Thoughts on Economics 33
Thoughts on Economics
Vol. 18, No. 02
Bangladesh-India Trade Relations
Prospects of a Bilateral FTA
Ayubur Rahman Bhuyan[1]
[Abstract: Bilateral trade between Bangladesh and India is heavily titled in favour of India. Bangladesh’s trade deficit with India keeps on growing fast. The country’s exports to India can now pay for only 13 percent of its imports from India. There are suggestions from different quarters that a bilateral free trade agreement (FTA) with India might bring benefit to Bangladesh by stimulating exports to India as well as by attracting larger doses of investment from that country. This paper examines the likely impact of the FTA on the Bangladesh economy and makes some tentative recommendation in that regard.]
I. Introduction
Bilateral trade with India is of great importance to Bangladesh. In terms of both population and GDP, India offers a large market for Bangladesh’s exports. Regarding imports, too, geographical proximity alongside India’s abundant natural resources and diversified production structure offers enormous opportunities to Bangladesh to obtain quick supplies of the much-needed consumption and development imports at lower transportation cost. The need for expanding trade between the two countries, therefore, hardly needs any renewed emphasis.
In both countries there is a growing recognition of the actual and potential benefits of mutual trade between them. At the official level, this recognition is reflected in the existing Indo-Bangla Trade Agreement, the formation of SAPTA in 1993, and now a full-fledged free trade area (SAFTA) that came into force on 1 July 2006. The two countries have also a Joint Economic Commission (JEC), which is responsible for promoting mutual trade and cooperation on other economic matters. At the private sector level, the apex trade bodies of the two countries – FBCCI on the Bangladesh side and the FICCI of India – as also business chambers like the MCCI (Dhaka) and the CII (New Delhi) have shown strong interest to boost trade between the two countries.
Most recently a proposal has been floated to establish a bilateral free trade agreement (FTA) between Bangladesh and India. This paper attempts an ex-ante evaluation of such an agreement. Section 2 outlines the trend and pattern of Bangladesh’s trade with India. Section 3 identifies and examines the causes of the prevailing trade imbalance with India. Section 4 examines the rationale for a bilateral free trade agreement (FTA) between the two countries. Section 5 highlights the likely impact of the FTA on Bangladesh economy and makes an appraisal of benefits and costs. Section 6 sums up the major conclusions of the paper and presents some tentative recommendations.
II. Trends in India-Bangladesh Trade
2.1 Exports, Imports and Trade Balance
Trade between Bangladesh and India has been highly uneven. Trade liberalization carried out by these two countries in the recent years produced a rather lopsided effect on their trade flows. Bangladesh’s imports from India registered a phenomenal increase, as a result of which India is now the second largest single source of supply of Bangladesh’s imports. In FY02, about 11.8 percent of Bangladesh’s imports were obtained from India. This share went up to 15.3 percent in FY05. In FY06 imports from India registered some decline – to $1851 million from $2009 million in FY05. Exports to India, however, increased to $242 million in FY06 from $144 million in the previous fiscal, but yet exports to India could pay for only 13 percent of Bangladesh’s imports from that country. It can be seen in Table 1 that in FY06 exports to India were just 2.3 percent of Bangladesh’s total exports, whereas Bangladesh obtained 12.5 percent of its imports from India in that year. It is also worth noting that Bangladesh’s trade deficit with India in FY06 was 38 percent of the country’s total deficit, the highest so far for a single country.
Table 1: Bangladesh’s Bilateral Trade with India (Million US $)
/ 2001-02 / 2002-03 / 2003-04 / 2004-05 / 2005-06 / Growth Rate* /Total Exports / 5926 / 6548 / 7603 / 8655 / 10526 / 15.15
Total Imports / 8540 / 9658 / 10903 / 13147 / 14746 / 14.63
Overall Deficit / 2554 / 3110 / 3300 / 4492 / 4220 / 13.38
Exports to India / 50 / 84 / 89 / 144 / 242 / 48.32
Imports from India / 1012 / 1355 / 1598 / 2009 / 1851 / 16.29
Deficit with India / 962 / 1271 / 1509 / 1865 / 1609 / 13.72
Export to India as % Imports from India / 4.94 / 6.20 / 5.56 / 7.17 / 13.07 / -
Exports to India as % of BD’s Total Exports / 0.84 / 1.28 / 1.17 / 1.66 / 2.30 / -
Import from India as % of Total Import / 11.85 / 14.03 / 14.66 / 15.28 / 12.55 / -
Deficit with India as % of Total Deficit / 37.67 / 40.87 / 45.73 / 41.52 / 38.13 / -
Note: *Average annual compound growth rate between FY02-FY06, based on end-year values.
Source: Bangladesh Export Promotion Bureau, Export Statistics, various issues; Bangladesh Bank, Annual Import Payments, various issues.
