Rolling back QCOs on key factory inputs is a good start but India’s import policy needs a broader overhaul

The point is not that quality does not matter. It does, vitally. Rather, the point is that quality checks often function as non-tariff barriers that jack up the cost of imports, offering domestic producers protection that is not reflected in the official tariff structure.

Such collateral effects must be kept minimal. Moreover, Indian policy needs to be coherent, strategic and principled.

A final product sold in the local market often comes stamped with a seal of quality from the Bureau of Indian Standards, mandatory in the case of some items. In cases where local output is subject to compulsory scrutiny, it would be unfair to let shipments enter the country unscreened.

For the rest, laws on consumer protection, fair trade and competition can act in concert with market forces to ensure the quality of imports, without each of these being tested item by item.

As buyers are quality-sensitive, substandard products would find no space in markets that have sufficient rivalry; where choice exists, good products get sifted from shoddy ones by the actions of economic agents acting in their best interest.

While a rollback of QCOs on all raw materials and intermediate goods may aid local factories, it would leave quality checks in place on imports of final goods even in cases where locally made stuff faces no such burden. This would be suboptimal. We need a broader view.

For decades, our import duty structure ensured that raw materials were charged less, midway inputs more and finished goods the most. This had no logical basis. Value addition is broadly the income generated by labour and capital in producing a good or service. There is nothing superior about value addition from, say, the assembly of a car as compared to the profits and wages earned from making the parts that are put together on its assembly line.

A policy of levying higher tariffs on items used at later stages of a value chain than on earlier-stage items is distortive. It inflates the effective protection for late-stage production, making upstream investment less attractive than downstream. Yet, the profits and wages earned on digging up bauxite are as valuable as the same money earned from making aluminium out of it or using this metal to make sheets, rods or cans.

Of course, downstream products offer greater scope for high returns off differentiation and patent monopolies, but that’s no reason to distort value chains. In some cases, India’s tariff patterns across these chains have been inverted. This is distortive too.

An ideal tariff structure would level the rate of effective protection across the economy, and for output to be globally competitive, we need a low—preferably single-digit—tariff on all imports. To the extent that QCOs act as import barriers, we need quality-check parity between imports and local output.

In general, nothing in the policy framework should be arbitrary; that only exposes it to the allegation of tilting the playing field and causing distortions, which result in resource misallocation and end up holding the economy’s overall efficiency back. Instead of fixing import costs item-wise, we should reform the entire duty structure.