Economics has played a significant role in the bilateral relations between India and Bangladesh. The economic relations between the two countries have been multifaceted, embracing trade transactions, credit arrangements, joint ventures, transit facilities and transport development. These relations have continued and expanded even in situations of adverse political relations. This is mainly because of the operation of objective factors like geographical proximity, common language, similarity of consumption pattern, common development needs and experience, and commonality of the inherited infrastructure.
Closer economic ties benefit both countries and have an overall stabilising effect on the political relations between them. On the other hand, economic relations are influenced by the climate of political relations. Because of the asymmetric size and strength of the two countries, political relations cast a deeper shadow on economic ties than would be the case other-wise. An eminent Bangladeshi economist, Nurul Islam, who was the first Deputy Chairman of the Bangladesh Planning Commission, has put it very succinctly: “Indo-Bangladesh relations are, therefore, likely to hold out greater prospects if they are anchored within the broader framework of political and strategic relation-ship.”
IN the gamut of economic relations, trade transactions have played a special role. This has emerged as a dynamic factor in recent years, particularly after 1982 when Bangladesh embarked upon the path of liberalisation. India has been the major beneficiary of the trade relations between the two countries. Bangladesh is one of the most important markets for India’s exports. For the past several decades, it has been the largest export market for India in the SAARC region. During 1985-90, the growth rate of Bangladesh’s trade with India was higher than that with the world and SAARC countries as a whole. During the period 1988-89 to 1992-93, whereas India’s total exports increased by 164 per cent, the increase in exports to Bangladesh was 293 per cent. In 1995, India jumped to the first position among exporters to Bangladesh, with China being a distant second. India maintained the first rank until 2005-06 after which it was overtaken by China. China has remained in that position until now. In 2011-12, India’s total exports to Bangladesh reached the level of 5.84 billion dollars. To this should be added the substantial volume of illegal exports which, according to some estimates, are as high as legal exports, and the sizeable amount of trade in services for which estimates are not available. Thus, India’s total earnings from trade with Bangladesh, both legal and illegal and in goods and services, may very well be in the range of 14 to 15 billion dollars per annum. This makes Bangladesh one of the most important export markets for India in the world.
Bangladesh’s exports to India, on the other hand, have been a very small percentage of its imports from India. The percentages in 2007-08 and 2008-09 were 8.8 and 9.11 respectively. There is a recent trend of impressive growth in Bangladesh’s exports to India. In the year 2011-12, Bangladesh’s exports to India reached the level of 584.64 million dollars. However, they still remain a very small percentage of Bangladesh’s imports from this country.
In spite of the impressive performance in the trade front recently, the full potential of economic cooperation between the two countries remains to be realised. Except during the first four years after the liberation of Bangladesh, there has been a lamentable lack of planned and concerted efforts on the part of the two governments to nurture their economic relations and impart dynamism to them. These relations have, by and large, grown on their own, dictated by the logic of the market forces.
The minimum necessary legal and institutional infrastructure for underpinning economic relations between the two countries has long been in place. These include bilateral trade agreement, periodic trade review meetings, Joint Economic Commission, Joint Rivers Commission, and Inland Water Trade and Transit Agreement. Besides, there are several memoranda of understanding covering cooperation in specific areas. However, in the absence of political push, these institutions have generally remained in suspended animation. There has been a welcome revival of the activities of some of these institutions after 2010 under the present government in Bangladesh.
The economic reforms introduced by Bangladesh in 1982 and by India in 1991 have inevitably brought about changes in the nature and forms of economic interaction between the two countries. For one thing, the state is now playing a far diminished role in economic cooperation which now rests more and more with private enterprises. However, the private enterprises of the two countries, on account of the burden of their past suspicious attitudes towards each other and the lure of the markets of developed countries, have not responded adequately to the opportunities opened up by the process of liberalisation. Moreover, since the trade liberalisation in both the countries pro-ceeded on an MFN basis, the stronger economic partner, that is, India, gained more from it than the weaker one, that is, Bangladesh.
