#325 Self-goals
The Tyranny of Quality Control Orders, Sacrificing Learning Outcomes at the Altar of Accountability, and Barriers that Prevent Listing of Deep Tech Firms
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India Policy Watch #1: When The Goal Is To Score A Self-Goal
Insights on current policy issues in India
—RSJ
Where are we on the India-US trade deal? For the past couple of months, there have been news reports on the deal being close to the finish line. Interestingly, earlier this month, even Trump seemed to suggest we were close to a deal:
“We’re getting a fair deal, just a fair trade deal,” Trump told reporters in the Oval Office at the swearing-in of his envoy to India, Sergio Gor. “We’re making a deal with India, much different deal than we had in the past.”
Last week, the Union commerce minister Piyush Goyal also indicated that the Bilateral Trade Agreement (BTA) was heading to a closure (HT report):
Speaking at the 22nd Indo-US Economic Summit, organised by the IACC, Goyal sought to minimise concerns about any friction in the relationship. “I don’t see any reason to be very worried. I don’t believe there is any hiatus in the relationship. It continues to be very important, very strategic for both countries, the United States and India,” he stated.
“.. when the deal becomes fair, equitable, balanced, you will hear very good news.”
I also think we are closer than ever before on a deal going by a series of coincidental news reports in November that look like India conceding to various terms the U.S. had placed as preconditions. At the start of the month, Reliance Industries announced it was stopping the import of Russian crude (after stocking up enough inventory, I suspect). The state-run refiners have also halved their imports from Russia in the last month.
Almost sequentially, India announced an agreement with the US to purchase 2.2 million tonnes of LPG every year from 2026. Then came the news about India purchasing over $93 million worth of arms from the US including Javelin anti-tank missiles and Excalibur precision projectiles on the back of a framework agreement signed in October to expand defence ties between the two countries. There may have been other similar steps taken which have gone under the radar or whose announcements will be made in the near future.
As we had written here earlier, the prudent thing for India will be to make the concessions gradually and spread them over time so that it is not seen as bowing to a bully, domestically. Optics are important here.
Separately, I read with interest the almost simultaneous withdrawal of a series of Quality Control Orders (QCOs) by ministries across sectors like chemicals and fertilisers, mining and petrochemicals. These QCOs, totalling to 114, covered raw materials, intermediaries and industrial inputs that go into manufacturing of finished goods by Indian firms.
QCOs, especially on intermediate goods, are just about the worst form of non-tariff trade barriers. Back in 2019-20, India started sliding down the protectionist slope with the Atmanirbhar Bharat initiative. This lead to an increase in import duties across multiple goods in a sharp reversal of trend seen since 1991. This gathered further momentum after the Galwan clashes.
Somewhat under-reported during that time was the exponential rise in QCOs during those years. From about 14 QCOs covering 106 products in 2014, India has now 187 QCOs on over 760 products with about 60 percent of them in intermediate and capital goods. The idea behind this QCO overdrive, on paper, at least, was to help restrict import of lower quality raw materials and intermediates so that Indian manufacturers could churn out high quality finished goods. This made zero sense.
Why do manufacturers, who understand their business the best, need any help from the government in quality control of the raw materials they use from global suppliers? If they don’t like the quality from a particular firm, they can easily shift to another who has better quality to offer. They know their business the best.
This scenario is different from QCOs on finished goods where you could argue that the end consumer (the ordinary Indian citizen) might not be able to discern an inferior quality product and needs to be protected through a robust quality control mechanism.
Or, where there is a clear danger of dumping of finished goods into the Indian market which needs to be controlled though non-tariff barriers like QCOs. But QCOs on intermediates was the State trying to achieve a flawed objective of self-reliance with bad tools. It is the equivalent of shooting yourself in one foot and at the same time scoring a self-goal with the other.
That’s exactly how it panned out. On the back of US tariffs and penalties imposed in June and Trump’s pointed criticism of non-tariff barriers raised by India, the government constituted the Gauba committee in August this year to review the QCOs. What the committee found isn’t surprising at all. It is an educative compendium of terrible unintended consequences of unthoughtful policy making.
First, there is no evidence that suggests there was due diligence done on the domestic manufacturing capacity in these intermediates to see if it could scale up to meet the requirements of the local manufacturers (mostly MSMEs) in the event of foreign vendors not adhering to the QC standards.
