The changing face of trade between Bangladesh and India

India has become Bangladesh's key trading partner on a bilateral basis. In recent years, Bangladesh's imports and exports to its neighbour India have expanded. Trade between the countries has increased over a comparatively short period of time despite the disruptions caused by Covid-19 and Russia-Ukraine war to the global supply chain. Importing goods from India is cheaper and takes less time, similarly exporting to India offers the same benefits. So, the issue of increasing trade and investment between the two countries is being given priority by both sides. 

India is a big market for Bangladesh. In recent years, Bangladesh has crossed $2 billion in product exports to India. In November 2011, the then Prime Minister of India, Manmohan Singh, announced a reduction in India's sensitive goods list from 480 tariff lines to only 25 for the less developed countries under the South Asian Free Trade Area Agreement. 

As a result, Bangladesh has access to almost 100% duty-free facilities on all goods except arms and drugs in the Indian market. Since 2011, the export of Bangladeshi products to the country has been increasing, and in the last 10 years, it has increased almost four times. In the 2011–12 fiscal year, Bangladesh exported goods worth $51.25 million to India, which increased to $199 million in the last fiscal year of 2021–22.
Various studies show that Bangladesh has much more potential to increase trade with India. According to a World Bank report titled "Interconnection for Prosperity: Challenges and Opportunities of Integrated Transport Systems in Eastern South Asia," while 10% of Bangladesh's total trade is with India, India's trade with Bangladesh is only 1%. 

India is now Bangladesh's second-largest import market after China. According to Bangladesh Bank's data analysis, in the fiscal year 2017–18, goods worth $8.62 billion were imported from India. And in the last fiscal year 2021–22, though there was a slight decrease in the middle due to the Covid-19 pandemic, the imports almost doubled to $16.16 billion. It reflects the imbalanced trade between the two countries, but experts believe that such commercial deficits are not a concern for Bangladesh. Because although Bangladesh has a trade deficit with India, there is a trade surplus with the European Union and the United States.

It is important to note that the composition of the products Bangladesh imports from India has changed dramatically over the past few years. While Dhaka was heavily dependent on imports of food and essential commodities in the beginning, imports have now shifted towards goods like raw materials and capital equipment required for industrialisation. 

It means that Bangladesh has been able to generate foreign currency by using the raw materials or machinery imported from India in the export sector, especially in the garment sector, and its domestic industries. Macroeconomic experts see the compositional shift in imports from India as a very positive change to the economic scope of Bangladesh.

Such structural and material transformation has not been observed in other neighbouring countries that trade with India. Sri Lanka has seen some progress. While Nepal and Bhutan have not had any, and in fact, they have an over-dependence on India for basic commodities. From that perspective, Bangladesh has increased its capacity to import from India and has used its capabilities more appropriately than many others.

Both countries are currently negotiating the signing of the Comprehensive Economic Partnership Agreement (CEPA), aimed at creating an environment that enables trade, investment, industrialisation, and overall economic cooperation. 

If Bangladesh makes this agreement through proper negotiation, bilateral trade will increase by $5 to $7 billion in the first year of the agreement. With such an agreement, no one can impose an anti-dumping duty on the products listed in the agreement to impede trade. At the same time, India's investment in Bangladesh will increase, which will create employment and help in growth. The products manufactured by Indian investors will be exported to India and other countries around the world. As a result, the trade deficit will decrease. 

The Bangladesh Foreign Trade Institute's (BFTI) preliminary study claimed that the CEPA agreement with India would remove trade barriers and launch joint testing and one-stop services. As a result, exports will increase by 3 to 5 billion dollars beyond the current (about 1.99 billion) export earnings. As most of India's products and services are compatible with Bangladesh's economy and culture, Bangladeshi importers will turn to India instead of far-eastern countries for the same products. The survey claims that the import-export deficit of the two countries can be gradually reduced by increasing the capacity and efficiency of product and service diversity.

Bangladesh received the final recommendation for the transition from least-developed to developing country on 22 March. After 2026, Bangladesh will hold the status of a developing country. The transition from an LDC poses several challenges to Bangladesh. 

So, as part of the preparation beforehand, Bangladesh has to make various types of bilateral agreements with different countries, including Preferential Trade Agreements (PTAs) and Free Trade Agreements (FTAs), to deal with these challenges. Agreements should also be made with regional trade alliances (RTAs). Apart from this, it will be necessary to sign CEPA agreements with major trading countries. Earlier, although no country has signed a service agreement with Bangladesh, India has already signed this agreement with seven countries: Sri Lanka, Singapore, South Korea, New Zealand, Australia, Indonesia and Thailand.

In the case of an FTA, Bangladesh's exports to India will increase by 182%, while India's exports to Bangladesh will increase by 126%. And if an uninterrupted transportation system is introduced, Bangladesh's exports to India will increase by 297% and India's exports to Bangladesh by 172%. Based on this, the World Bank claimed in a 2018 study that if the trade potential is exploited, the bilateral trade between Bangladesh and India can increase up to 16.4 billion dollars.

India's investment in Bangladesh needs a closer look - it could be a big driving force for Bangladesh's economy. Bangladesh has an excellent opportunity to encourage India's investments in various sectors, especially infrastructure, services, tourism, communication and transport. It will create employment and help with growth. In short, CEPA or FTA will create a "win-win situation" for the people of both countries.

Therefore, prompt and appropriate actions need to be taken to address the bureaucratic complexity and to maximise the advantages of laws or policies in the fields of investment.  In addition, the type of trade and the means of trade, i.e., the structural and infrastructural conditions of rivers and land ports should be developed to facilitate business.

Ali Akbar Rouf is a PhD candidate in South Asian Politics and Political economy at Boston University, UK.