INDO-BANGLADESH TRADE has remained lopsided, dominated by Indian exports, with Indian imports from Bangladesh occupying very low levels. The trade deficit which was 476 million dollars in 1980 increased to 140 million in 1990 and then to nearly a billion in 2000. It further increased from 1.5 billion dollars in 2003-04 to three billion dollars in 2007-08. The latest available figures for 2011-12 show a trade balance in favour of India, of the magnitude of 3.2 billion dollars.
This massive trade balance in favour of India should, however, be viewed in the proper pers-pective. Any attempt by a country to balance its trade separately with each of its trading partners will amount to the negation of the very concepts of free trade and comparative advantage. Because of the operation of these factors, India has had for decades a persistent imbalance in its trade with almost all major developed countries. Bangladesh also runs adverse balance of trade with several countries. In fact, its largest trade deficit today is with China. In the year 2008, its trade imbalance with China was equivalent to 3.8 billion dollars as against 2.8 billion dollars with India.
It is the overall balance of trade of a country and not the balance with individual trading partners that has macro-economic implications. Even an overall trade imbalance need not be of much concern if it can be offset by capital inflows and other forms of transfers from abroad. Moreover, trade benefits both partners, even if it is imbalanced. For, imports can be as important for an economy as exports. They can help export efforts and the general growth of the economy and act as an anti-inflationary force which benefits consumers and assists producers in remaining competitive both in the domestic and foreign markets. In the case of Bangladesh, a high percentage of its imports from India is in the nature of inputs, that is, cotton yarn and textiles, meant for the production of its main export item, that is, readymade garments. Besides, imports from India are market driven as they are cheaper and of higher quality than from other sources.
However, in spite of the soundness of these arguments, Bangladesh’s persistent and massive negative balance of trade with India does have important adverse implications. As psychological and political factors play an important role in the relationship between the two countries, the large trade imbalance with India readily becomes susceptible to exploitation by political
parties, which can adversely affect future trade flows between the two countries.
Unilateral Trade Concessions by India
BANGLADESH has contended over the past several years that high levels of Indian tariffs on products of export interest to it have been a major constraint to its effort to expand its exports to India. It is true that even after successive phases of external trade liberalisation commencing from 1991, Indian tariffs on an average are higher than those of Bangladesh. Besides Bangladesh has reduced tariffs at a faster rate and maintained a lower tariff regime over a longer period than India. This is an important factor lending justification for India extending unilateral trade preferences to Bangladesh. A far more important justification is that the growth and prosperity of Bangladesh would in the long term redound to the benefit of India and would also be a major factor in bringing stability to the region as a whole. To the extent that exports contribute to growth and prosperity, it is in India’s interest that there is a steady growth in Bangladesh’s exports. India can make its own contribution in this regard by substantially increasing its off-take of Bangladesh’s products. Finally, because of India’s competitive advantage in exporting to Bangladesh, India can proceed on the assumption that a substantial part of an increase in Bangladesh’s earnings from trade with India will be devoted to imports from the latter. Extension of unilateral trade preferences by India is also likely to help in reducing the trade gap between the two countries which will have a beneficial spill-over effect on the political relations between the two countries. It is very unlikely that if India establishes a unilateral free trade regime for Bangladesh’s products, there will be a flooding of exports from Bangladesh to India and thereby a disruption of the domestic industry in India. This is because of the numerous problems that Bangladesh faces in mobilising export supplies, mounting an effective export promotion drive and over-coming the transport and other infrastructural bottlenecks.
For several years, India adopted an incremental approach in responding to Bangla-desh’s request for duty-free entry of its goods into the Indian market. It did extend tariff concessions to Bangladesh from time to time but they were always too late and too little. At the Commerce Secretary-level talks in Dhaka in April 2002, duty-free access to 40 out of 121 items on Bangladesh’s request list was provided. Later, India agreed to allow duty-free entry for 39 more items. Bangladesh did not find these concessions of much significance as these did not include most of the items of export interest in which it enjoyed competitive advantage like jute and jute goods, footwears, readymade garments, knitwears, ceramic products etc. On the other hand, the Government of India also got frustrated because it felt that there was no appreciation for the concessions given by it in the face of what it considered to be formidable domestic opposition. Therefore, at a meeting of Commerce Secretaries held in New Delhi in late March 2003, India indicated to Bangladesh that further trade liberalisation would be possible only within the framework of a bilateral free trade agreement (FTA), of which India subsequently submitted a draft.
