Picture a small dye-maker in an industrial cluster somewhere in Gujarat. For years, he bought a key raw material from an overseas supplier. It was cheap, reliable and consistent. Then a new rule arrives: the material now needs a mandatory BIS certification. The supplier can’t get it quickly, so he switches to a domestic seller who charges more. His costs go up. He tries to raise prices, but his customers push back. His profit shrinks even though his factory runs exactly as before.
This is an imaginary example, but it mirrors what the Centre for Social and Economic Progress (CSEP), a Delhi-based public policy think tank, found in a recent working paper. A working paper is early-stage research shared publicly for feedback before formal publication. This one tracked about 2,700 Indian firms that use chemical inputs.
Behind the squeeze is a rule most consumers have never heard of: the Quality Control Order (QCO), a certification hurdle that a product must clear before it is allowed on Indian shelves. It was designed to protect Indian manufacturing. The data suggests it has a price, and the smallest firms pay most of it.
Five points, one uncomfortable question: when a country builds a wall to protect its factories, who ends up paying for the bricks?
1. Chemicals: the ingredient behind almost everything
2. Why India reached for the QCO
3. The paradox: bigger sales, thinner value
4. Small firms pay the bill, large firms cope
5. The China+1 dream and the road ahead
1. Chemicals: the ingredient behind almost everything
Look around you. The medicine in your cabinet, the plastic bottle, the colour of your shirt, the paint on the wall and the fertiliser behind your lunch all started life as chemicals.
India is the world’s sixth-largest chemical producer, and the sector makes up roughly 9% of manufacturing output (GVA). It covers over 80,000 commercial products.
The important bit is who uses these chemicals. The CSEP paper found that the biggest customer of the chemical industry is the chemical industry itself (29%), since one factory’s output is another’s raw material. Rubber and plastics take 18%, pharma 13% and electrical equipment about 7%.
That makes chemicals a chokepoint. If chemical inputs get costlier, scarcer or harder to import, the effect travels quietly through medicines, packaging, textiles and electronics. It’s like a pipe that supplies water to a whole building: a problem in the pipe is felt on every floor.
2. Why India reached for the QCO
Every wall begins with a fear, and this one was easy to understand.
Imagine you run a pharma company in 2020. Orders are pouring in, but your factory suddenly stalls. The chemical intermediates you need, the building blocks of your medicines, are stuck somewhere in a Chinese port. You have the machines, the workers and the customers. What you don’t have is the ingredient. You realise that a single country holds a very large key to your business.
That wasn’t a one-off scare. It was a glimpse of a deep dependence. In 2023, India bought about $75 billion of chemicals from the world and sold only $44 billion, leaving a gap of $31 billion. China alone supplies 30-35% of those imports. In pharma, the reliance gets sharper: roughly 76% of bulk drug imports and around 87% of antibiotic inputs come from there.
Now add a second frustration. Indian producers kept saying that foreign sellers were dumping, meaning they unloaded surplus stock at very low prices that local factories couldn’t match. Some of those imports also didn’t have to meet the standards Indian makers were held to. A local factory was running a race with heavier shoes on.
So policymakers reached for a tool that sounded both sensible and hard to argue with: the Quality Control Order. A QCO says a product cannot be sold in India unless it carries BIS certification, and domestic makers and importers both have to comply. On paper, everyone plays by the same rules. In practice, a foreign supplier often finds the certification slow and expensive, so the QCO quietly doubles as a speed bump for imports.
The speed at which these speed bumps multiplied is what stands out:
- Products under QCOs rose from fewer than 70 in 2016 to nearly 800 by 2025.
- Chemical QCOs went from almost none before 2018 to 52 by 2024.
- By 2024, 57% of chemical-using firms had a QCO on at least one of their inputs.
Then came second thoughts. In 2025, the government revoked 14 chemical QCOs, including those on terephthalic acid and ethylene glycol. But dozens remained in the pipeline across other sectors.
Quick context: India has a long habit of shielding industry from imports, from the licence-raj era to today’s push for self-reliance. QCOs are the latest chapter. Their appeal is that they look like quality regulation rather than a trade barrier, which makes them easier to justify and harder to challenge.
3. The paradox: bigger sales, thinner value
This is the most interesting finding in the paper. When QCOs apply to the inputs a firm buys, two things happen together:
- The value of production goes up by about 10%.
- Gross value added (GVA) falls by about 37%.
That looks contradictory, so here’s a chai-stall example. Say you sell tea worth ₹100 and spend ₹70 on milk, sugar, tea leaves and gas. Your production value is ₹100 and your GVA is ₹30, which is what you actually created.
Now a rule makes your milk costlier. You raise the tea price to ₹110, so your sales look better. But if the ingredients now cost ₹95, your GVA drops from ₹30 to ₹15. You sold more rupees’ worth of tea and created less real value.
