Input QCOs Tied to 47.6% Profitability Fall in Small Firms as 600-Plus Products Await Reassessment

The news

New Delhi. India’s mandatory product-standards regime needs a second round of reform aimed at inputs, argue Prerna Prabhakar, Fellow at the Centre for Social and Economic Progress (CSEP), and Nancy Gupta, Visiting Fellow at the Crawford School of Public Policy, in The Hindu. A Quality Control Order (QCO) is a government order that makes a Bureau of Indian Standards (BIS) standard compulsory for a product, so that it cannot be made, imported or sold without BIS certification. Products covered by QCOs rose from 88 in 2019 to 765 by the end of December 2024, but the pace slowed considerably towards the end of 2025 as several QCOs were revoked or suspended, particularly those on intermediate goods, because mandatory certification had raised concerns over input availability, costs and supply-chain disruption. Concerns over India’s QCOs and other non-tariff barriers were raised at the WTO’s eighth Trade Policy Review of India in July 2026, not only by the EU and the United States but also by fellow BRICS members Brazil, China and Indonesia. On June 25, 2026, the Department for Promotion of Industry and Internal Trade (DPIIT) notified the Transition Facilitation (Quality Control) Order, 2026, which lets eligible firms unable to obtain BIS Scheme-I certification temporarily source from BIS Scheme-II-licensed suppliers in specified sectors, including toys, footwear and air conditioners, subject to eligibility criteria and approval by a DPIIT committee. More than 600 QCO-covered products remain to be reassessed, including critical inputs in chemicals, steel, textiles, machinery, electronics, and rubber and plastics. The authors cite a CSEP study of chemical-using firms: the first chemical QCO came in 2018 and 52 chemical products were covered by 2024, so the share of chemical-using firms exposed to regulation on the input side rose from 11.8% in 2019 to 56.6% in 2024. Among larger firms, input QCOs are associated with a 9.6% rise in production but a 37% fall in gross value added (GVA), which is the value of output minus the cost of inputs. Among smaller firms, they have no statistically significant effect on output or GVA but are associated with a 47.6% fall in profitability. The authors want supply-chain effects built into QCO design, dedicated help and transition periods for MSMEs, and success judged by quality gained rather than products covered. The syllabus link is GS3 on industrial policy and MSMEs, and GS2 on the WTO.

Static syllabus linkage

1. Section 16 of the BIS Act, 2016 is the legal root of every QCO. The Bureau of Indian Standards Act, 2016 replaced the BIS Act of 1986 and made BIS the National Standards Body of India, functioning under the Department of Consumer Affairs. Section 16 empowers the Central Government, after consulting the Bureau, to direct that the Standard Mark be used compulsorily on any goods, article, process, system or service in the public interest, for the protection of human, animal or plant health, the safety of the environment, the prevention of unfair trade practices, or national security. Once such an order is issued, making, importing, selling or storing the product without a valid BIS licence or certificate is an offence under the Act. QCOs are issued by the ministry or department that administers the product — DPIIT, the Department of Chemicals and Petrochemicals, the Ministries of Steel and Textiles and others — while BIS runs the certification.
2. Conformity assessment is where a standard turns into a cost. A standard is a technical specification; conformity assessment is the process of proving that a product meets it. The BIS (Conformity Assessment) Regulations, 2018 set out several certification schemes, of which Scheme-I is the familiar ISI mark licence, granted after product testing and inspection of the factory, including factories abroad for foreign manufacturers. Per the PIB release on the June 2026 order, Scheme-II is an alternative licensing scheme under the same regulations, which the order accepts as a temporary substitute in specified sectors. The time and cost of certifying a factory, above all a foreign supplier’s, is what creates input shortages when a QCO is imposed faster than certification capacity can grow.
3. The WTO’s TBT Agreement accepts mandatory standards but polices their trade effect. The Agreement on Technical Barriers to Trade (TBT) distinguishes voluntary standards from mandatory technical regulations, of which QCOs are an example. Article 2.1 requires national treatment and most-favoured-nation treatment for imports, and Article 2.2 requires that technical regulations not be more trade-restrictive than necessary to fulfil a legitimate objective such as national security, the prevention of deceptive practices, or the protection of human health, safety or the environment. Members must notify draft regulations to the WTO and allow time for comments, and a 2001 Doha Ministerial decision says there should normally be at least six months between publication and entry into force. Other members raise ‘specific trade concerns’ in the TBT Committee, the usual route by which QCOs are questioned before any formal dispute.
4. A Trade Policy Review is peer scrutiny, not a trial. The Trade Policy Review Mechanism, set out in Annex 3 of the Marrakesh Agreement establishing the WTO, subjects every member’s trade policies to periodic collective review by the Trade Policy Review Body, which is the General Council meeting in another capacity. Each review rests on two reports, one by the WTO Secretariat and one by the government under review. Since 2019 the four largest traders are reviewed every three years, the next sixteen every five years and the rest every seven years. The mechanism is expressly not a basis for enforcing obligations or for dispute settlement, so the criticism voiced at India’s eighth review in July 2026 is diplomatic pressure rather than a legal finding.

