Bangladesh India Trade

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    Abstract:Bangladesh has been suffering massive trade Imbalance with India. It isnow almost a self-evidenttruth. One of the main factors for this massiveimbalance is Indias policy of tariff and non-tariff barriers to theBangladeshicommodities exportable to India. Currently India is the 2nd largest tradingpartner of Bangladesh,and Indias position is at the top for Bangladeshsimports trade. Bangladeshs trade with India increasedtremendouslyespecially in the 1990s. The average annual growth rates of Bangladeshstrade with India, during1980 to 1995, were much higher than those with theSAARC and the world. However, Bangladesh has always beentrade deficitwith India, and recently it has increased exponentially. Limited export base,backward industries,inadequate infrastructure, lower productivity inBangladesh, appreciation of Bangladeshs Taka against IndianRupee,earlier and faster trade liberalization program in Bangladesh compared to

    India, tariff and non-tariff barriers (NTBs) imposed by the Indiangovernment, huge illegal trade, diversified exports andtechnologicallyadvanced industrial base of India are identified as the mainreasons of this huge trade imbalance. Structural andpolicy measures suchas sound physical, social and economic infrastructure, superior productquality, exportdiversification, sufficient institutional facilities for banking,credit and insurance, improved law and ordersituation, labor unrest freeenvironment, an honest and efficient administration, continuous politicalstability,huge domestic and foreign investments, joint ventures in

    Bangladesh with buy back arrangements, competitivedevaluation of theBangladesh currency against the Indian currency, removal of illegal trade,tariff and NTBs-free entry of Bangladeshs exports to Indian market aresuggested to improve this trade deficit. Also cordial andproductivecooperation between these two nations is crucial to materialize thesemeasures.I.

    IntroductionBangladesh suffers a huge trade imbalance with India. Apart from the large size oftheeconomy, maintenance of a high protectionist trade regime by India in the forms

    of tariff andnon-tariff barriers have contributed to this imbalance. WhileBangladesh has progressed muchahead of India along with its liberalization oftrade, India remains slow. Both Bangladesh andIndia are two major countries ofthe SAARC and have a long common historical past andsimilar cultural and socialevolution. As far as trade relation is concerned, India is the 2ndlargest trading

    partner of Bangladesh just after USA in 2003. Indias position is at the topforBangladeshs imports from the world (

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    IMF: Direction of Trade Statistics, June 2004).Therefore, an analysis of current tradestatus between the two nations, obstacles andopportunities for mutual tradeexpansion is very critical for economic development of bothcountries, especially ofBangladesh, as Bangladesh has been suffering from historical tradedeficit withIndia since its independence. The trade deficit has been increasingexponentiallysince the recent past. Official data show that compared to 1983, tradedeficit in 2003 is morethan 46 times higher1 (IMF: Direction of Trade Statistics). This growing deficit is a cause of serious concernfor Bangladesh and has important economic and political implications. Hencetheimportance of the study is realized, and it is expected that the study will helppolicy makersto understand the roots of the problems on the way of tradeexpansion, and to formulate andexecute the appropriate policy measures to

    mitigate or remove these problems. With thisobjective in mind, this paper makesan attempt to deal with the issues of bilateral traderelationship between Bangladeshand India.2.

    Historical Development of Bangladesh-India Trade RelationsBangladesh and India signed the Treaty of Friendship, Cooperation and Peace on

    March 19,1972 in Dhaka for 25 years. Owing to this treaty, both countries signedthe first one-year tradeagreement on March 28, 1972.In the agreement, fish, raw

    jute, newsprint and naphtha wereidentified as the principle exports of Bangladeshto India. Indias major export items toBangladesh, on the other hand, were cement,coal, machinery and unmanufactured tobacco.The trade between the nations waslimited to government level. This agreement also providedborder trade betweenBangladesh and Neighboring Indian states; and within 16 kilometers of bothcountries border, free trade was allowed forcertain commodities.The expected level of trade was not achieved under the first trade agreement. Alsofree bordertrade between Bangladesh and India led to some illegal trade and hencewas abolished inOctober 1972 by mutual consent of the both governments.However, to attain the desired levelof trade, the first trade agreement was furtherextended up to September 27, 1973. The firsttrade agreement of 1972 was replaced

    by another trade agreement for three years. Thisagreement was signed on 5 July1973 and became effective from 28 September 1973. Raw jute,fish, newsprint, etcwere identified as major exportable items of Bangladesh to India. On theotherhand, major exports of India to Bangladesh were unmanufactured tobacco, cement,coal,raw cotton, cotton yarn, cotton textiles and books. This agreement providedfor a system of Balanced Trade and Payment Arrangement (BTPA) and mostfavored nations treatment toeach other. The desired level of trade between the two

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    nations was not achieved by theagreement of 1973, and trade imbalance increasedin the very first year. Rupee trade was foundto be a barrier in the bilateral trade,and thus abolished rupee trade from 1 January 1975 by aProtocol signed on 17December 1974. It was decided that trade would be conducted in freeconvertiblecurrency.India and Bangladesh signed another trade Protocol on 12 January 1976for higher volume of trade and long-term arrangements for trade of coal andnewsprint. BTPA between Bangladeshand India was extended for another threeyears till 27 September 1979 on 5 October 1976. On 4October 1980, the third tradeagreement was signed between these two nations initially forthree years.By mutual consent, this agreement was extendable for another 3 years. On8November 1983, Bangladesh and India renewed a Protocol on trade of 1980 forfurther threeyears. In May 1986, the trade agreement of 1983 was extended foranother three years till 3October 1989. Subsequently this agreement was renewed anumber of times. Based onavailable information, this agreement was valid up to 3

    October 2001.3.

