Indian Quality Control Orders: A Cause of Concern for ASEAN

Prateek Bansal & Jatan Mudgal

Introduction

India has decided to prioritise domestic manufacturing and become economically self-reliant. Various schemes and policy measures like Production Linked Incentive (PLI) Schemes, Make In India, etc., have been undertaken to implement this decision. To ensure the quality of such goods manufactured in India and also of the imported goods, the Government of India has adopted the policy of issuing Quality Control Orders (QCOs). Being part of the globalised world, India has also made international commitments to its trade partners. Recently, some ASEAN countries like Thailand, Vietnam and Philippines have complained at the World Trade Organisation (‘WTO’) that import restrictions in the QCOs are causing delays and hurting their trade interests in India. This has created a conflict between protecting domestic interests and fulfilling international commitments. India's foreign policy has long prioritized deeper economic integration with ASEAN nations. In the present article, we shall discuss the reasons for such policy conflict and also suggest possible approaches to resolve it.

India’s Quality Assurance and Standards Regime

Under the Bureau of Indian Standards Act, 2016 (‘the BIS Act’), the Bureau of Indian Standards (‘BIS’) is the national standards body inter alia responsible for the development of quality assurance measures and issuance of certificates for such purposes. Indian Standards established by the BIS are the basis for such quality assurance, and the products complying with such standards are allowed to bear the relevant Standard Mark and the manufacturer of such products is granted a certificate of conformity (CoC) by the Director-General of the BIS. Section 16 of the BIS Act empowers the Central Government to notify goods which shall compulsorily confirm to the relevant Indian Standards. The QCOs are issued by the government under this provision, and the domestic and international businesses are required to comply with such QCOs if they wish to sell the notified goods in India. Under the Foreign Manufacturers Certification Scheme (FMCS), the foreign manufacturers are required to obtain a Licence to use the ‘ISI’ mark and Certificate of Conformity (CoC) with Indian Standards from BIS. The process of grant of such a licence and CoC has been laid down in various ‘schemes’ in the BIS (Conformity Assessment) Regulations, 2018 (‘the Regulations’). When a QCO is notified by the government, it specifies the goods for which it is mandatory to bear of ISI mark and to obtain a test certificate, CoC, etc. The scheme of the Regulations under which the manufacturer shall make the application is also specified in the QCO.

Once an application has been made by the foreign manufacturer, the BIS has to conduct a physical audit of the manufacturing facility of the applicant to verify the production process and to draw a verification sample for third-party laboratory testing. Licence to use the ‘ISI’ mark and the CoC is granted only after this step is completed. Throughout this process, the foreign manufacturers incur a lot of costs, especially in preparing the relevant test results to demonstrate compliance with the relevant Indian Standard. Hence, such foreign manufacturers desire that their applications are promptly processed by the BIS and that the acceptance or rejection of the application should be done in a timely manner. The ASEAN countries have alleged that there has been a deliberate delay from the Indian authorities (BIS) in conducting the physical audits at the sites of the manufacturers based in such countries. India should address these complaints after properly assessing its obligations under international trade law and the consequences if such complaints are escalated.

International Trade Commitments: ASEAN Free Trade Agreement & WTO Agreements

India has made international trade commitments to two multilateral forums: ASEAN and WTO. With ASEAN countries, India has entered into a Free Trade Agreement (FTA), and the Agreement On Trade In Goods (‘Goods FTA’) is an important part of such FTA. Article 8 of the Goods FTA states that any party to the agreement shall not institute or maintain any non-tariff measure on the importation of goods from the other parties, and non-tariff measures, if any, shall be transparent. Article 8.2 provides that parties shall continue to have their rights and obligations under two agreements in the WTO Agreement: Agreement on Technical Barriers to Trade (‘ATB Agreement’) and the Agreement on the Application of Sanitary and Phytosanitary Measures. As part of the WTO framework, the ATB Agreement provides in its Preamble that no country should be prevented from taking measures necessary to ensure the quality of its exports, or for the protection of human, animal or plant life or health, of the environment, or for the prevention of deceptive practices. But Article 2.1 contains the following restrictions:

1. technical regulations and standards, and methods for certifying conformity with technical regulations and standards do not create unnecessary obstacles to international trade 
2. measures necessary to ensure the quality of its exports, or for the protection of human etc., are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries

In case of dispute between member countries on technical regulations like QCOs, the dispute resolution mechanism provided in Article 14 of ATB Agreement may be invoked, if the Complaining Party considers that its trade interests are significantly affected. At first stage, parties try to resolve the issue by Consultations. If that fails, the WTO Committee on Trade and Development investigates and attempts to resolve it. On non-resolution, the WTO Committee either forms a technical expert group or establishes a Dispute Resolution Panel at the request of any party.

The direct implication of the above provisions and the grievances of the ASEAN nations might be that the QCOs may be seen as the trade distorting non-tariff barrier, contrary to India’s commitments under international trade regime. If the physical audits are not conducted by the BIS in a timely manner, the entire regime of QCOs could be jeopardized should the dispute escalate and the WTO may hold the QCOs scheme to be contrary to Article 2.1 of the ATB. 

India is no stranger to the WTO Dispute Resolution mechanism, and in fact one of the major setbacks to our import policy was dealt in a dispute with the USA under the Agreement on Subsidies and Countervailing Measures (‘SCM Agreement’). USA had complained that the exemptions given by India to its exporters from customs duties on importation under various schemes like EOU, EHTP, BTP, EPCG, SEZ Scheme, DFIS and MEIS duty scrips were in violation of the SCM Agreement. The Dispute Settlement Panel concluded that such exemptions are subsidies contingent upon export performance, and thus inconsistent with the SCM Agreement. Thus, to protect the domestic policy of quality control, it's imperative that efforts are taken to address the concerns of ASEAN countries, and timely physical audits by BIS are ensured.

Conclusion

The scheme of QCOs has highly important imperatives to ensure the quality of goods that are manufactured and imported in India. The supply chain disruptions during COVID-19 and escalating US-China trade tensions highlight the strategic importance of robust trade relations with ASEAN members. While India seeks to strengthen these ties, it must balance its commitments related to international trade and international relations vis-à-vis its domestic quality assurance and manufacturing growth.

Prateek Bansal, Partner, White & Brief – Advocates & Solicitors, with assistance from Jatan Mudgal, Associate, White & Brief – Advocates & Solicitors