At the 14th SAARC Summit held in New Delhi in 2007, India announced its decision to grant duty-free access to all imports from Bangladesh that were not in the negative list of India under the SAFTA. At the time of the operationalisation of the SAFTA in 2006, India’s negative list for imports from Bangladesh consisted of 763 items. In 2007, it was reduced to 744 and in 2008 to 480. There were further reductions subsequently, the last two being of 47 items at the time of Sheikh Hasina’s visit to India in 2010 and of 46 textile items during Prime Minister Manmohan Singh’s visit to Dhaka in 2011. With this, practically all the items in which Bangladesh has export interest in the Indian market have been removed from the negative list. There is, therefore, little rationale for maintaining the negative list at all. The Prime Minister of India would have been well advised to declare during his visit in 2011 that there will be no negative list for Bangladesh and that henceforward Bangladeshi exporters should treat the entire Indian market as an extension of their domestic market. This would have enhanced the prospect of Bangladesh narrowing the trade gap with India, and provided incentives to Bangladeshi manufacturers and their Indian and foreign collaborators to invest in industrial development in Bangladesh with an eye on the vast Indian market.
Case for a Bilateral FTA
INDIA’S proposal for an FTA with Bangladesh still remains under the latter’s consideration. Bangladesh’s lukewarm attitude towards an FTA with India could be partly because of its expectation that under international pressure and in its own enlightened self-interest, India would, in any case, extend duty free access to imports from Bangladesh without reciprocity. This has in fact come to materialise to a considerable extent as a result of India’s successive reductions of its negative list under the SAFTA, which is of interest only to Bangladesh, as the other least developed countries of South Asia already enjoy duty free access to the Indian market.
An FTA is no panacea for dealing with trade problems, including that of trade imbalances between two countries. Besides, designing an FTA between two countries placed in a highly asymmetrical economic position as India and Bangladesh are, is by no means going to be an easy task. At the same time, there are obvious advantages in an FTA which cannot be ignored and which the extension of unilateral tariff concessions cannot ensure. Some of the advantages for Bangladesh of an FTA with India are the following:
(a) Whereas unilateral trade concessions are voluntary and discretionary and can be withdrawn, concessions under an FTA are within a contractual framework and hence more stable.
(b) An assured access to the large Indian market within a long-term contractual framework will be an incentive for Bangladesh to expand export capacity for the products already exported by it to India, and create export capacity for those products in which it has potential competitive advantage in exporting to India, but which currently do not figure in its export basket.
(c) An assured access to the vast Indian market would result in an enlarged flow of foreign private capital including that from India, for investment for building export capacity and export infrastructure facilities in Bangladesh.
(d) An FTA will open up opportunities for specialisation and division of labour between the two countries and thereby the generation of intra-industry trade opportunities.
(e) An FTA is likely to improve the overall competitiveness of the Bangladesh economy through access to the marketing network, skill and technology of Indian manufacturers and trading partners.
(f) Unilateral trade concessions may not provide for the elimination of non-tariff barriers but an FTA, to be true to its nomenclature, must provide for the elimination of such barriers within a time bound framework.
(g) An FTA is likely to substantially reduce illegal imports from India by diminishing their profitability vis-a-vis legal imports. This would eliminate several anomalies that have surfaced in the current trade relations between the two countries.
(h) Because of geographical proximity and commonalties of language and consumption pattern, Bangladesh has a competitive advantage over the rest of India in exporting to the North-Eastern part of India. With the implementation of the FTA with India, this advantage would come fully into play, assuming that other barriers to trade like the cumbersome customs formalities and transport bottlenecks are also removed.