    Trend, Structure and Current Picture of Bangladesh-India TradeOne of the important features of Bangladesh-India bilateral trade to be mentionedis that a largevolume of informal or unrecorded trade, both in commodities andservices, occurs every year,and it is growing despite unilateral or regional ormultilateral trade liberalization in these twocountries. The official data on trade inservices between these nations are, in fact, not availableat all. Under this situationof data paucity with regard to illegal trade and trade in services, ourcurrent analysiswill depend on mostly on the official trade data in commodities. In this section,dataon trend, structure and current state of Bangladesh-India trade are presented.Attention ispaid on overall trade relationship; special reference is to be made toexamine the importance of Bangladesh - India trade in the context of SAARC aswell as individual country. Bangladeshshistorical trade deficit with India and thecommodity composition of Bangladesh-India tradeover time are also examined.3.1

    Bangladesh-India Trade in SAARC PerspectiveAs mentioned earlier, both Bangladesh and India are two major trading partners in

    the SAARCregion. Their combined share in the SAARC trade demonstrates theirimportance and highinfluence in the regional trade. Table 1 shows that the tradeshare of both countries was 56.23percent of the intra-SAARC trade in 1990. Thisshare increased to 64.5 percent in 2002. Indiasshare is, more or less, double of

    Bangladeshs share in intra- SAARC trade with limitedexceptions for some years. However, Indias export share is much higher thanimport share inthe regional trade. On the other hand, Bangladeshs position is

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    opposite; its imports share ismuch higher than export share in the SAARC region(Table 2).Table 1:Share of Bangladesh and India in Intra-SAARC Trade,1990-2002 (Million of US$)Intra-

    IND-

    BD-

    (B+I)-

    SAARC SAARC

    SAARC

    SAARC

    Percent Share

    Year

    Trade Trade

    Trade

    Trade

    IND

    BD

    (BD+IND)1990 1590 584 310 894 36.73 19.5 56.231991 1914 718 331 1049 37.51 1

    7.29 54.81992 2488 913 423 1336 36.7 17.0 53.71993 2458 920 532 145237.43 21.64 59.071994 2937 1151 635 1786 39.19 21.62 60.811995 42631742 1230 2972 40.86 28.85 69.711996 4928 1848 1368 3216 37.5 27.7665.261997 4447 1648 967 2615 37.06 21.74 58.81998 6001 2549 1376 3925 42.48 22.93 65.411999 5511 2370 1206 3576 43 21.88 64.882000 58842400 1138 3538 40.79 19.34 60.132001 6537 2783 1383 4166 42.57 21.1

    6 63.732002 6246 2739 1290 4029 43.85 20.65 64.5

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    Sources: IMF (Various Years), Direction of Trade Statistics YearbookTable 2:Export and Import Share of Bangladesh and India in Intra-SAARC Trade, 1990-2002(Percent)Year

    India's Export Share

    India's Import Share

    BD's Export Share

    BD's Import Share 1990 30.63 6.1 3.77 15.721991 32.55 4.96 4.18 13.111992 28.9 7.8 1.81 1

    5.191993 33.4 4.03 2.24 19.41994 34.8 4.39 1.7 19.921995 36.21 4.64 1.95 26.911996 33.48 4.02 1.18 26.581997 32.92 4.14 1.84 19.91998 34.23 8.

    25 1.72 21.211999 36.04 6.97 1.47 20.412000 34.31 6.48 1.5 17.842001 35.9 6.67 1.39 19.762002 34.34 9.51 1.19 19.47Sources: IMF (VariousYears), Direction of Trade Statistics Yearbook; United Nations (VariousYears), StatisticalYearbook for Asia and the Pacific; and authorscalculation3.2

    The Importance of India in Bangladeshs TradeIndia plays an important role in Bangladeshs trade since the independence, and

    recently,especially in 1990s, Bangladeshs trade with India increasedtremendously. The Table 4compares the growth rates of Bangladeshs trade withIndia, SAARC countries and world forselected years from 1980. It is observedfrom the table that the average annual growth rates ofBangladeshs trade withIndia, during 1980 to 1995, were much higher than those with theSAARC and theworld. For example, during 1980- 85, while average annual growth ratesofBangladeshs trade with the World and SAARC countries, were 2.46 per centand0.11 percent respectively, this figure was 9.72 per cent with India. During1985-90 the growth rateswith the world, SAARC countries and India were 7.94,

    18.68 and 20.63 per cent respectively.The growth rate of trade with India increasedvery significantly during 1990-95. While thegrowth rates with the world andSAARC countries were 16.70 and 57.85 percent respectively,the growth rate withIndia was 87.29 per cent. Though the growth rates with SAARC countriesand Indiawere slightly negative during 1995-2000; those figures turns intoconvincinglypositive in 2001. The overall growth performance was negative in

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    2002 following theSeptember 11 incident in 2001 in the USA. However,Bangladeshs trade got momentum in2003 with all noted destinations in the table.Table 4:Growth of Bangladesh's Trade with India in SAARC andGlobal Perspectives (Millions of US $)Annual

