CSEP
Study Finds Anti-China QCO in Chemical Sector Hits MSME, Costs Up, Turnover Up
but Profits Crash. Same Trend in Big Company to a Lesser Extent
1.
Revocation of QCOs Signals Policy Reassessment
·
The Government's decision in late 2025 to revoke
several QCOs received mixed industry reactions.
·
While some viewed it as policy uncertainty, others
welcomed the reduction in compliance burdens.
·
The move indicates a shift towards a more
evidence-based and streamlined QCO framework.
2.
Intermediate Goods Triggered Major Concerns
·
Around 46% of QCOs in force by December 2024
applied to intermediate goods.
·
Industry feared supply-chain disruptions and
increased production costs.
·
The study provides empirical evidence on these
concerns using firm-level data.
3. Study
Based on Firm-Level Evidence
·
Uses Annual Survey of Industries (ASI) data
covering FY2015–FY2024.
·
Maps QCOs to firms' regulated inputs and outputs.
·
Focuses on chemical-using manufacturing firms.
·
Evaluates impact on Gross Value Added (GVA),
production, and profits, including differences across firm sizes.
4. Sharp
Rise in Chemical-Related QCOs
·
Chemical QCOs increased from virtually none
before 2018 to 52 by 2024.
·
By 2024:
o
56.6% of chemical-using firms were
affected through regulated inputs.
o
66.4% were affected through either
regulated inputs or outputs.
5. Input
QCOs Raise Production but Reduce Efficiency
·
Production value increased by 9.6%, largely
due to firms passing higher input costs to consumers.
·
Gross Value Added (GVA) declined by 37%, indicating
lower production efficiency.
·
Firms produced more but generated less value
addition.
6. Output
QCOs Show Little Economic Benefit
·
Output-side QCOs had no statistically
significant impact on production, GVA, or profits.
·
They failed to improve firm-level performance as
intended.
7. MSMEs
Bear the Highest Burden
·
Small firms suffered the greatest adverse
impact:
o
Input QCOs reduced profits by 47.6%.
o
Output QCOs reduced GVA by 44% and profits
by 58.9%.
o
Combined input and output QCO exposure negatively affected
production, GVA, and profits.
8. Large
Firms Better Able to Absorb Compliance Costs
·
Production increased by 9.6–12.3%.
·
GVA still declined by 37%.
·
Profitability remained broadly unaffected.
·
Larger firms appear better able to pass higher
costs to consumers.
9. QCOs
May Increase Market Concentration
·
Higher compliance costs disproportionately affect smaller firms.
·
This could strengthen the position of larger firms
and increase market concentration.
10.
Overall Conclusion
·
Input-side QCOs increase production but reduce
efficiency and competitiveness.
·
Output-side QCOs do not significantly improve firm
performance.
·
Current QCOs impose disproportionate costs on MSMEs
while weakening supply-chain efficiency.
Policy
Recommendations
·
Impose QCOs only on clear quality and safety
grounds.
·
Exercise caution before extending QCOs to
intermediate goods.
·
Assess domestic production capacity before
introducing QCOs.
·
Strengthen testing and certification
infrastructure.
·
Periodically review existing QCOs based on
empirical evidence.
·
Reduce compliance burdens on MSMEs.
·
Ensure QCOs support supply-chain efficiency and
India's integration into Global Value Chains (GVCs).
Executive Summary
Towards the end of 2025, there was a policy
decision to revoke several Quality Control Orders (QCOs), and it received mixed
responses from the industry. While for some, it signals policy uncertainty, for
others, it is a welcome step as it reduces the excessive compliance burdens.
Nevertheless, the revocation represents a policy
move in the right direction and is likely to encourage a more streamlined
approach toward QCOs in the pipeline. Such reassessment could be led by the
same factors that led to the recent withdrawals, enabling a more calibrated and
evidence-based framework.
The decision to revoke QCOs was largely driven by
concerns around their application to intermediate goods, which was one of the
key observations in Prabhakar (2025). While the likely supply chain disruptions
arising from QCOs on intermediate goods have been recognised, it is important
to empirically substantiate this concern. Moreover, many QCO-affected sectors
are characterised by high firm concentration, making it possible that QCOs
could further aggravate this concentration. These issues require deeper
investigation. In this context, this paper makes an important contribution by
providing firm-level evidence on the supply-chain and competition implications
of QCOs.
