Although as part of the South Asia Free Trade Area (SAFTA) Agreement India has given duty-free, quota-free market access to Bangladesh (as also to the other three least developed countries of the SAARC), Bangladesh has not been able to take advantage of this offer in any significant manner.
Bangladesh-India bilateral economic relation is currently passing through a period of significant changes. Reaping the potential benefits originating from recent initiatives will critically hinge on identifying appropriate win-win follow-up measures. A recent study by the World Bank estimates the Bangladesh-India bilateral trade potential to be to the tune of $16.40 billion, as against the actual figure of $6.20 billion (in 2015 terms). These figures reflect and succinctly capture both the prevailing scenario concerning the economic relationship between the two countries, and also what the opportunities could be if the attendant challenges are adequately addressed. Given this backdrop, the need for identifying appropriate measures to realise the potential benefits cannot be overemphasised.
However, a good starting point for a discussion would be to first dispel some of the prevailing misgivings. Bangladeshi traders often complain about the non-tariff barriers (NTBs) they face in exporting to India; many commentators are also concerned about Bangladesh's significant bilateral trade deficit with India. True, there are a large number of NTBs that Bangladeshi exporters have to tackle when trading with India. And India has also imposed anti-dumping duties (ADDs) and countervailing duties (CVDs) on Bangladesh's exports from time to time which had detrimental impact on Bangladesh's exports to the country. Nonetheless, experience bears out that it is the lack of adequate trade facilitation which is the most important NTB, creating major barriers to trading by operators on both sides of the border. The issue of the large bilateral deficit with India also needs a closer scrutiny. With $8.60 billion worth of imports and $1.25 billion of exports, the size of Bangladesh's bilateral trade deficit with India, at $7.35 billion, is indeed significant. Moreover, the deficit has been on a steady rise over the past years. However, it is also important to keep in mind that, a large part of the imports from India constitutes raw materials for Bangladesh's export-oriented sectors, particularly for the export-oriented apparels industry. Imported inputs from India go into production of ready-made garments (RMG) destined for export, primarily to the markets of developed countries of the North. For example, 87% of Bangladesh's exports to the US market constitute RMG items a large part of which uses imported inputs from India. Thus, that Bangladesh has more than $6.1 billion trade surplus with the US is, at least in part, explained by the country's trade deficit with India. In recent years, because of India's rising competitiveness and enhanced supply-side capacities, there has also been import diversion from other countries favouring India. Indeed, a large number of items was traditionally imported by Bangladesh from other (developed) countries are now being sourced from India. Imports from India at competitive prices and with reduced lead times benefit the consumers of final goods in Bangladesh, as also producers dependent on imported inputs. Additionally, it cannot be denied that in a globalised world the bilateral deficit with a particular country should not be seen as a major concern. It is reducing the global trade deficit which should matter most.
There are a large number of non-tariff barriers (NTBs) that Bangladeshi exporters have to tackle when trading with India. And India has also imposed anti-dumping duties (ADDs) and countervailing duties (CVDs) on Bangladesh's exports from time to time which had detrimental impact on Bangladesh's exports to the country.
However, this is not to say that the increasing bilateral trade deficit with India remains a major point of worry in Bangladesh's policy circles and public opinion. A key concern for Bangladesh is that it is not being able to take advantage of the significant and growing import market of India (Indian imports exceeded $510.0 billion in FY 2018-19). It is to be noted in this connection that, India is importing a number of items from the global market, but not from Bangladesh, while Bangladesh is exporting these same items to the global market but not to India. In view of this, the task before the policymakers of the two countries is to remove the obstacles that undermine trading opportunities and impede higher bilateral trade flows, through appropriate policies and measures.
About 90 percent of the bilateral trade between Bangladesh and India takes place through the land ports. However, the border points are at present not crossing points, rather these act as control and checking points. Goods have to be unloaded and reloaded in the no man's land which leads to delays, and consequently, to cost-escalation and loss of competiveness. If it is agro-products, (or cement for that matter) in absence of mutual recognition agreements goods have to wait for several days till inspection results come from laboratory facilities in distant testing centres. The documentation requirements are also onerous. Not surprisingly, the cost of transporting goods from Dhaka to Delhi is significantly higher than those from Dhaka to the ports in Europe. Consequently, exporters need higher lead times and importers incur higher costs. As a result, exporters lose competitiveness and consumers pay higher prices.
Efficiency of trade connectivity, indeed, depends on how effective the other connectivities are - transport connectivity; investment connectivity; logistics connectivity. In all these areas there are many weaknesses that work as NTBs to trade between the two countries. Thus, not surprisingly, although as part of the South Asia Free Trade Area (SAFTA) Agreement India has given duty-free, quota-free market access to Bangladesh (as also to the other three least developed countries of the SAARC), Bangladesh has not been able to take advantage of this offer in any significant manner.
However, in going forward there are reasons to be optimistic. A number of new initiatives have already been taken and many are being put in place in recent times to facilitate bilateral trade and deepen economic cooperation between the two countries. Many of these concern trade facilitation at the border. Infrastructure at land customs stations are being improved, documentation reduced, and coordination between the two customs authorities bettered. A motor vehicle agreement has been signed with participation of Bangladesh, Bhutan (yet to ratify), India and Nepal (BBIN-MVA) which will allow cargo-carrying vehicles to move across borders to final destinations in the partner countries. The standard operating protocols to operationalise the agreement are being finalised at present. The MVA is expected to significantly reduce both time and costs in trading between the two countries. Bangladesh has now allowed India connectivity to move goods between western part and the north-eastern states of India through its territory, through road and waterways. A coastal shipping deal will now allow vessels of the two countries to carry goods to each other's recognised ports.