    Annual

    Annual

    Year BTWI

    growth rate

    BTWS

    growth rate

    BTWW

    growth rate1980 63.6 164.8 --- 33581985 94.5 9.72 163.9 -

    0.11 3771 2.461990 192 20.63 317 18.68 5269 7.941995 1030 87.29 123457.85 9670 16.702000 995.6 -0.67 1146 -1.43 13147 7.192001 1256.326.19 1391 21.38 13176 0.222002 1185.2 -5.66 1294 -6.97 12480 -5.282003 1541.6 30.07 1681 29.91 16744 34.17Sources: IMF (VariousYears), Direction of Trade Statistics Yearbook and author's calculation.Note:BTWI

    = Bangladesh's trade with India;BTWS= Bangladesh's trade with SAARC;BTWW

    = Bangladesh's tradewith the worldIn the context of Bangladeshs global trade though Indias share is notconvincingly high, itmay be mentioned that the influence of India on Bangladeshstrade has been increasing overthe years. From the Table 5, it is observed thatIndias share in Bangladeshs global trade hasincreased to 10.7 percent in 1995from 3.6 percent in 1990. Though this share has slightlydecreased in recent years,

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    it is still almost 10 percent.The important feature is that though Indias share inBangladeshs global import has beenincreasing over the years, Indias contribution

    in Bangladeshs global exports has beenshrinking. For example, Indias share inBangladeshs global import increased to 15.5 percentin 2003 from 4.7 percent in

    1990. On the other hand, with regard to exports, this sharedecreased to 0.7 percentfrom 1.3 percent during the same period. As per as Bangladeshs tradewith the

    SAARC countries is concerned, India certainly holds an important position, andoverthe years its dominance has been increasing. India provided with the 94.1percent oBangladeshs imports from the SAARC countries in 2003. Indias contribution to

    Bangladeshsexports to SAARC countries increased to 53.5 percent in 2003 from36.6 percent in 1990.Indias share in Bangladeshs total trade with the SAARCcountries increased from 60.6percent to 91.7 percent during the same period oftime.

    Table 5:Indias Share in Bangladesh's Global and SAARC Trade forSelected Years (Millions of US$)Item1990

    1 9 9 5

    2 0 0 0

    2 0 0 1

    2 0 0 2

    2 0 0 3 Global Exports of Bangladesh 1671 3173 4786 4826 4566 7167Global Imp

    orts of Bangladesh 3598 6497 8360 8350 7914 9577Exports to SAARC 6083 89 92 73 99Imports from SAARC 257 1151 1057 1299 1221 1582Exports to India22 36 50 61 39 53Imports from India170 994 945 1195 1146 1489Source: IMF (Various Years): Direction of

    Trade Statistics Yearbook and author's calculations.The importance of India as the source of Bangladeshs imports can be wellunderstood by theTable 6. Based on official trade data only, India was the fourthlargest importing source forBangladesh in 1990 just after Japan, Singapore and theUSA. If unofficial trade were taken intoaccount, Indias position would be higher.

    The table also reveals that India topped the list forBangladeshs imports in 1995,

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    and since then India continued to maintain the largest importingsource forBangladesh.Table 6:India's Position among Top 5 Import Partners (OfficialTrade) of Bangladesh for Selected Years (Millions of US$)

    Country

    1 9 9 0

    Country

    1 9 9 5

    Country

    2 0 0 0

    Country

    2003Japan 482India994India945India1 4 8 9 Singapore407China 601

    Japan 850China 1326USA186Japan

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    598Singapore731Singapore910India170Hong Kong420China 668Japan 640Hong Kong

    168Korea417Hong Kong 470Hong Kong 471Source: IMF (Various Years), Direction of Trade Statistics Yearbook.3.3

    The Importance of Bangladesh in Indias TradeThe importance of Bangladesh to Indias trade can also be examined.

    Bangladeshscontribution to Indias global trade was 0.74% in 1990. In 1995, thisshare rose to 1.59 percent(Table 7). After that, though this figure decreasedmarginally, it was still 1.13 percent in 2003.This is the official record of trade; ifunofficial trade is also considered, this ratio would bedouble or even more. Withregard to exports, Bangladeshs contribution to Indias globalexports is significant.In 1990, Indias exports to Bangladesh was 297 million i.e. 1.67 percentof Indias

    global exports. Within 5 years of time, i.e. in 1995, this ratio increased to3.14percent. In 2002 and 2003, Bangladeshs share in Indias global exports was

    2.11 and 2.42percent respectively. As per as import of India is concerned, Indiaimported from Bangladeshonly 0.06 percent of its global imports in 1990. Thisratio was more or less the same over theyears except in 1995 and 2001 when it roseto 0.23 percent and 0.13 percent respectively (Table7). In the context of Indias

    trade with the SAARC countries, Bangladeshs contribution issignificant.

