Quality Control Orders Hurting MSMEs, Not Big Players

The overarching objective of QCOs is to regulate imports of low-quality products in the country and to promote a quality manufacturing ecosystem. 

With the implementation of QCOs, it is clear that its underlying intent is to restrict imports in specific sectors to galvanise domestic manufacturing. Several commentaries have been written on the potential implications of QCOs for India’s trade competitiveness.

Industry associations and micro small and medium enterprises (MSMEs) have vehemently opposed a blanket approach for QCOs, and urged the commerce department to review them and adopt a more nuanced approach, based on extensive consultation with MSME stakeholders.

QCOs severely undermine the interests of MSMEs by restricting their access to competitive imports of key inputs for their manufacturing. MSMEs are the backbone of the Indian economy, and play a crucial role in employment generation, exports and domestic manufacturing.

Needless to say, MSMEs contribute up to 8 per cent of India's GDP, 45 per cent of manufacturing output and 40 per cent of exports. They also play a critical role in socio-economic transformation of millions of people who are dependent on the sector.

MSMEs On The Mat

MSMEs face considerable challenges because, in a market-oriented economic system, their capacity to negotiate is limited. QCOs have emerged as new nightmare for the sector and significantly impact their manufacturing capabilities in different ways.

First, they place stringent technical requirements on imported raw materials and intermediate inputs to manufacture for both domestic and export markets. This not only curtails their access to competitive inputs but also increases manufacturing costs.

Consequently, MSMEs are not able to manufacture and supply their domestic and foreign lead buyers, which in turn impacts their participation in global value chains. QCOs on key inputs of man-made fibres, for example, has restricted access to imported inputs such as polyester staple fibre and viscose staple fibre.

This, in turn, increases input costs for textile manufacturers, adversely affecting their export competitiveness. The high cost of critical inputs is sabotaging our efforts to shift from cotton-based fabrics to man-made fibres in view of the changing global fashion market.

Likewise, QCOs on polymers have inhibited access to competitive imports of polymers, which in turn harms downstream manufacturers in the country. This is aimed at protecting the interests of a handful of large domestic polymer producers that control over 80 per cent of the domestic market.

These two product specific cases reveal the complex nature of domestic political economy, in which large corporations continue to enjoy protection at the cost of MSMEs.

Second, MSMEs contend that the government has adopted a selective approach to give Bureau of Indian Standard (BIS) licenses to foreign manufacturers in different sectors. For instance, it allows all foreign fastener manufacturers, except from China, to obtain a BIS license to supply fasteners in India.

This creates disguised regulatory barriers for Chinese fastener manufacturers. The key issue is a selective approach, especially given that the government has allowed BIS licenses to Chinese manufacturers in sectors like solar and chemical, simply because most firms that source raw materials and intermediate inputs from China in these sectors are large domestic firms.

A selective approach to accommodate the commercial interest of large corporations exposes a complex web of industry lobbying, and raises serious concerns regarding inclusive and participatory policymaking. This ultimately leads to red tapism and crony capitalism.

Why Only Chinese Suppliers?

Third, MSMEs are of the view that BIS licenses given to all foreign manufacturers except those from China will neither help the country scale up domestic manufacturing, nor contribute to our efforts to reduce our trade deficit with China.

This is because of China’s inextricable connection with regional production networks of Southeast Asian economies like Vietnam, Thailand, etc. Any manufactured product originating from Southeast Asia has Chinese footprints.

Not allowing Chinese manufacturers to obtain a BIS license for their factories creates a potential risk of Chinese goods moving via our FTA partners, where suppliers have a BIS license. This will not only undermine our objective of reducing imports from China, but also cause revenue loss if such products enter through our FTA partners.

Fourth, QCOs not only proliferate red tapism, but also create potential opportunities for massive corruption in the system. Industry experts have stated that many importing firms are misclassifying their products to circumvent QCOs and also indulge in unethical practices to clear their imported consignments.

This in turn fosters a culture of rent seeking in the national trading environment.

Furthermore, domestic firms are facing considerable challenges to get the BIS license for their factories, and have to pay what is called “speed money” to get things done in a time-bound manner.

Legalised Corruption?

The complex and cumbersome procedures for obtaining a BIS license have also contributed to the rise of “agents” or “consultants”, who facilitate MSMEs to navigate through the complex process of acquiring BIS licenses, and charge hefty fees for this. 

Given the challenges posed by QCOs to the MSME industry, it is imperative that the commerce department takes immediate remedial measures to address these concerns.

A comprehensive and fair review of all QCOs is urgently needed to ensure that they do not become instruments for unnecessary harassment, red tapism and corruption. The department needs to take a look at the approaches of other countries to explore possible alternatives.

For example, the European Union has a self-certified CE mark via a third-party verification system. This approach may be useful in the case of QCOs in India. 

(The writer is an Associate Professor, Jindal School of Liberal Arts and Humanities, O P Jindal Global University, Sonipat. Views are personal)