Friedman’s pencil lesson guides Economic Survey’s caution on India’s QCO push

New Delhi: Invoking economist Milton Friedman’s famous 1980 lecture to highlight the deep interconnectedness of global production systems, the Economic Survey 2025–26 on Thursday backed the government’s expanding use of quality control orders (QCOs) as a key pillar of India’s manufacturing and export strategy. It, however, cautioned that poorly designed or hastily implemented quality mandates could trigger cost shocks, disrupt supply chains and weaken competitiveness, particularly for small businesses.

The survey argued that quality is now as critical as cost-competitiveness, if India is to position itself as an indispensable part of global value chains.

The warning gains significance as the government has withdrawn 50 QCOs following the recommendations of a NITI Aayog committee chaired by former cabinet secretary Rajiv Gauba in October last year.

Drawing on Friedman’s observation that no single individual can make even something as simple as a pencil—since its production depends on the coordinated effort of thousands of people across countries—the survey said that regulations introduced without comprehensive value-chain assessment risk creating cascading effects that raise costs and erode competitiveness across downstream industries.

“QCO is a key pillar of India’s manufacturing and manufacturing as quality is now as critical as cost competitiveness if India is to position itself as an indispensable part of global value chains,” it said.

The survey has used the reference to caution that regulatory interventions at one point in the supply chain can ripple through the entire production ecosystem if not carefully designed.

The survey noted that India has significantly expanded its mandatory quality assurance framework in recent years. As of 31 December 2025, a total of 143 QCOs covering 723 products have been notified by various ministries, more than tripling coverage from just 214 products in 2019.

However, as Mint report on 17 January, India now has just 712 products under the QCO regime, compared with a peak of 761 in March 2025.

These orders mandate conformity with specified quality standards, with an aim to protect consumers, avoid market distortions, and align domestic production with global norms.

In an international environment marked by tightening technical regulations and rising scrutiny of product standards, the survey said, “QCOs play an important role in mitigating reputational risks arising from inconsistent or substandard quality. By curbing the influx of inferior imports, QCOs help level the playing field for domestic firms that invest in quality and compliance.”

The survey cited improved outcomes in sectors such as toys, transformers, footwear and cement, where the introduction of QCOs has reduced the circulation of substandard products and supported long-term improvements in manufacturing standards.

The toys sector was highlighted as a clear example of how quality regulation, when combined with supportive tariff policy, can drive structural change. Following the introduction of a QCO for toys in 2020, along with higher customs duties and mandatory testing of import consignments, India witnessed a sharp decline in toy imports and a surge in exports.

“The experience of sectors such as toys bears ample testimony to the fact that quality control orders are beginning to work as intended. QCOs have significantly reduced the entry of hazardous and poor-quality products, including low-grade imports that tended to distort the market, by setting a bare minimum quality standard,” Vivek Singhal, co-founder & chief executive, BIDSO, a B2B toys manufacturer, said. “More importantly, they are encouraging manufacturers to move beyond short-term cost optimization and focus on process and quality enhancement. The net effect is that of a healthy manufacturing environment where quality becomes a non-negotiable norm, even as challenges in the implementation of the same continue to exist, especially in the case of small-scale enterprises.”

Between FY15 and FY23, toy imports fell by 52%, while exports rose 239%, with India turning into a net exporter of toys from FY21 onwards, it stated. The survey attributed this shift largely to quality regulation, enabling domestic manufacturers to scale up and meet international benchmarks.

Beyond trade competitiveness, the survey underscored that consumer and workplace safety provide a strong justification for mandatory standards. QCOs covering products such as electrical appliances and helmets were described as essential for protecting public welfare and sustaining market confidence. The government plans to reinforce this framework through enhanced surveillance, expanded testing infrastructure and digitised certification systems.

However, the survey stressed that mandatory certification is not cost-free, and must be grounded in economic practicality. Micro, small, and medium enterprises (MSMEs), which form a significant part of India’s industrial base, often lack the capital to establish in-house testing facilities or rapidly adapt to new certification requirements. Narrow transition timelines, the survey cautioned, can lead to production delays, supply disruptions and higher inventory costs, undermining the very firms QCOs are intended to support.

“The risks become more pronounced when QCOs extend to raw materials and intermediate inputs. Modern manufacturing is deeply integrated with global suppliers, and mandating certification for specialised intermediates or spare parts—especially when domestic alternatives are limited or absent—can have unintended consequences,” it said.

The survey cautioned that such measures could disrupt critical downstream sectors including automotive, power and electronics, and therefore require exceptional care and flexibility in design.

This was among the reasons why, following the recommendations of the NITI Aayog committee, the Centre withdrew 14 QCOs in a single day in November last year. The QCOs were rolled back for a set of petrochemicals and industrial raw materials, most of which are imported and used as inputs in the manufacture of downstream products.

The rollback had reduced the number of products covered under mandatory QCOs to 744 from 761, even as the Centre had earlier indicated plans to bring more than 700 additional products under compulsory quality standards in FY26.

The move stood out, as it coincided with a renewed public push by the Centre for quality-driven manufacturing. Speaking at Udyog Samagam 2025 in November, commerce and industry minister Piyush Goyal reiterated that Quality Control Orders remain central to India’s efforts to ensure that high-quality, globally competitive products reach consumers.

The survey called for a forward-looking QCO framework that incorporates rigorous pre-notification assessments, calibrated transition periods—especially for MSMEs—adequate national testing capacity and close alignment with industry-readiness. Where sufficient domestic production capacity does not exist, it said, “the framework should allow exemptions or alternative pathways for specialised inputs, raw materials, spare parts and R&D-related imports.”

Also, the survey acknowledged that recent regulatory decisions reflect a growing willingness on the part of the government to recalibrate QCOs where necessary. This balanced and adaptive approach, it said, would allow quality regulation to function as a strategic enabler rather than a constraint, strengthening India’s manufacturing capabilities while preserving cost competitiveness and supply-chain efficiency in an increasingly complex global trading environment.