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    Bangladesh constituted 40.91 percent of Indias total trade with theSAARCcountries in 2003. In 1990 and 1995, this ratio was 53.42 and 59.64

    percent respectively.Bangladeshs share of Indias exports to SAARC countrieswas 49.64 per cent in 2003. In2002, it was 52.57 percent. In 1990 and 1995, this ratio was even higher, 60.98 and62.17percent respectively. However, Bangladeshs share of Indias imports from

    SAARC countrieswas not convincing; it was only 8.42 percent in 2003.Table 7:Bangladesh's Share in India's Trade in Global and SAARCPerspectives for Selected Years (Million of US$) Item

    1 9 9 0

    1 9 9 5

    2 0 0 0

    2 0 0 1

    2 0 0 2

    2 0 0 3 Global Exports of India 17813 30537 44313 44613 49312 57080Global Im

    ports of India 23990 34484 52773 51562 56517 71238Exports to SAARC 4871544 2018 2347 1982 2786Imports from SAARC 97 198 381 436 492 748Exports to Bangladesh 297 960 860 1087 1042 1383Imports from Bangladesh 15 79 55 67 43 63(B/W)T 0.74 1.59 0.94 1.2 1.02 1.13(B/W)X 1.67 3.14 1.94 2.44 2.11 2.42(B/W)M 0.06 0.23 0.1 0.13 0.07 0.08(B/S)T 53.42 59.6438.14 41.47 43.86 40.91(B/S)X 60.98 62.17 42.61 46.31 52.57 49.64(B/S)M 15.46 39.9 14.43 15.36 8.73 8.42Sources: United Nations (VariousYears): Statistical Yearbook for Asia and the Pacific, IMF (Various Years):Notes:

    (B/W)T = Bangladesh's share in Indias global trade (per cent)(B/W)X =Bangladesh's share in Indias global exports (per cent)(B/W)M =Bangladesh's share in Indias global imports (per cent)(B/S)T =Bangladesh's share in Indias trade in SAARC countries (per cent)(B/S)X =Bangladesh's share in Indias exports to SAARC Countries (percent)(B/S)M = Bangladesh's share in Indias imports from SAARCCountries (percent)

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    The importance of Bangladesh for Indias export market can further be realizedfrom the Table8. It is observed that Indias largest export market in the SAARC

    region is Bangladesh at all thetime.Table 8:Direction of India's Exports to SAARC Countries forSelected Years (Percent of Total Share)Country

    1 9 9 0

    1 9 9 5

    2 0 0 0

    2 0 0 1

    2 0 0 2 *

    2 0 0 3 *

    Bangladesh1.67 3.14 1.94 2.44 2.11 2.42Bhutan 0.04 0.03 0.04 0.01 0.01Maldives 0.03 0.04 0.09 0.1 0.05 0.08Nepal 0.22 0.35 0.89 0.970.35 0.38Pakistan 0.24 0.23 0.37 0.49 0.3 0.32Sri Lanka 0.57 1.25 1.23 1.23 1.2 1.68SAARC

    2 . 7 3

    5 . 0 5

    4.55

    5.27

    4.02

    4 . 8 9

    World

    100

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    100

    100

    100

    100

    100Sources: United Nations (Various Years), Statistical Yearbook for Asia and

    the Pacific3.4

    The Balance of Trade of Bangladesh with India

    As mentioned earlier, Bangladesh had always trade deficit with India since itsindependence,and recently it has increased significantly. Table 9 and figure 1provide the bilateral tradesituation between Bangladesh and India for 31 years,1973-2003. These figures clearly indicatethe unfavorable trade balance ofBangladesh with India. In 1990s, especially in the 2nd half of the decade, tradedeficit of Bangladesh increased very sharply. In 2003, the trade deficitreached toUS$ 1, 435.9 million, which is about 4 times higher, compared to 1993, andmorethan 46 times higher compared to 1983. The value of exports compared tothat of imports isalways quite low, and in 2002 and 2003, it was 3.4 and 3.6

    percent respectively. This is really adisappointing picture for Bangladeshsbilateral trade financing as, according to economictheory, countrys exports are tobe used to pay for its imports. Though the export-importrelationship should belooked at the world trade level rather than bilateral level, yet this tradeimbalancestill has some economic and political implications for Bangladesh.Table 9:Bangladesh's Trade Balance with India, 1973-2003(millions of US $)Year

    Export

    Import

    Deficit

    Exports as percentage of imports1973 23.3 114.8 91.5 20.31974 0.4 82 81.6 0.51975 5.3 83.3 78 6.41976 7

    .1 58.5 51.4 12.11977 0.6 55.2 54.6 1.11978 2.3 43 40.7 5.41979 12.1 40 2

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    7.9 30.31980 8 55.6 47.6 14.41981 20.2 64 43.8 31.61982 20.3 43.3 23 46.91983 6.9 37.9 31 18.21984 28.3 60.1 31.8 47.11985 29.6 64.9 35.3 45.61986 7.7 57.2 49.5 13.51987 11 74.4 63.4 14.81988 8.7 90 81.3 9.71989 10.7 120.7 110 8.91990 22 170 148 12.91991 23 189 166 12.21992 4 284 2801.41993 13 380 367 3.4

    1994 24 467 443 5.11995 36 994 958 3.61996 20 1138 1118 1.81997 37.2795.6 758.4 4.71998 55 1178.8 1123.8 4.71999 49.5 1023.8 974.3 4.8200050.1 945.5 895.32 5.32001 60.8 1195.5 1134.7 5.12002 39.3 1145.8 1106.

