How Quality Control Measures Are Hurting India's Export Ambitions
India's push for higher quality standards through Quality Control Orders (QCOs) is having unintended consequences that threaten to undermine the country's export competitiveness and burden domestic micro, small and medium enterprises. According to an unreleased Niti Aayog report, these regulatory measures are proving ill-planned and costly for both exporters and MSMEs.
The report from the 'High-Level Committee on Non-Financial Regulatory Reforms' reveals that most QCOs target raw materials and intermediate products rather than finished goods. Even more concerning, many of these new quality standards fail to align with global benchmarks, creating additional trade barriers.
The Import-Export Impact: Startling Statistics
Research from the Centre for Social and Economic Progress (CSEP) provides concrete evidence of QCOs' negative impact. Their September working paper shows that imports dropped by 13% in the year following QCO notification and experienced a staggering 24% decline over the long term.
While exports initially saw a 10.6% increase in the first year, this gain proved temporary. The second year witnessed a 12.8% decline in exports, with no long-term export benefits materializing. Intermediate goods faced the most severe impact, with imports falling by 16% in the notification year, 17.5% the following year, and 30% over the long term.
The CSEP report concludes that QCOs suppress imports without improving export performance, particularly affecting intermediate inputs crucial for domestic production.
Market Concentration and Export Sector Damage
Niti Aayog's analysis indicates that quality control norms have significantly affected export-intensive sectors that employ millions of Indians. The footwear and electronics industries, which together employ approximately 4.5 million people across various clusters, have been particularly hard hit.
Both sectors depend heavily on imported intermediate materials that determine end-product performance and design flexibility. The QCOs on these critical intermediate products have disrupted access to materials that either aren't produced in India or have very few domestic suppliers.
The implementation challenges have created an unexpected consequence: greater market concentration among domestic suppliers. Global suppliers struggle to obtain BIS certification, giving domestic players the ability to raise prices above global levels.
Specific examples include polyester fibre, yarn, and certain steel products commanding 15-30% price premiums over international benchmarks. This price disparity directly affects downstream industries' cost competitiveness in international markets and contributes to India's declining share in global apparel exports.
MSMEs Bear the Brunt of Compliance Burden
Micro, small and medium enterprises face disproportionate challenges in complying with QCO requirements. The certification costs ranging from Rs 10,000 to Rs 15,000 per consignment, combined with lengthy approval delays, create significant financial and operational hurdles.
Testing backlogs at BIS-approved laboratories can extend for several months, while the costs of obtaining and renewing licenses often prove prohibitive for small enterprises operating with limited profit margins.
The report highlights that larger firms can better absorb compliance costs, sometimes even benefiting from the exclusion of smaller competitors. This dynamic creates an uneven playing field that disadvantages India's vital MSME sector.
Unlike exporters located in Special Economic Zones (SEZs), MSMEs operating in domestic tariff areas with mixed domestic and export portfolios often lack access to exempted import channels. This reduces their competitiveness in both domestic and international markets.
The Niti Aayog report recommends revoking the Steel Import Monitoring System (SIMS) and No Objection Certificate (NOC) process for steel grades not covered under BIS, noting that existing mechanisms are already available with the Directorate General of Foreign Trade.
As India continues to negotiate new Free Trade Agreements and open its markets to foreign goods, the parallel effort to improve quality standards through QCOs requires careful reconsideration to avoid undermining the country's export competitiveness and harming its crucial MSME sector.
