The government has rolled back 76 quality control orders (QCOs) with the stated objective of improving raw-material access for downstream industries and MSMEs, which form the backbone of India’s manufacturing ecosystem, and attempting to increase the ease of doing business is important for sustained growth and domestic value addition. However, a blanket rollback of QCOs across sectors, without a sector-specific assessment, cannot address the deeper structural constraints that determine long-term competitiveness in manufacturing. In some cases, it may even inadvertently amplify existing disadvantages faced by the domestic industry.
The withdrawal of the QCO on viscose staple fibre (VSF) illustrates this concern. VSF is a bio-degradable and sustainable fibre that serves as an important complement to cotton within India’s textile basket, currently accounting for about 6 per cent of India’s total fibre consumption. Domestic producers meet nearly 90 per cent of India’s VSF demand and possess sufficient installed capacity to service the domestic market fully. While the rollback of the QCO may increase the share of imports, imports cannot substitute a reliable domestic source of supply, particularly given their exposure to external risks such as supply disruptions and price volatility.
Domestic VSF manufacturers, therefore, remain the principal suppliers for downstream yarn, fabric and garment producers. Despite this, domestic VSF producers face persistent structural cost disadvantages that transmit through the value chain, raising input costs for downstream industries and undermining overall competitiveness.
Under the current tariff framework, dissolving grade wood pulp (DGWP), the primary raw material for VSF production, attracts a basic customs duty (BCD) of 2.5 per cent. Since DGWP accounts for nearly 60 per cent of VSF production costs, the imposition of BCD, along with an applicable cess of 10 per cent, raises the effective duty on this critical input. At the same time, finished VSF imported from ASEAN countries enters India at NIL BCD under the ASEAN-India Free Trade Agreement, creating an inverted duty structure. This structure increases the cost of domestic production while implicitly incentivising imports of finished products, placing Indian manufacturers at a systematic disadvantage.
Moreover, ASEAN producers, particularly in Indonesia, procure key inputs such as wood pulp, sulphur and natural gas at zero duty, whereas Indian manufacturers pay customs duties on these raw materials. In addition, domestic producers pay 18 per cent GST on wood pulp, while finished VSF and viscose yarn are taxed at 5 per cent. This tax inversion further tilts incentives in favour of importing finished products rather than manufacturing them domestically. Persistence of such tax-driven distortion pushes the Indian economy towards dependence on Chinese and ASEAN suppliers.
If the policy objective is to enable fair competition, regulatory parity on tariffs for inputs between domestic and foreign suppliers is essential. To provide a level playing field between domestic manufacturers and imports from Chinese and ASEAN suppliers, it is critical to address domestic challenges such as inverted duty structures, which burden the domestic manufacturers in such a critical sector. Persistence of such tax-driven distortion pushes the Indian economy towards dependence on Chinese and ASEAN suppliers.
The goal of improving competitiveness is timely and important. But QCO withdrawal, by itself, cannot deliver this outcome
Enabling imports alone is not a comprehensive solution to improving raw material access. Ensuring reliable and cost-competitive availability from upstream domestic producers remains a sustainable and viable option for downstream industries. Excessive reliance on imports to meet intermediary demand also carries significant systemic risks. The Covid-19 pandemic demonstrated how dependence on external suppliers, particularly in concentrated markets such as China and ASEAN, can disrupt domestic value chains during a crisis. Temporary export restrictions on pharmaceutical intermediates led to sharp price increases in drugs, such as paracetamol and azithromycin, straining India’s pharmaceutical supply lines. Similar disruptions were observed in the automotive sector due to shortages of semiconductors, wiring harnesses and other components. More recently, China’s export restrictions on rare-earth magnets, which are critical for electric mobility, renewable energy, precision manufacturing and defence applications, have once again highlighted the vulnerabilities associated with dependence on foreign-controlled upstream inputs.
These episodes reflect a consistent pattern: when critical intermediates are sourced predominantly from abroad, even limited global disruptions can destabilise domestic industries, depress capacity utilisation and weaken export competitiveness. Strengthening the competitiveness of upstream manufacturing is, therefore, integral to improving overall cost efficiency and supply-chain resilience.
The goal of improving competitiveness is timely and important. But QCO withdrawal, by itself, cannot deliver this outcome. The VSF case shows that structural issues, such as inverted duties, raw-material taxation and FTA asymmetries, directly shape both MSME competitiveness and the viability of upstream manufacturing. If India is to strengthen its textiles sector and avoid slipping into a mere assembling-based structure, policy interventions need to be tailored to sector-specific issues and aligned with long-term industrial resilience rather than short-term cost adjustments.
The author is president, Centre for Domestic Economy Policy Research (C-DEP.in)