    5 3.42003 52 .9 1488 .7 1435 .9 3.6Sources: IMF (Various Years), Direction of Trade Statistics Yearbookand author's calculation.Fig. 1:Bangladesh's Trade Picture with India, 1973-2003 3.5

    Trade Structure of Bangladesh with IndiaBangladeshs exports to India are highly concentrated to a few items. Table 10demonstratesthat the countrys major countable export items were only six in FY1994FY1996. In fact, inFY 1996 only 3 items- chemical fertilizer, raw jute andfrozen fish- constituted about 90percent of Bangladeshs exports to India.However, fertilizer and newsprint are sometimesexport items and sometimesimport items depending on domestic production (Eusufzai 2000).On the otherhand, Indias exports to Bangladesh are more diversified and export-baseissignificantly wide. It is observed from Table 11 that Bangladesh classified a totalnumber of 5985 items for imports in the First Import Schedule at 8-digit H.S. Codelevel. Out of 5985items, in FY 1996, Bangladeshs imports from the world were4601 items of which 2129 itemswere from India alone. In terms of number ofcommodities imported from India, Indiascontribution to Bangladeshs globalimports was 47.8, 45.8 and 46.3 percent respectively in FY94, FY 95 and FY 96Table 11:Number of Commodities Imported by Bangladesh at 8Digit H.S. Code Level

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    Table 12 provides data on the imports composition of Bangladesh from India for

    selected yearsduring FY 1980 to FY 1996. It is evident from the table thatBangladeshs major imports itemsfrom India are vegetable products, textile and

    textile articles, machinery and transportequipments, chemical and allied products,mineral products, and base metals. Examining thedata of FY 1996 we see thatvegetable products constituted 36.64 percent of total imports of which cerealsalone accounted for 33.24 percent. The second largest import category wasthetextile and textile articles, which constituted 27.43 percent of total imports. Thiscategorysrank was the first in FY 1991, FY 1994 and FY 1995. More than 50

    percent of total importsfrom India were under this category in FY 1991.Observing

    data for last three years it is revealed that textile and textile related articles plusthemachinery and transport related equipment constituted for roughly 49 percent oftotal importsfrom India. Thus Bangladeshs total official imports consist of

    significantportionintermediate inputs.

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    4.

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    Problems Causing Indo-Bangladesh Trade ImbalanceAlthough the trade deficit with a particular country is not bad if the over all tradebalance issatisfactory, yet from the distribution aspect of trade policies (thedistribution of benefits andcots among groups of producers and groups ofconsumers) the growing trade deficit with Indiais a great concern for Bangladesh.Bangladeshs fear is that if this deficit continues, Bangladeshwill be dependentonly on a few products for its exports, and imports from India displacedomesticproduction to such an extent as to reindustrialize Bangladesh. As a result, it isargued,a severe polarization in Bangladesh and high levels of unemployment willoccur. Therefore,increasing trade deficit with India is a problem, and attempts aremade here to find out thecauses of this problem.4.1

    Bilateral Exchange Rate

    Bilateral exchange rates between Bangladesh and India during 1990 to 1999 havebeenpresented in Table 13 in order to explore the dynamics underlying thisexpansion of tradeimbalance between these two countries. Available data exhibitthat the nominal and real valuesof the Bangladeshs Taka vis--vis the IndianRupee have been appreciating, with negligibleexceptions, over the years. Thisappreciation of Taka has a significant positive effect on theincreased trade deficitof Bangladesh with India. It is evident from the table that the nominalexchangerate, Taka per Rupee, had been continuously declining right from 1986 to 1996.In1997, though it increased slightly, it started to decline again from 1998. Thisdeclining trend of the exchange rate implies that Taka had been appreciating. Innominal term, the exchange ratedecreased to 1.140 in 1999 from 2.411 in 1990indicating a 125.432% appreciation ofBangladeshs Taka against Indian Rupeeduring 13 years of time. The downward trend of realexchange rate was alsoobserved from the Table 13. In real term, Taka appreciated 31.72percent againstIndian Rupee in 1999 compared to 1990. Thus the appreciation of Taka, bothinnominal and real terms, might have contributed to the growing trade deficit ofBangladesh. It istrue that both Bangladesh and India depreciated their currenciesover the years, but depreciationhad been stronger in Indian than in Bangladesh.Hence Bangladeshs exchange rate policy isinappropriate compared to that of India

    resulting large trade deficit. Indias products becamemore competitive than that ofBangladesh, both in terms of bilateral trade and with eachcountrys trade with therest of the world. Thus India has become successful to divert demandfromimported goods to domestic goods and to take away income from itstrading partners4.2

    Productivity Issues and Structural Factors

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    The productivity differences can also best explain trade patterns between countries.India hasproductive advantages both in agriculture and industry compared toBangladesh because of scale economies. Structurally Indian economy is muchlarger, more diversified andtechnologically advanced. Indian products now havebecome globally competitive both interms of price and quality. Alsogeographically India is very closed to Bangladesh, andBangladeshs importers are

    very familiar with Indian products and production capacities. Allthese factors havemade Indian products very competitive in Bangladeshs market. As a result,Indias

    exports to Bangladesh are more diversified and consists of high valueaddedmanufactured goods. On the other hand, Indias imports from Bangladesh arelimited to a fewitems, as Bangladesh does not have a large supply base to offer awide variety of products toIndia. The obvious result is an increase of tradeimbalance between the two nations.4.3

    Tariff and Non-Tariff BarriersHistorically, both Bangladesh and India used to follow a similar type of importsubstitutingindustrial policy. They, however, started to move towards more liberaltrade policies since the1980s along with the worldwide move towards more openeconomies. It is generally agreedthat Bangladesh has initiated the program of tariffliberalization earlier than India- in the mid1980s, and the speed of liberalization inBangladesh is faster than that in India. Bangladesh hascontinued this higher speedof liberalization till recent years. This is evident from the Table 14,which shows acomparison of nominal rates of protection (simple average and importweightedaverage) for both countries in three different sectors. The table shows thatBangladesh sharplyreduced its tariff rates in all categories of imports in FY1996compared to FY1991. Forintermediate and capital goods, both for the unweightedaverage and the import-weightedaverage, Bangladesh exhibited a slightly higherspeed of liberalization than India. Tariff reduction in consumer goods sectorthough seems higher in India than in Bangladesh duringthis period, there weresignificant quantitative restrictions on consumer goods imports in India.

