India’s quiet deregulation is a relief to its friends

By Mihir Sharma

About a decade ago, the Indian government quietly turned protectionist. But now, there are some signs of a rethink — particularly on insidious non-tariff barriers that had hurt not just foreign companies, but consumers and exporters.

After Prime Minister Narendra Modi took office, the finance ministers he appointed tended to raise tariff rates marginally every year, reversing a decades-long trend toward greater openness. That became increasingly difficult to do under the radar, given protests from various trading partners. And so new regulations that targeted imports were introduced: Quality Control Orders, or QCOs. Over the last month, however, some of these rules have unexpectedly been withdrawn.

The idea behind them was deceptively simple. The government argued that, since it was facing a flood of imports from China, it needed to ensure that these were of sufficient quality to meet Indian standards. Importers should thus demonstrate that every shipment they brought in qualified under domestic rules.

In effect, this led to a free-for-all. In barely more than a year, 800 or so new rules were issued, and the minister in charge suggested he wanted to take the number up to 2,500. Bureaucrats in multiple ministries were encouraged to come up with arbitrary definitions for products, and apply unpredictable and novel standards to each of these.

This caused chaos in the real world. Shippers sometimes didn’t know which particular set of rules applied to a particular batch of imports — and neither did port officials. Compliance costs went through the roof, especially for smaller companies.

Every now and then, politicians have to relearn a basic lesson: The state can’t be trusted to regulate with a light touch. If officials are given an interventionist inch, they will take a dirigiste mile. That’s what happened with QCOs: Outsiders struggled to see whether there was a coherent pattern to how these barriers were being put up and why. And if the bureaucrats in charge knew, they weren’t telling.

For India’s trade partners — including the US and the European Union, both of which are trying to close a deal with New Delhi — regulations like these are exhausting. They raise the bar for what any agreement would require, and they make it seem like Indian official-dom is unreliable and uncommitted to giving foreign companies a level playing field. Multinational executives struggle to justify an India strategy to their boards and shareholders when unexpected policy shifts make the entire market look riskier than it is.

The government, which fears nothing more than appearing weak, tends not to reverse course on policies — even when there’s ample evidence they’re going wrong. That’s why its both a surprise and a relief that some of these protectionist regulations are now being rolled back.

That’s partly thanks to a committee under Rajiv Gauba, who until recently was India’s top bureaucrat. Charged with identifying how domestic producers could continue to thrive in an age defined by President Donald Trump’s tariffs, Gauba appears to have zeroed in on the new quality norms as a big part of the problem. Several ministries have now started rolling back their directives; the steel ministry, for example, has already withdrawn more than one-third of its 151 QCOs.

The focus is, for now, on intermediate inputs like minerals and polymers. An inability to import these raised costs for small producers in sectors such as textiles — precisely those that are also likely to suffer if the 50% tariffs that Trump imposed in India stay in place.

But it shouldn’t stop there. The rollbacks should be extended to the things normal people buy as well. India’s citizens also need advocates in New Delhi. Gauba may have fought back against protectionist companies and officials on behalf of thousands of smaller businesses, but someone should do the same for consumers. That’s a politician’s job: Keeping an eye on what their voters are buying, and ensuring that those stay affordable.

Some officials still defend their over-reach, arguing that people need to be protected against sub-standard products. Let’s take them at their word. If the government is really concerned about China’s lax regulatory environment, it can instead impose specific conditions — for example, that goods that had cleared the far more stringent quality checks in the EU or Japan would be exempt from any future QCOs.

It certainly needs to be more transparent about which particular goods are being regulated, and why — and allow time for public consultation and for importers to prepare. The arbitrariness, unfairness, and unpredictability of this regulatory regime is even more disturbing than its existence.

Politicians should remember that nobody in the country was blaming them for the availability of the occasional sub-standard product. But they will certainly blame New Delhi if ham-fisted trade barriers raise prices. Nobody in the world is as cost-sensitive as an Indian e-commerce addict, and there are hundreds of millions of us.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)