(i) Finally, an FTA can, and will most probably, contain measures for deeper integration of the economies of the two countries, including trade facilitation measures; mutual recogni-tion, certification and harmonisation of standards; cooperation for the building and upgradation of transport facilities; liberali-sation of investment flows and of trade in services; monetary and financial cooperation and coordination of macro-economic policies. Bangladesh as a less developed country is likely to gain more than India from these measures of deeper integration.
However, the extent to which Bangladesh can derive the above benefits will depend largely on how the FTA with India is designed. In order to enable Bangladesh to derive maximum benefits from an FTA with India and make it really worthwhile for it, the following features must be included in it:
(1) The speed of liberalisation should be faster by India than
by Bangladesh in order to provide a level playing field to the latter. This has already become a reality on the ground because of the unilateral concessions recently extended by India.
(2) Free trade must provide for the elimination, within a time-bound framework, of all non-tariff barriers, including administrative regu-lations and taxes which discriminate against bilateral trade. A suitable mechanism should be created to identify such barriers and monitor progress in their elimination on a regular basis.
(3) The negative list should be confined to a few commodities justified exclusively on security and health grounds and not on protectionist or revenue grounds. This is also already a fait accompli by the action recently taken by the Government of India.
(4) If tariff quotas are resorted to for the import of sensitive items like readymade garments, there should be a provision for phasing them out within a time-bound framework and allowing all imports duty-free.
(5) If there is a provision in the FTA for special safeguards, Bangladesh should be given greater flexibility with regard to sector coverage, duration of safeguards, establish-ment of injury etc.
(6) The FTA should include measures for deeper integration, particularly trade facilitation and investment promotion.
(7) It should provide for a regular dialogue between the Finance Ministers of India and Bangladesh for a better understanding of the changes in the two countries’ macro-economic policies in the areas of tariffs, exchange rates, interest rates, administered prices and subsidies.
(8) India should establish, within the framework of the FTA, a sizeable fund of the magnitude of at least five billion dollars for investment in Bangladesh in order to improve and strengthen its infrastructure and for capacity building for export production and human resources development.
Progression to CEPA
AN FTA between India and Bangladesh should be a part of a wider arrangement for cooperation in other related areas, particularly management of water resources, science and technology, energy, environment and natural disasters. To this end, the two countries should enter into a Comprehensive Economic Partnership Agreement (CEPA) of which the FTA could be the kingpin and cooperation in areas outside trade, the other key components. In spite of suggestions for negotiating a CEPA between the two countries made by independent experts, neither of the two governments has displayed any eagerness to embrace it. Perhaps political considerations are coming in the way of either of the two countries mooting this idea formally to the other. However, a hint that they might be moving in this direction is contained in the following paragraph of the Joint Communiqué signed on the occasion of Sheikh Hasina’s visit to India in January 2010:
“The two Prime Ministers agreed to put in place a comprehensive framework of cooperation for development between the two countries, encapsulating their mutually shared vision for the future, which would include cooperation in water resources, power, transpor-tation and connectivity, tourism and education.”
Another significant development towards putting in place an institutional framework for exploring new avenues and approaches to mutual economic cooperation was the signing, during the Indian Prime Minister’s visit to Dhaka in September 2011, of a Framework Agreement on Cooperation for Development. An important provision of this Agreement is the establishment of a Joint Consultative Commission for its effective and smooth implementation. The Commission will function under the leadership of the Foreign Ministers of the two countries. It is encouraging that the Foreign Ministers have already met twice under the aegis of this Commission.
Under the Framework Agreement on Coope-ration for Development, the two countries can, if and when they muster the necessary political will, negotiate an FTA or a CEPA which, apart from providing for free trade, can include the measures of deeper integration described above. If and when a CEPA is negotiated between the two countries, it must include provisions for cooperation for the optimal utilisation of the waters of the common rivers, including for a more effective functioning of the Joint Rivers Commission. Moreover, it should include mandatory provisions for the two countries to come to each other’s assistance in situations of natural disaster, sudden shortage of essential supplies and economic and financial crises.