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    Recently Indian commodities, compared to theworlds commodities, faces lower

    average tariff restrictions in Bangladesh. Table 15 compares the dynamics of

    decline in the average importweighted tariff imposed by Bangladesh on its

    imports from the world and India. It is observedthat Indian imports faced a higher

    rate of tariff (31.16%) compared to the world average(24.14%) in FY 1992.

    However, import weighted tariffs on imports from India were lower(12.05%) than

    that from the world (17.33%) by FY 1996. This reverse scenario came becauseof

    almost 60 per cent decline of import weighted tariff rate between FY1994 and

    FY1995 onimports from India compared to 14.70 per cent decline on imports from

    the world.

    There are many non-tariff barriers (NTBs) in India that Bangladeshi exporters are to face toenter into Indian markets. TheseNTBs are real cause of concern for Bangladeshs businesscommunity. In Table 16, fivetypes of suchNTBs are mentioned that are imposed on imports of India. Rahman (1998) notesthat there are thousands of items under theseNTBs, andBangladeshi exporters are generally unhappy with theseNTBs as there is lack of transparencyand clarity with regard to application of theseNTBs because customs authorities in Indiamainly apply these according to their owndiscretion. Though significant fiscal reforms took place in the 1990s in India, trade

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    policy pursued by Indian government is considered as highlycomplex andrestrictive.Among other NTBs, the rules of origin (ROO) issue and infrastructural bottlenecks

    deserve tobe mentioned here for huge trade deficit of Bangladesh with India.

    According to SAPTAagreement, local content in the exported goods has to be atleast 50% of f.o.b. value of theproduct in order to receive preferential treatment /

    tariff concession. If goods are processed inmore than one member country, the

    aggregate content originating in the member country mustbe a minimum of 60%

    of its f.o.b. value. As the manufacturing base of Bangladesh is not strongenough

    as India, this ROO criterion limits the export expansion of Bangladesh to India.

    This isparticularly true for exports of some cosmetic goods and toiletries, where

    Bangladesh hasachieved notable expertise, and India has a huge market for this

    kind of products. Inadequateinfrastructure in Bangladesh also imposes sever

    limitations on trade expansion with India.There is severe lack of facilities of

    infrastructure in all land-routes, except Benapole. Severelimitations also exist in

    storage facilities. As a result, enhancing exports from Bangladesh toIndia is being

    constrained.

    5

    Remedial Measures and Opportunities

    Given the current trade scenario with India, the obvious question is now what canbe done toreduce, if not remove, the huge trade deficit of Bangladesh. There is nosimple and shortcutanswer to this question. The search for effective solution mustbe looked at with dueconsideration of macroeconomic reality, different policyoptions and honest will of cooperationof both countries. It is important to note thatone cannot expect dramatic reduction of tradedeficit of Bangladesh with Indiawithin a short span of time even though required policyoptions are designed and

    implemented. This is realized based on the current pattern and trendof bilateraltrade and prevailing state of fundamentals of the Bangladesh economy. However,inthe short run, detrimental impacts of bilateral trade deficit can be minimized ifappropriatesteps are taken. For effective and durable solution, medium and long-term measures must beundertaken too. Below are some remedial measures thatcould be considered to improve thetrade imbalance between these two neighboringcountries.

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    5.1

    Bilateral trade without impediment

    Bangladeshi products should be allowed to compete with Indian products withoutanyGovernment-created impediment like tariff and non-tariff barriers. Such a pleareinforces theargument of reciprocity in trade relations. However, Bangladesh hasits limitations on thesupply side. It has been projected in the MCCI-sponsoredstudy that Bangladesh's export isunlikely to exceed $ 100 million by the year 2000,when Indian exports to Bangladesh willexceed $ 1.5 billion. So a balanced trade isout of the question. What is needed, however, is agenuinely two-way trade, afeeling of reciprocity.Access to Indian goods in Bangladesh, it is agreed, takesplace as part of Bangladesh's nationalpolicy applicable for all nations of the worldand if Bangladesh's products do not have access inIndia it is also because ofuniform national policy in India. But it may be argued that India doesoffer special

    preferential treatment to Nepali products, which is why trade imbalancebetweenIndia and Nepal is not as serious with Bangladesh. Not only Nepal but alsoBhutan enjoyspreferential (near zero-duty) access to the Indian markets.Bangladesh, therefore, seeksunilateral free trade, including dismantling of the non-tariff barriers from India. Moreover, sucha gesture from India's side wouldgenerate a clear political signal for India's support forstrengthening Bangladesh'sexport capability to India and improving Indo-Bangladesh traderelations andBangladeshi should pay more attention to the needs of this economy, especiallyforsecuring greater access to the Indian market.5.2