Why UPSC loves this

1. GS3 asks about industrial policy and the MSME squeeze. The syllabus covers changes in industrial policy and their effects on industrial growth, and Mains keeps returning to why Indian manufacturing has not scaled and why MSMEs stay small. QCOs are a concrete, evidence-backed case of a well-meant regulation raising costs for small firms, which examiners reward over generic lines about ‘ease of doing business’.
2. Prelims tests institutions and WTO agreements. BIS, its parent Act, its ministry and its marks are standard Prelims material, as are the WTO agreements on technical barriers to trade and on sanitary and phytosanitary measures. The Trade Policy Review Mechanism and the difference between tariff and non-tariff barriers are natural question stems.
3. The trade-negotiation angle links this to the EU and U.S. talks. Partners in FTA talks raise India’s QCOs as non-tariff barriers, so a Mains answer on India’s trade strategy can cite QCO rationalisation as domestic reform that strengthens India’s hand when it objects to others’ barriers.

Analysis

1. An input QCO works like an inverted duty structure without any duty. An inverted duty structure hurts domestic manufacturers when inputs are taxed more heavily than the finished goods made from them. An input QCO produces the same effect through certification: foreign suppliers without BIS licences drop out, the few certified suppliers can charge more, and the finished good may face no matching barrier. The CSEP finding that larger firms raised production by 9.6% while their GVA fell 37% is the signature of this squeeze — more output, but less value added on it. The counter-view is that uncertified chemical inputs can be genuinely unsafe or substandard, and in such cases a QCO protects downstream buyers and consumers; the case is for targeting, not abolition.
2. The small-firm result is the more dangerous because it hides in profits, not output. For smaller firms, input QCOs had no significant effect on production or GVA but were associated with a 47.6% fall in profitability. Small firms, in other words, keep producing to hold on to buyers while swallowing the cost, which does not show up in industrial production data and surfaces later as stressed loans, delayed wages or quiet closures. They cannot pass costs on as large firms can, because they sell into crowded markets or to large buyers who set prices. The study covers only chemical-using firms and reports associations rather than proven causation, but its direction matches what industry reported before the 2025 revocations.
3. Counting products covered was the wrong target, and the authors propose the right one. A rise from 88 to 765 products in about five years suggests QCOs were being produced as outputs of a programme rather than as answers to specific quality failures. The authors’ test — whether quality improves without constraining scale, efficiency and competitiveness — needs evidence before and after each order: test-failure rates, recalls, input prices and lead times. India has no statutory requirement of regulatory impact assessment, which is why more than 600 products are being reassessed after the fact. Building such an assessment into every new QCO, with a mandatory review date, would turn an ad hoc correction into a routine discipline.
4. The WTO criticism matters less as law than as leverage. A Trade Policy Review cannot find India in breach, but concerns voiced by the EU, the United States and BRICS partners Brazil, China and Indonesia show that QCOs are now seen abroad as non-tariff barriers. That costs India in negotiations, because it is harder to call the EU’s carbon border measure or U.S. tariffs disguised protectionism while one’s own certification regime is described the same way. The counter-view is fair: China’s compulsory certification system and many other standards regimes also restrict trade, and India is entitled to regulate quality. The difference lies in procedure — notification, reasonable transition periods and certification capacity — and that is exactly where India’s QCOs have drawn fire.
5. The transition order is a useful valve but a discretionary one. Letting firms source temporarily from Scheme-II suppliers when Scheme-I certification is stuck relieves real bottlenecks in toys, footwear and air conditioners. But access depends on eligibility criteria and a DPIIT committee’s approval, and the PIB release lists conditions such as three continuous years of QCO compliance without default, which favour established firms over new entrants and the smallest units. Discretionary relief also invites the perception of favouritism, however carefully it is run. A rule-based alternative would be automatic transition periods for MSMEs, published certification timelines for BIS, and recognition of accredited foreign test reports for inputs.

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