As of now, India has provided three lines of credit through the EXIM Bank of India, worth about $8.00 billion. These LOCs – worth $1.062 billion (2010), $2.00 billion (2015) and $5.00 billion (2017) respectively – were extended at the concessional interest rate of 2%, (with an additional commitment charge of 0.5%; repayment period is 20 years with a grace period of 5 years). A large part of the loans is being used to build the needed multi-modal transport networks in Bangladesh, improve land border crossings and keep rivers navigable. Indeed, India has converted $200.0 million of the first LOC into a grant that went towards construction of Bangladesh's longest bridge, the bridge over the river Padma, which, when built (along with the rail link), will also facilitate bilateral trade with India. Bangladesh has also started to import electricity from India, 600MW as of now already, with an additional 1000MW planned over the near-term future. This will be critical to addressing the energy deficit that has been a major deterrent to FDI flow to Bangladesh from India and other countries. Bangladesh has offered special economic zones (SEZs) for investment by Indian private sector companies, in Bheramara, Kushtia and in coastal Mongla belt in Bagerhat, as also in Mirsharai SEZ in Chattogram. Reliance power has signed an agreement to invest $3.0 billion to set up a 3,000MW power plant and a floating LNG import terminal in Bangladesh. It is hoped that the improved infrastructure, better trade facilitation, dedicated SEZs, multi-modal transport connectivity and higher energy security will incentivise investment from India to Bangladesh, targeting the Indian market, taking advantage of the duty-free market access offered by India.
Realising the Opportunities
However, while the evolving scenario is a promising one, realising the potentials to the fullest extent will hinge on many other steps. For the value chains and production networks to be established and expanded, trade facilitation at the border, behind the border (in Bangladesh) and beyond the border (in India) must be improved further. The cost of doing business in Bangladesh will need to be reduced significantly; according to the World Bank's Doing Business index 2020 report, Bangladesh was ranked a lowly 168th among the 190 countries surveyed (albeit this was an improvement of 8 steps over the previous year). The regulatory regime will have to be appropriately streamlined and the dispute settlement mechanism strengthened. At the border, single window, interoperability of systems and electronic data interchange will need to be put in place. These will ensure that customs clearances on both sides of the border are synchronised through common data platforms, and cargo vehicles are issued permission to cross the border at one go rather than undergoing duplication of procedures and paper-based processing. These measures will ensure that vehicular movement, as envisaged under the BBIN-MVA, is hassle-free. Mutual recognition agreements relating to certification, accreditation, laboratory testing, sanitary-phytosanitary measures and technical standards etc. will need to be signed, backed by adequate capacity building of national standardisation, accreditation and certification institutions in Bangladesh.
Developing a comprehensive strategy to leverage and draw synergies in view of the emerging economic ties with other countries including China, and particularly in connection with China's belt and road initiative, must be seen as an important task for Bangladesh's policymakers in going forward in the twenty-first century.
While a bilateral free trade agreement (FTA) with India could have significant adverse revenue implications for Bangladesh, in the context of Bangladesh's LDC graduation and loss of duty-free market access in India, this is an option that Bangladesh may need to consider in all earnest in the near future.
While a bilateral FTA with India could have significant adverse revenue implications for Bangladesh, in the context of Bangladesh's LDC graduation and loss of duty-free market access in India, this is an option that Bangladesh may need to consider in all earnest in the near-term future. If this is to be the case, serious analysis must be undertaken to assess win-win approaches to such a bilateral deal. It is reckoned that a bilateral agreement with India has to be of a comprehensive economic partnership type of cooperation. Elements of trade, transport and investment connectivities, services including financial services, development of value chains and production networks, will need to be embedded in such an agreement. If Bangladesh is able to negotiate a two-track arrangement with India, particularly concerning trade liberalisation plan, with a relatively slow pace of trade liberalisation for Bangladesh, immediate revenue concerns of the country could be mitigated to some context.
On a promising note, as far as Bangladesh-India bilateral relationship is concerned, the early positive outcomes originating from the ongoing developments are already becoming visible. Bangladesh's exports have crossed the billion-dollar mark, for the first time, in fiscal year 2019 (July-June). At $1.25 billion, this was 42.9 % higher than the previous year. To be true, the trade deficit has also been on the rise; imports from India rose by 30% to $8.60 billion over the corresponding period. As was noted earlier, Bangladesh's primary interest lies in being able to significantly increase her exports to India by taking advantage of the growing market demand in India. This will also contribute to addressing the attendant concerns about the growing bilateral trade deficit. Just to compare, while Bangladesh's global export was $40.0 billion in FY 2019 that of Vietnam exceeded $235.0 billion (although the GDP size of the two countries was comparable). Greater access to the Indian and regional markets could enable Bangladesh to play in the same league.
As distinct from the traditional northern markets, regional markets should be seen by Bangladesh as the next major frontier with the greatest potentials. Attracting FDI to Bangladesh from India and other countries, to tap into the growing Indian import market, by taking advantage of the preferential market access, could be an important game changer for Bangladesh. The signs are encouraging, and a good beginning has been made to further deepen Bangladesh-India bilateral economic ties. But there is a long way to go if the potential benefits are to be exploited to the fullest. Time is now to take the needed actions to seize the emerging opportunities.
The author is Distinguished Fellow at the Centre for Policy Dialogue (CPD), Dhaka.