Another trade hurdle: How quality control orders are hurting India

Conversations about trade, both globally and in India, are dominated by tariffs. India, after a period of increasing tariffs across the board, has signalled in recent months, including through the Union Budget, that import duties will now be lowered. The justification for this shift in policy is, correctly, that it will enable value addition within India and allow Indian producers to become part of global supply chains. However, economic openness and integration are not a function of tariffs alone. Regulations, restrictions, and quotas also play a role — these are generally called “non-tariff barriers” to trade. Policymakers in New Delhi must consider whether their approach to non-tariff barriers is contradicting the gains they will make from reduced tariffs.

 

In recent years, bureaucrats in New Delhi have discovered a new form of non-tariff barrier. This protectionist and statist measure is disguised under the so-called “quality control orders”, or QCOs. As economist Arvind Subramanian and others have pointed out on these pages, the increasing use of QCOs amounts to an astonishing, and stealthy, assault on Indian trade and competitiveness. Though nominally meant to ensure that goods available in the Indian market meet local standards, in fact these orders are used as discretionary mechanisms to delay or divert shipments of imports. While almost 800 such orders have already been issued, covering sectors from steel to leather, senior officials in the Union government have indicated that three times as many QCOs may be promulgated in the coming months. This would make life difficult for traders and producers. On some occasions, it is not clear what precise product line is being referred to in a QCO. On other occasions, orders cover entirely new and novel classifications, for example, of types of speciality steel. Producers or importers are often not sure that their shipment will arrive and will be cleared on time. This affects schedules and costs, and the exporters’ ability to meet their contractual obligations.

 

The tacit reason for QCOs is to prevent substandard goods from China that many worry are flooding Indian markets. But the general application of such orders reveals that, like all such controls, they have escaped containment and become worse than the disease they are meant to cure. Bureaucratic incentives are unchanged since the worst excesses of the licence-permit-quota raj: More control and more discretion mean more power — and more lobbying, with all the negative consequences of such behaviour. Maximising efficiency requires such discretion to be eschewed in policymaking. Certainly, officials should not be able to create or identify arbitrarily narrow product categories and then create regulations that apply to them. No market economy can be created effectively under such conditions. It has also had a chilling effect on investment. Companies with a long and disaggregated supply chain are hesitant to set up shop in India and create jobs because they are unable to properly evaluate the real cost they would pay for their needed inputs. Labour-intensive sectors like readymade garments, in which Indian exporters underperform, have been particularly hit by QCOs — as Dr Subramanian and his co-authors have identified.

 

The government has clearly taken a high-level decision that economic openness is good for Indian manufacturing and trade. It is unfortunate that protectionism by stealth is being enforced by officials in apparent contradiction of the overall policy goal. The tyranny of QCOs must be addressed through political intervention.