    Tariff and Non-Tariff ConcessionsBangladeshs trade strategy with India must revolve around the SAPTA tariffnegotiations. Inthis regard zero export duty strategy is getting importance. Indiashould take necessary stepsof unilaterally taking the decision of providing zero-tariff access of Bangladeshs exports toIndia. Tariff preference should be given onthose items that have high import value, are actuallytraded and have high potentialfor entering into Indian market. India may exclude thoseirrelevant items from itsconcession list for Bangladesh, which Bangladesh does not produce, orhardlyexports. However, mere tariff concession will not reduce trade deficit of

    Bangladesh toany significant extent if NTBs, which are more serious impedimentsof export expansion of Bangladesh to India, are not phased out simultaneously.Appropriate measures must be takenby India in this regard. Such measures wouldcertainly encourage local, Indian and regionalinvestors to locate investment inBangladesh targeted to the larger Indian market. Because ofBangladeshs great dependence on imported inputs for its exports, especially formanufacturingexports, low backward linkages of industries, the domestic value

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    addition is also low. Henceconcession given on the range of goods is extremelylimited. To be eligible for SAPTAconcessions, this local content requirement forBangladeshs commodities should be broughtdown to 25 per cent. These tariff andnon-tariff concessions are, however, short term measuresonly.5.3

    Proper implementation of South Asian Free Trade Agreement (SAFTA)Bangladesh's trade deficit with India can also promote through effectiveimplementation of South Asian Free Trade Agreement (SAFTA) which will enterinto force on 1 January, 2006.This agreement has laid down a clear path for tariffreduction in its trade liberalizationprogram, which spans 10 years beginning2006. However, there are some grey areas in theSAFTA agreement that need to beaddressed immediately (or in the very near future) to ensureits effective

    functioning. These flaws are noticed in the provisions of the Agreement relatingtonon-tariff and para-tariff measures has been addressed in Article 7(4) where in itis stated thatthat members 'shall notify the SAARC Secretarial all non-tariff andpara-tariff measures to theirtrade on an annual basis....... The Committee of expertsshall recommend the elimination orimplementation of the measures in the leasttrade restrictive manner......." There are twoproblems with this provision. First,member countries will be tempted to using these measuressince 'least traderestrictive manner' is nebulous and does not impose any definite discipline ontheiruse for meaningful trade liberalization to occur such measures must beeliminated.Second, a definite time frame must be set in order to facilitate intra-SAARC trade. In thebackdrop of correcting these measures, Bangladesh may gainbenefits with regard tominimizing trade imbalance with India within the context ofintra-SAARC trade.5.4

    Productive Capacity and Economic EfficiencyAs mentioned earlier, the internal dimension of the trade deficit problem is relatedto the pooreconomic strength of Bangladesh compared to that of India. So theproduction capacity andeconomic efficiency of Bangladesh must increase in orderto meet the countrys growingdemand for importable goods and maximize the

    export earnings. In the major economicsectors, efficient import-substitutingactivities must increase along with continuousimprovement of economic efficiencyand competitiveness within an open economicenvironment. Huge exportablesurplus are to be generated and exports must be diversifiedtaking Indian demandrequirements into account. Bangladesh must earn relative efficiency intheproduction of exportable goods and services to reduce her trade deficit. To gainfrombilateral trade, there is no alternative but to increase the productivity in all

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    sectors as a long runmeasure. For this purpose, Bangladeshs agriculture sectorurgently needs a technological spurt.More R&D, transfer of technologies, marketbased effective price system and appropriateincentive mechanisms are veryimportant to enhance the countrys agricultural productivity. Toincrease the

    productivity in the industrial sector, development of the countrys technicalbaseand technological capacity building are crucial. To develop the technologicalcapacity building,huge investment, creative intervention of the government,appropriate incentive mechanism tofoster technical education must take place inthe country. As regard the productivity increase inthe service sector, quality ofeducation must be increased; quality medical service withinreasonable cost mustbe ensured. Huge private investment in health and education withcreativegovernment interventions would be very helpful for this purpose.5.5

    Competitive Devaluation of Bangladesh Currency

    Bangladesh currency has been appreciated against Indian currency over the yearsboth innominal and real terms, and this may be one of the main reasons of hugetrade deficit ofBangladesh. Therefore, a competitive devaluation of Bangladeshscurrency is imperative inorder to make Bangladesh products price competitive bothin Indian and world markets andthus to reduce trade imbalance. Also tradeimbalance has deteriorated because of huge informaltrade; this must be stopped,and reinforcement of border patrol can help in this regard.5.6

    Joint VenturesThe trade imbalance can greatly and effectively be reduced by cordial andproductive mutualcooperation. There are still many opportunities that could beexploited for the greater benefit of both countries and thus reducing the tradedeficit of Bangladesh with India. For example,Bangladesh can obtain financialbenefits by the greater economic integration with IndianNorth-Eastern States(NES), which are geographically situated in a disadvantageous locationfrom themain land. A system of joint ventures (JVs) with buy back arrangements is tobedeveloped. Such JVs will stimulate FDI to Bangladesh and thus productivelyexploit theopportunities of existing complementarities. To meet the demand ofNES of India, JVsinvestments in cement, granite and lime stone, paper, food and

    fruit processing plants hadalready been identified. Other identified sectors, whereJVs projects could be set up, are textile,fertilizer, newsprint, pharmaceuticals,small steel plants, chemicals, machine tools, fishprocessing and leather goods. TheJVs investments in backward linkage textile sector is veryimportant forBangladesh to enhance the local value addition of the countrys major exportitem,ready made garments. Both countries can also be benefited from the jointinvestment ininformation, communication and financial services. Also there is a