INDIA has extended credits to Bangladesh since the liberation of the country with brief interregnums without credit. Credits granted during the first few years after Bangladesh’s liberation were under exceptionally soft terms and conditions, mostly as grants and geared to meet the urgent relief and rehabilitation needs of the country. As a result, they were quickly disbursed.
Subsequently Indian financial aid to Bangladesh increasingly assumed the form of export credits. They were offered at more rigorous terms and conditions and their utilisation was tied to supplies from India. There were also bureaucratic delays in processing projects both from the Indian and Bangladesh sides. Moreover, as a least developed country, Bangladesh started receiving credits from international financial institutions and major donors either in the form of grants or under very liberal terms and conditions. This made Indian credits even less attractive to Bangladesh. Due to these factors, there were long delays in the utilisation of the Indian credit, making it necessary for it to be extended from time to time.
If extended as grants and on softer terms and if bureaucratic delays in implementation are removed, credits from India can still play an extremely important role in underpinning the economic relations between India and Bangladesh. Bangladesh can use Indian credits because it is in need of external resources for development and it is faster to get supplies from India than against the credits extended by other countries. Besides, some of the supplies available from India are uniquely suited to meet the requirements of Bangladesh.
A major initiative taken by India in this direction was its announcement, during the Bangladesh Prime Minister’s visit to India in January 2010, of the extension of a credit of one billion dollars to Bangladesh. It was the single largest amount of credit extended by India to any country. It has been granted under very soft terms and conditions with 1.7 per cent rate of interest, 20 years of maturity and five years of grace period. A good proportion of this credit, amounting to about 200 million dollars, is in the form of grants. The projects identified for being financed under this line of credit are mostly in the sector of transport infrastructure. If the facilities for connectivity, granted by Bangladesh during Prime Minister Sheikh Hasina’s visit to India in 2010, become available, India would develop a huge stake in the railway, roadway and riverine infrastructures of Bangladesh. Given this stake, the renovation and expansion of these infrastructures would be equivalent to the expansion and modernisation of India’s own infrastructure. Surely, in the context of the provision, in India’s 12th Five Year Plan, to invest one trillion dollars for the development of infrastructure within the Indian territory during the Plan period, an amount of one billion dollars, committed for the development of transport infrastructure in Bangladesh, is too meagre. If the transit facilities promised by Bangladesh are finally operationalised and if they are to have their full impact on the flow of Indian goods through Bangladesh’s territory, India would require to invest much larger resources, at least in the range of five to ten billion dollars, and that too mostly in the form of grants, for the development of the transport infrastructure in Bangladesh.
Indian Investment in Bangladesh
INDIA can be a very important source of foreign direct investment (FDI) for Bangladesh, thereby contributing to the expansion of its export capacity as well as to the growth of its economy. The Bangladesh Government claims that it maintains one of the most liberal regimes in the developing world for foreign investment. In spite of this, the overall flow of FDI into Bangladesh remains at a very low level as compared to the inflow of FDI into several other developing countries. It is mainly because foreign investors do not feel very secure in investing in Bangladesh. Indian investors are particularly apprehensive on this account.
In 2005, the Tatas put forward a proposal for the investment of close to three billion dollars in Bangladesh for setting
up a steel plant, fertiliser factories and power plants, mainly based on the local supply of gas. It was the largest investment proposal made by any foreign investor to Bangladesh. This led to other Indian companies like Reliance, Mittal and Birlas also showing interest in similar and other projects for investment in Bangladesh. If the Tatas’ proposal would have materialised, many of these other investors would have followed suit. But after keeping the proposal under consideration for about three years, the Bangladesh Government rejected it on the ground that because of the limited gas reserves in Bangladesh, it could not guarantee the supply of gas needed for operating these projects. While one has to accept this explanation at its face value, there are reasons to believe that political factors have also played a role in arriving at this decision. The big-neighbour-small-neighbour syndrome, which impels Bangladesh to look with suspicion at every major initiative for linking its economy with that of India, has also been in operation in the process of decision-making on this issue.
