Bureaucratic interventions in the form of QCOs hurt Indian manufacturing

The government has stated in recent years that India is taking a pragmatic approach to trade and economic integration. It has sought better utilisation of existing free-trade agreements and looked for new ones to sign. Partly this is because it recognises that, for manufacturing to grow, India must become part of global value chains. Yet, at the same time, it has introduced a new licence-permit system that traders in multiple sectors must deal with. The number of “quality control orders”, or QCOs, has multiplied. These restrict imports of goods unless various certifications are obtained, particularly from the Bureau of Indian Standards (BIS). The government’s justification is that Indian consumers need to be protected from substandard goods; it is also likely the case that this is used informally to minimise the presence of Chinese manufacturing in Indian supply chains. But the fact is that a new set of non-tariff barriers have been erected and they are antithetical to consumer interests and hurt both traders and manufacturers.

 

Steel is a case in point. The industry is naturally concerned about the impact of overcapacity in China, which might render Indian-made steel uncompetitive. But steel dumping by China cannot be addressed through the overuse of QCOs. Orders have been issued for different kinds of steel in an arbitrary fashion. This has hurt other manufacturing companies that might require imported or speciality steel to produce their goods, including goods for export. Getting the BIS licence is an expensive and time-consuming process. Even if not covered by QCOs, importers are expected to get a “no objection certificate”. Many will simply make do with inferior-quality steel rather than jump through these hoops — which, in turn, renders them less competitive on both price and quality. This is not the way to build a world-class domestic manufacturing sector.

 

It also specifically harms small and medium enterprises. Larger companies making larger orders of import might find it cost-effective to deal with the required bureaucratic hurdles. But smaller companies will naturally find it more difficult. Thus, they will be rendered comparatively costly and their goods of poorer quality. Given that a government priority has been to expand the markets for micro, small, and medium enterprises (MSMEs) and enabling their entry into global value chains, the promulgation of a large number of QCOs seems counterproductive. Labour-intensive tradeable goods like textiles have suffered disproportionately as a consequence of QCOs in raw materials. They are now at the mercy of monopolistic producers of those materials within the country. This rash of new bureaucratic interventions in markets will not achieve the ends of protecting Indian industry, which will wither away without inputs. Instead, it will merely reduce investment in manufacturing in India because few will want to expand capacity when access to vital inputs is rendered uncertain, thanks to an arbitrary QCO regime. 

 

The government can rightly be proud of its record of deregulation and reform. However, it is putting its achievements in jeopardy by reinstating a bureaucratic control regime in the name of combating substandard Chinese imports. The government had earlier said that QCOs would eventually cover 2,500 goods. This would effectively return India to autarkic foreign-trade policy, with catastrophic results for Indian productivity and quality, as well as for consumer welfare. A reconsideration of this undesirable turn to statism and intervention is overdue.