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    tremendous scope for Indianprivate investment in Bangladeshs education andhealth sectors.Bangladesh can reduce its trade deficit by such investment, as tradein services now is mostlyone way (Bangladesh imports service from India). TheseJVs investments should targetregional as well as world markets. For successfulJVs, private sectors in both countries shouldcome forward and the governmentsmust support by providing adequate incentives,infrastructures and appropriatepolicies. Bangladesh can reduce its trade deficit by allowing seaand road transits toIndia; however, the transit issue is very controversial in the country. Bothcountriesmust prepare an appropriate cooperation framework in this regard.Therefore,potentials and opportunities to improve bilateral trade imbalancebetween Bangladesh and Indiaare available. The necessary matters are properinitiatives, policy measures, mutual cooperationand above all political will of bothcountries. Maximum efforts are to be made by the peopleand the governments ofthese two countries in order to attain the highest possible mutual gainsfrom the

    bilateral trade.6

    Summary and ConclusionsIn this chapter, attempts have been made to highlight the importance of study ofbilateral traderelationship between Bangladesh and India. Historically India hasbeen the important tradingpartner of Bangladesh since its independence. CurrentlyIndia is the 2nd largest trading partnerof Bangladesh, and Indias position is at the

    top for Bangladeshs imports trade. The study alsounderscores the trend, structureand current picture of Bangladesh-India trade. It is observedthat Indias exportshare is much higher than import share, and Bangladeshs imports share ismuchhigher than export share in the SAARC regional trade. Bangladeshs trade withIndiaincreased tremendously especially in the 1990s. The average annual growthrates ofBangladeshs trade with India, during 1980 to 1995, were much higherthan those with theSAARC and the world. India and Bangladesh are veryimportant trading partners in theSAARC region. India alone provided 94.1 percentof Bangladeshs imports from the SAARCcountries in 2003. Indias share in

    Bangladeshs total trade with the SAARC countries was 91.7per cent, andBangladeshs share in Indias total trade with the SAARC countries was 40.91

    percent in 2003. In fact, Bangladesh is the Indias largest exports market in

    the SAARC region. .However, the trade relation between these countries is notbalanced. Bangladesh has alwaysbeen trade deficit with India, and recently it hasincreased very sharply. Since this tradeimbalance has some economic and politicalimplications on the Bangladesh economy,Bangladesh considers it as a matter ofgreat concern. Limited export base, backward industries,inadequate infrastructure,lower productivity in Bangladesh, appreciation of Bangladeshs Takaagainst IndianRupee, earlier and faster trade liberalization program in Bangladesh compared

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    toIndia, tariff and NTBs imposed by the Indian government, huge illegal trade,diversifiedexports and technologically advanced industrial base of India are themain reasons of this hugetrade imbalance. . Therefore, current unequal bilateraltrade needs to be transformed intomutually beneficial, balanced and interdependentone. This has to be done for the great interestsof both economies. If Bangladeshcannot improve the situation, the country would eventuallybecome a market forIndian products, lose the existing industries, experience high levelof unemployment and lose import capacity by losing income from its exports. Onthe other hand,for the sake of Indias own interest India should promoteBangladeshs export to India. IfBangladeshs exports were increased, this wouldinduce higher imports of raw materials andintermediate goods from India. Thedemand for the Indian consumer goods exports would alsoincrease in Bangladeshdue to higher income from increased exports. So some remedialmeasures havebeen suggested to mitigate this problem. The governments, private investors

    andbusinessmen of both countries must work together to bring these measures intoreality.The government of Bangladesh must try to remove all structuralimpediments of exportsexpansion. Availability of sound physical, social andeconomic infrastructure, superior productquality, sufficient institutional facilitiesfor banking, credit and insurance, improved law andorder situation, labor unrest free environment, an honest and efficient

    administration andcontinuous political stability must be ensured for thecountrys

    export promotion. To encouragecapacity building and to improve productivity and

    competitiveness in terms of both quality andcost, domestic and foreign

    investments must be attracted through appropriate governmentpolicies.

    Maximum efforts are to be devoted to diversify the export base. Bangladesh

    shouldfurther devalue its currency to make its products more competitive.

    Measures must be taken tostop illegal trade; tariff and NTBs- free entry of

    Bangladeshs exports to Indian market must beensured; more Indian investments

    in Bangladesh in the form of JVs must be encouraged. Thereis no reason to

    believe that Bangladeshs exports would flood or disrupt the whole

    Indiandomestic market if India establishes a unilateral free trade regime for

    Bangladeshi products, asBangladeshs industrial base is relatively weak. So the

    Indian government should also becordial to remove this trade imbalance. So there

    is a scope for mutual trade expansion Tradecomplementarities between

    Bangladesh and India can be developed by vertical specializationthrough

    production sharing arrangements. It would allow both countries to strengthen

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    theirtrade ties and to reap economies of scale by concentrating on a specific

    production process inthe value-addition chain. For the economies of two

    countries a coordinated developmentapproach is also essential. The two

    countries can work together in the field of tourism by jointmarketing and joint

    publicity, and in establishing the price of jute by coordinated holding of stocks,

    etc. It is important to remember that bilateral relationship with India needs to be

    lookedat in conjunction with regional and multilateral cooperation. Hence a

    cordial and productivecooperation between these two development partners

    must be ensured within appropriateregional and multilateral cooperation

    framework to reduce the trade imbalance. So it is crucialto make SAPTA more

    effective and operational.