·
The paper
uses firm-level data and maps existing QCOs to both the outputs produced by
firms and the inputs used in production over the full panel period from
financial year (FY) 2015 to FY 2024.
·
It focuses
on chemical-using firms to analyse the impact of QCOs on regulated inputs and
outputs, and their effects on firms’ gross value addition, production, and
profits.
·
The
analysis disaggregates these impacts across firm sizes to capture heterogeneity
in the effects of QCOs.
Supply-Chain Implications
QCOs have increasingly shaped India’s manufacturing
supply chains, particularly by targeting intermediate goods, an issue that has
driven strong industry pressure and led to the revocation of several QCOs.
About 46% of QCOs in force by December 2024 applied to intermediate inputs,
raising concerns about downstream production disruptions. Against this
backdrop, this paper focuses on one critical manufacturing input, i.e.,
chemicals.
Using panel data from the Annual Survey of
Industries (ASI), this study identifies firms using chemical inputs and
assesses the impact of QCOs on both inputs and firm output. Over the past
decade, around 2,731 firms have reported using chemical inputs. Chemical inputs
are most intensively used within the chemical sector itself, followed by rubber
and plastics, pharmaceuticals, and electronics.
The analysis shows a sharp expansion of QCO
coverage after 2018. Chemical-related QCOs increased from virtually none before
2018 to 52 by 2024, resulting in 56.6% of chemical-using firms being affected
on the input side and 66.4% on either the input or output side.
Regression Results: Understanding the Impact of
Quality Control Orders on Firm Performance
The impact of QCOs is assessed using three performance
indicators—gross value added (GVA), profits, and production—across two broad
dimensions: the overall impact and heterogeneous effects differentiated between
small and large firms. The key results are as follows:
Overall Impact
·
Production
value increases by 9.6% as a consequence of QCOs on inputs, which may be
reflective of higher prices of output, as firms pass on some of the increased
input costs to consumers.
·
Firms
exposed to QCOs on inputs experience a 37% decline in GVA.
·
Overall,
the results suggest that in the case of input QCOs, firms expand production
even as efficiency deteriorates.
·
Output-side
QCOs show no statistically significant effects on GVA, profits, or production,
indicating that they do not improve firm-level production as intended by these
regulations.
Heterogeneous Effects
·
The
combined effect of input and output QCO exposure is negative and statistically
significant for small firms across all three outcomes, i.e., production, GVA,
and profits.
·
The
combined effects for large firms are positive in magnitude for production, at
12.3%, and are not statistically significant for GVA and profits.
·
Among
larger firms, exposure to input QCOs is associated with an increase in
production value by 9.6%, reflective of higher product prices passed on to
consumers. Consequently, there is a sharp decline in GVA, which falls by 37%.
·
For
smaller firms, while input QCOs have no significant impact on production and
GVA, they lead to a significant decline of 47.6% in their profitability due to
high-cost burdens.
·
Output
QCOs hit smaller firms even harder across margins, with GVA declining by 44%
and profits by 58.9%, while remaining insignificant for larger firms’
efficiency and profitability.
The key takeaway from the results is that
input-side QCOs lead to an increase in production, but are associated with
significant declines in efficiency, as reflected in reduced GVA. Output-side
QCOs, in contrast, show no meaningful impact on firm performance across
outcomes. The effects are highly uneven across firms and also vary according to
whether a QCO is on the input side, the output side, or both. Larger firms
expand output but with a decline in GVA, while smaller firms face sharp
declines in all firm-level performance indicators.
Overall, QCOs appear to increase production without
improving value added and firm-level competitiveness, with disproportionately
adverse effects on smaller firms.
Policy Suggestions
To address these distortions, the QCO framework
must be reformed along two dimensions: introduction and implementation. New
QCOs should be imposed strictly on quality grounds, with clearly articulated
objectives. Intermediate goods should be regulated with particular caution,
given their systemic role in production. Before imposing QCOs, policymakers
must assess domestic production capacity and ensure adequate testing and
certification infrastructure.
Revamping the QCO regime requires consistent,
evidence-based reassessment of existing QCOs and thorough examination of
upcoming ones. Reducing the regulatory burden on Micro, Small and Medium
Enterprises (MSMEs) and safeguarding supply-chain efficiency are essential for
strengthening competitiveness and enabling India’s integration into Global
Value Chains (GVCs).