cost burden, the CSEP paper said. 

Among larger firms, exposure to input QCOs is associated with an increase in production value by 9.6 per cent, reflective of higher product prices passed on to consumers. Consequently, there is a sharp decline in GVA, which falls by 37 per cent.

The authors of the study found that QCOs on output products lead to GVA declining by 44 per cent and profits by

58.9 per cent, while remaining insignificant for larger firms’ efficiency and profitability. 

QCOs enforced by the Bureau of Indian Standards, were introduced in 2016 by mandating the already existing voluntary standards in Indian manufacturing. 

These regulations require both domestic manufacturers and importers to ensure that their products meet all testing and certification requirements before being sold in the market. 

The number of QCO-hit products increased from 88 in 2019 to 765 in 2024, with the majority of them applying to intermediate goods or raw materials. Towards the end of last year, 14 QCOs across three sectors were revoked. 

Last month, the Department for Promotion of Industry and Internal Trade (DPIIT) offered an alternative way to producers of ten items, including toys, personal protective equipment, air conditioners and footwear, to ensure quality standards without the rigors of following QCOs. 

That scheme was offered as a transition arrangement till the manufacturers can comply with the QCOs. 

Sharat Chander, director, Public Affairs at Samsung, who also spoke on the occasion, cited the example of refrigerator, which faces multiple QCO requirements, not only for the final product but also for components like steel, copper, compressors, glass and fasteners. 

“If QCOs are used as a non-tariff barrier to restrict imports, the market becomes dependent on a handful of suppliers. Over time, this could affect our price competitiveness,” he said. “There are several well-known examples in India where no QCOs were imposed, yet we have become major manufacturers and exporters,” he added. 

Speaking at the same event, Ishtiyaque Ahmed, Programme Director, Industry & Foreign Investment at NITI Aayog said when QCOs are issued by the ministry they become compulsory, and that is where most of the problems arise. He added that QCOs have contributed to supply-chain disruptions, higher input costs and certification hurdles. 

Another speaker, Rahul Ahluwalia, Founder-Director of Foundation for Economic Development also argued that India's comparative advantage lies in downstream manufacturing, where market opportunities are much larger than in upstream component production. 

He said that restricting access to cheaper intermediate goods raises production costs, reduces competitiveness, and ultimately hurts manufacturers, consumers and overall economy. He stressed that any gains in domestic production must be weighed against their economic cost. 

The CSEP’s working paper recommended that new QCOs should be imposed strictly on quality grounds, with clearly articulated objectives. 

“Intermediate goods should be regulated with particular caution, given their systemic role in production. Before imposing QCOs, policymakers must assess domestic production capacity and ensure adequate testing and certification infrastructure,” the study said. 

Reducing the regulatory burden on micro, small and medium enterprises and safeguarding supply-chain efficiency are essential for strengthening competitiveness and enabling India’s integration into global value chains, the working paper said.