The real breakthrough in Indian investment in Bangladesh will come only if there is a marked improvement in the political relations between the two countries. These relations have no doubt looked up after the Awami League, under Sheikh Hasina, returned to power following the parliamentary election in December 2008. But there is still a long way to go before Bangladesh gets rid of its apprehensions regarding forging really close economic ties with India and before Indian investors are assured about the durability of the improved climate of relations.
Transit of Indian Goods through Bangladesh Territory
THE transit arrangement to transport Indian goods to the country’s North-Eastern part through what has now become Bangladesh’s territory, was operational till 1965. This was disrupted by the India-Pakistan war of 1965 (when East Pakistan, as an integral part of Pakistan, constituted present-day Bangladesh) and has not been restored since then. Some of the infrastructures, through which the goods in transit were carried, have decayed or got disrupted because of sheer negligence and prolonged disuse. After the liberation of Bangladesh, on several occasions India took up with the Bangladesh Government the question of the restoration of these transit facilities, but Bangladesh until now has continued to deny them to India.
Bangladesh has given mainly two reasons in justification for denying transit facilities to India through its territory. The argument which has figured most prominently in the Bangladesh media and the statements of its political leaders has been that India would take advantage of the transit facilities, to transport troops and weapons, which would pose a threat to Bangladesh’s sovereignty. This is patently a false argument because an agreement for granting transit facilities can easily include provisions prohibiting the transport of armed personnel and weapons. Besides, sending this kind of cargo is farthest from India’s intention. Moreover, transit facilities, granted by various countries to each other for the passage of goods through their territory, have not posed any such problems. Thus this argument is only a false alarm raised in Bangladesh. The real reason lies somewhere else. The second argument that the transit of Indian goods through its territory will overburden and even destroy Bangladesh’s transport infrastructures is exaggerated, because transport infrastructures must be seen in the dynamic context of their being constantly updated, improved and expanded in response to growing demand for their use. The grant of transit facilities for Indian goods will, in fact, accelerate this process of upgradation and improvement of the transport infrastructure of Bangladesh, by attracting investment from the Government of India, Indian companies as well as foreign companies.
Bangladesh has also from time to time made the extension of transit facilities to India through its territory conditional upon the solution of political and other problems. This linkage is very short-sighted because it comes in the way of cooperation even in areas where such cooperation is a positive-sum game. Such linkages generally lead to a race to the bottom in economic cooperation and can even have the effect of freezing such cooperation for a long time to come.
There is no doubt that both India and Bangladesh would gain immensely from freedom of transit of Indian goods through Bangladesh’s territory. The following are some of the obvious benefits to the two countries:
India would be able to send goods to its North-Eastern part at a cost much lower than that being incurred presently. This would not only help the consumers but also attract investment in the North-Eastern region, both foreign and Indian, which currently is not taking place due, among others, to high transportation cost in the absence of direct transit route through Bangladesh’s territory. This would remove one of the major bottlenecks for the progress and prosperity of the North-Eastern region and link this region more closely with the mainstream of the Indian economy. This will have an important bearing on the unity and cohesion of the nation.
(a) It would facilitate large scale investment by India for the upgradation of the transport infrastructure in Bangladesh.
(b) It will also lead to large scale investment for the development of the Chittagong and Mongla ports in order to enable these ports to handle the additional volume of Indian cargo.
(c) The reactivation of the transit routes for carrying Indian goods through the Bangladeshi territory would lead to the development of throbbing service activities, like banking, insurance, hotels, rest houses and petrol pumps.
(d) There would be a direct economic gain to Bangladesh by way of transit fees which, according to most conservative estimates, would amount to at least one billion dollars per annum.
(e) With the acceleration of growth in the North-Eastern region of India, Bangladesh’s exports to this region would increase substantially.
(f) Bangladesh’s earnings from its export to Nepal as well as Bhutan will also increase considerably with India granting these two countries transit facilities through its territory for export to Bangladesh and to third countries through the Chittagong and Mongla ports.
Bangladesh-India Balance of Trade
(Value in Mln. US$)
(Source EPB. Information received on July 07, 2013)