That is the pattern in chemicals. Restricted sourcing raises input costs, firms pass part of it on as higher prices, and the revenue line goes up. But no extra efficiency was created. The economy just became more expensive.
What about QCOs on finished products, the ones meant to improve quality? The paper found no statistically significant effect on production, GVA or profits. So the rule’s stated purpose isn’t showing up in the firm-level financial data.
There’s another twist. In organic chemicals, capacity utilisation fell from 73% (FY19) to 64% (FY24). In dyes and pigments it dropped from 78% to 58%. In plain words, Indian factories already had spare capacity. QCOs weren’t fixing a shortage. They were shielding capacity that wasn’t being fully used, and the bill went to downstream buyers. India’s chemical exports haven’t risen meaningfully as a result either.
A fair caveat: the authors say these are associations, not proven cause and effect, though the pattern held across several robustness checks. Also, QCOs may deliver benefits that are hard to see in company accounts, such as fewer substandard products reaching consumers.
4. Small firms pay the bill, large firms cope
The paper splits firms at ₹50 crore turnover, and the results differ sharply:
Large and medium firms
- With input QCOs, production rises about 10%, but they too take the ~37% GVA hit.
- With output QCOs, the effect is not statistically significant.
Small firms
- With input QCOs, production and GVA don’t change much, but profits fall by almost half.
- With output QCOs, GVA drops by about 44% and profits by about 59%.
The reason is bargaining power. Large firms can pass higher costs to customers, afford certification, negotiate with suppliers and absorb shocks. Small firms sit on thin margins and can’t do most of that. A cost that is an irritation for a big company can be a survival question for a small one.
There is also a political-economy angle. The paper cites research suggesting large firms in QCO-covered sectors sometimes support these rules, because they know smaller rivals will struggle with compliance. Over time, that shifts market share from small to large and makes an already concentrated sector more concentrated. Steel saw a similar story, and some steel QCOs were rolled back in late 2025 after pushback.
This matters because small firms aren’t a side note. Behind the well-known listed names sits a large base of MSMEs making the intermediates that bigger companies depend on. Weaken that base and the whole chain gets more fragile, and larger firms end up with fewer suppliers and less competition.
5. The China+1 dream and the road ahead
Since the pandemic and the Galwan standoff, global pharma and agrochemical companies have been looking for an alternative manufacturing base to China. India is a strong candidate: skilled engineers, competitive costs, a large home market and improving regulatory standards. Companies such as PI Industries, SRF, Navin Fluorine and Aarti Industries have already benefited from contract manufacturing orders.
But there is a catch. Winning “China+1” orders means being cost-competitive on the world stage, and that depends on cheap, dependable access to inputs. If QCOs raise input costs for Indian manufacturers, they may make India less attractive to the very buyers it wants to win.
A useful comparison is Vietnam. It became a major manufacturing hub partly by staying open to imported inputs (including from China) and then exporting finished goods. Indian firms that must pay more for inputs than their rivals do are competing with one hand tied.
The reasons to worry aren’t only domestic. The West Asia crisis has reportedly pushed some Indian importers toward more Chinese sourcing, and US tariff policy keeps shifting. That is a lot of uncertainty for a small manufacturer to carry.
So what could work better?
- Target the problem. Anti-dumping duties, temporary safeguards or product-specific testing deal with dumping and quality directly, without taxing every input.
- Regulate the final product, not every ingredient. Consumer safety mostly depends on what reaches the customer.
- Build capability, not walls. Incentives for higher-value chemicals like fluorochemicals and battery materials help India move up the chain instead of staying stuck in bulk products. (India converts about 95% of its propylene into polypropylene, versus 70% globally.)
- Help small firms comply. Faster BIS processes, subsidised testing and longer transition periods reduce the burden.
- Review the evidence. Every QCO should be checked against real outcomes, as the 2025 rollbacks showed is possible.
Conclusion
The QCO story isn’t about good versus bad. India’s concern about cheap dumping and weak quality is legitimate, and a country that depends on one supplier for most of its antibiotic inputs has reason to want resilience.
But protection is not free. Someone always pays, and in chemicals the payer appears to be the downstream manufacturer, especially the small one with no room to negotiate. The numbers point to higher sales figures, sharply lower value creation, no clear quality gain from finished-product QCOs, and a market tilting toward the biggest players.
The lesson goes beyond chemicals. The best industrial policy isn’t the one that blocks the most imports. It’s the one that makes Indian firms better at making things, and blunt tools rarely do that. As the remaining 28 chemical QCOs and the many others in the pipeline come up for review, the real test will be whether policy follows the evidence.
Disclamer- This content is for informational and educational purposes only and does not constitute investment, legal, or tax advice. Please consult qualified professionals before making any financial decisions. MintWit Financial Services LLP is an AMFI-registered Mutual Fund Distributor (ARN-283168); however, all investments are subject to market risks and returns are not assured.