Nor was any planned increase in testing capacity taken up with BIS (the accreditation body) to ensure there are no delays in certifying those vendors who were keen to meet the QCO requirements. This is no surprise because why would anyone at BIS be keen on increasing the capacity when the implicit understanding about the objective of QCOs is to restrict imports rather than actually improving quality standards.
If you have any illusions about how seriously Indian labs take quality standards, please read our earlier editions on pharma quality controls. Anyway, because of this lack of planning and short implementation window, we had the familiar spectre of testing bottlenecks, delays in compliance certification and supply chain disruptions impacting the MSMEs output (which was mostly exported) in these sectors. In most of these sectors, India lost market share globally in the past five years.
More interestingly (or worse), in most sectors where the QCOs were introduced, there was already a market power concentration in domestic capacity. The clearest example of this was in the viscose and polyester fibre segment where the QCOs almost made any import almost impossible in a domestic market that’s dominated by two large players (you know who).
In the past 2 years, fibre prices went up by 25-30 percent because of these QCO driven import barriers which pushed the production cost by about 50 per cent. Globally, Indian manufacturers lost market share to cheaper competitors from Southeast Asia. The same story repeated itself for QCOs applied on plastics, electronic components, footwear and polymers.
On balance, the global competitiveness of Indian manufacturers who used these products as inputs for their finished goods went down. And the market power of a few large Indian conglomerates went up who continued to raise prices instead of creating additional capacity in a hurry.
Lastly, there’s limited evidence to suggest the quality of Indian manufacturing went up because we stopped importing substandard intermediates. The local alternatives aren’t necessarily subjected to the same standards and BIS specifications or standards haven’t scaled up. In fact, there are global standards for many of these products that are used and recognised by multiple countries which we should simply align with to make our MSME segment competitive. We don’t need to reinvent the wheel or design QCOs with the express purpose to deter imports.
The withdrawal of this set of QCOs on 114 products is an encouraging step in redressing the impact of a bad policy decision. This still represents only 16 percent of the total product codes affected by the QCO overdrive India went on from 2019.
There’s still a long way to go to eliminate these in other sectors, which are still reeling from the unintended effects. Protectionism is a bad idea at all times, but even if you are forced to resort to it for a brief period because everyone else is doing the same, it must be done with more nuance and calibration.
In any case, the upside of Trump bullying India with a 50 per cent tariff and being tough on non-tariff trade barriers is that it gave voice to MSMEs to raise the issue of QCOs and a positive set of actions thereafter. I hope the empirical evidence that’s now available gets embedded in institutional memory on the sheer stupidity of using QCOs as a tool to improve manufacturing competitiveness.
India Policy Watch #2: Sir Sir O Sir…*
Insights on current policy issues in India
—Pranay Kotasthane
The Special Intensive Revision (SIR) of electoral rolls has been causing quite a havoc in government schools over the last few weeks. Sample these news snippets:
With 13 of 16 teachers at Mahatma Jyotiba Phule School in Surat deployed as Block Level Officers (BLOs) in the ongoing Special Intensive Revision (SIR) exercise, the parents of children enrolled at the municipal corporation school have raised a complaint.
However, there is unlikely to be relief anytime soon, with the exams for the second semester days away. [Indian Express, November 27]
Or
At the Narayan Das Bangur Memorial Multipurpose School in Kolkata, 13 of 34 teachers have been given BLO duty. Moreover, even the lone Group C staff at the institution has been appointed as a BLO.
Speaking to The Indian Express over the phone, Sanjay Barua, Headmaster, Narayan Das Bangur Memorial Multipurpose School, said, “I’m myself performing the duties of the Group C staff, as I have no other choice. We have got some guest teachers from other schools, and exams are currently underway.” [Indian Express, November 23]
Neither is this use of teachers for miscellaneous purposes restricted to SIR. Just a few weeks ago, the Karnataka government conducted a caste census, which also involved teachers and other government employees. As a result, government and aided schools in Bengaluru were shut for eight days so that teachers could be deployed for surveying. There was no school between the Dasara and Deepavali breaks, leading to losses of 74 class hours in primary schools and 66 in high schools.
Now, it’s not that government teachers are helpless. They are a powerful interest group and are now organising against the rushed-through SIR exercise. But it’s the students and parents, a diffuse interest group, who are the big losers.
It’s an indication of our warped priorities that hurting the educational outcomes of the disadvantaged children is not considered a denial of social justice, while diverting teachers to conduct a caste survey is. In the case of SIR, even the ruse of social justice doesn’t apply.
For an alternative, check what the UIDAI did with Aadhaar enrollment centres. The enrollment drive brought in empanelled agencies that registrars contracted. It’s time for other arms of the government to take this approach as well. Hire empanelled agencies to do surveys instead of forcefully ‘volunteering’ teachers into such tasks. If you treat teachers as casual labour, don’t expect excellent learning outcomes from government schools either.
Apart from their impact on students, these news items also illustrate the arguments Yamini Aiyar makes in her book, Lessons in State Capacity from Delhi’s Schools. The book argues that the frontline educational bureaucracy feels powerless in the face of a Circular Raj enforced from the top, which imposes a ‘very narrow rule-based culture of performance.’ This system forces top-down accountability in a rigid fashion that is dissociated from students’ learning outcomes.
Seen through this lens, the diversion of government teachers’ time and energy to the SIR or caste census is just an extreme form of this top-down accountability. It might get you compliant teachers, but it won’t get you learning outcomes.
*Song from the movie Sir (1993)
Global Policy Watch: Unlocking Markets for Deep Tech Firms
Global issues relevant to India
—Pranay Kotasthane
This week’s The Economist has a stellar profile of China’s advances in two industries: autonomous vehicles and biotech. The latter is less-discussed and hence merits some attention. Within a decade, China’s drugmakers have moved beyond the low-level equilibrium of generic drugs and are launching new medications at a frantic pace.
Some reasons for success are familiar: a capable workforce, intense domestic competition, regulatory improvements, and the role of foreign returnees. But there’s one additional reason that caught my eye: rules that make it easier for biotech firms to get listed on the Hong Kong stock exchange.
Incidentally, Kiran Mazumdar-Shaw, chairperson of Biocon, also flagged this reform idea a few days back in her Economic Times column:
Hong Kong created a specialised listing regime in 2018 for pre-revenue biotech companies. It allowed companies with no commercial revenues - but strong scientific validation - to access public capital under well-defined safeguards. Many questioned whether retail investors could assess the risks involved. HKEX addressed this with rigorous scientific disclosures, adviser oversight and eligibility conditions linked to professional VC investment.
The results have reshaped the global biotech landscape:
Nearly 30% of all new drugs emerging globally today originate from Chinese biotech companies that grew through HKEX’s listing pathway. Close to 20% of Big Pharma’s in-licensing deals now come from these companies, reflecting global confidence in their science. [Kiran Mazumdar-Shaw, Economic Times, 26 November]
The Indian financial market regulator, SEBI, does have a mechanism to encourage pre-revenue firms, but the listings don’t take place on the main board. The result is that Indian biotech and other deep tech firms with long gestation periods are unable to raise capital from India’s buoyant financial markets. They end up listing on NASDAQ or remain small due to capital constraints.
There are oversight negligence risks in this approach. Fly-by-night firms can swindle unsuspecting retail investors out of their money, eroding confidence in India’s financial markets. Additional protection mechanisms focusing on scientific capabilities will thus have to be put in place.
Another method could be to start with deep-tech domains where India already has a comparative advantage: fabless chip design firms, biotech, and space, before expanding it to other sectors.
Endless hand-wringing about India’s low corporate R&D spend is not enough; we need to dismantle the barriers firms face under Indian conditions. Unlocking financial markets seems like one such idea worth considering.
HomeWork
Reading and listening recommendations on public policy matters
[Event] The 16th Emerging Markets Conference is happening next month in Mumbai. Some exciting papers on the big policy questions are lined up for discussion. Passes are on sale here.
[Article] Bhuvana Anand highlights the unfinished business of labour code reform in this excellent Business Standard piece.
[Podcast] Check out this Ideas of India episode on education policy featuring Yamini Aiyar.
[Podcast] We have a Puliyabaazi with Ornit Shani and Rohit De on their terrific book Assembling India’s Constitution. The book provides a mountain of evidence that ordinary Indians didn’t just receive the Constitution from up above, but actively shaped it. One of the best books we read this year.