2.2 Commodity Pattern of India-Bangladesh Trade
Table 2 presents H.S. data on Bangladesh’s official imports from India. Major product categories of imports are textiles and textile articles (H.S. 11), vegetable products (H.S. 2), machinery (H.S. 16), mineral products (H.S. 5), chemical products (H.S. 6), base metals (H.S. 15), transport equipment (H.S. 17), prepared foodstuffs, beverages and tobacco (H.S. 4), plastics and rubber products (H.S. 7), animal products, mainly fish (H.S. 1), and a few other intermediate goods.
Table 2: Commodity Composition of Bangladesh’s Imports from India
(Fiscal year 2001-02—2005-06)
Thousand US$
H.S Section and Commodity Groups / Fiscal2001-02 / Fiscal
2002-03 / Fiscal
2003-04 / Fiscal
2004-05 / Fiscal
2005-06 / Average Annual Growth:
FY06/FY02 /
/ Values / % / Values / % / Values / % / Values / Values / % /
Grand Total / 1011.8 / 100.0 / 1355.0 / 100.0 / 1598.4 / 100.0 / 2009.1 / 100.0 / 1850.9 / 100.0 / 16.3 /
1. Live Animals & Animal Prods / 17.6 / 1.7 / 6.9 / 0.5 / 4.6 / 0.3 / 24.4 / 1.2 / 13.2 / 0.7 / -7.0
2. Vegetable products / 204.7 / 20.2 / 403.6 / 29.8 / 518.9 / 32.5 / 667.8 / 33.2 / 394.6 / 21.3 / 17.8
3. Animal or veg. fats & oil / 1.3 / 0.1 / 4.4 / 0.3 / 4.0 / 0.2 / 3.5 / 0.2 / 4.8 / 0.3 / 37.6
4. Food, Bev. & Tobacco / 58.1 / 5.7 / 117.3 / 8.6 / 106.5 / 6.7 / 87.2 / 4.3 / 93.3 / 5.0 / 12.6
5. Mineral products / 82.2 / 8.1 / 106.5 / 7.8 / 146.0 / 9.3 / 191.0 / 9.5 / 169.7 / 9.2 / 19.8
6. Chemicals / 91.2 / 9.0 / 112.4 / 8.3 / 132.8 / 8.3 / 162.6 / 8.1 / 167.5 / 9.1 / 16.4
7. Plastic and rubber articles / 36.5 / 3.6 / 44.6 / 3.3 / 68.1 / 4.3 / 72.4 / 3.6 / 70.7 / 3.8 / 18.0
8. Raw hides & skins, leather / 0.5 / 0.1 / 0.2 / - / 0.3 / - / 0.9 / - / 1.2 / 0.1 / 22.0
9. Wood & Cork / 1.7 / 0.2 / 2.1 / 0.2 / 3.4 / 0.2 / 2.3 / 0.1 / 3.2 / 0.2 / 16.2
10. Pulp of wood, paper or paperboard / 19.7 / 1.9 / 23.6 / 1.7 / 21.8 / 1.4 / 20.4 / 1.0 / 18.0 / 1.0 / -2.2
11. Textiles & textile articles / 237.7 / 23.4 / 173.2 / 12.7 / 253.8 / 15.9 / 299.0 / 14.9 / 433.9 / 23.4 / 16.2
12. Footwear / 0.3 / - / 0.5 / - / 1.3 / 0.1 / 1.3 / 0.1 / 1.8 / 0.1 / 58.5
13. Articles of stone, ceramics, glass/glassware / 8.4 / 0.8 / 8.9 / 0.7 / 7.4 / 0.5 / 7.9 / 0.4 / 7.0 / 0.4 / -4.5
14. Pearls & stones / 0.2 / - / 0.4 / - / 0.5 / - / 0.5 / - / 1.6 / 0.1 / 61.8
15. Base metals / 66.4 / 6.6 / 119.7 / 8.8 / 89.0 / 5.6 / 128.1 / 6.4 / 142.7 / 7.7 / 21.1
16. Machinery & appliances, / 116.8 / 11.6 / 125.3 / 9.2 / 138.4 / 8.7 / 236.0 / 11.7 / 196.3 / 10.6 / 13.8
17. Transport equipment / 60.7 / 6.0 / 95.7 / 7.1 / 91.9 / 5.7 / 83.4 / 4.1 / 106.4 / 5.8 / 15.1
18. Optical, and other instr. / 4.8 / 0.5 / 6.1 / 0.4 / 5.5 / 0.3 / 14.5 / 0.7 / 19.3 / 1.0 / 41.5
19. Arms & ammunition, / 0.3 / - / - / - / - / - / 0.1 / - / 0.8 / - / 31.0
20. Misc. Mfrs / 2.3 / 0.2 / 3.7 / 0.3 / 3.7 / 0.2 / 5.6 / 0.3 / 5.3 / 0.3 / 22.9
21. Works of art, etc. / 0.3 / - / - / - / 0.5 / - / 0.1 / - / - / - / -48.3
Source: Bangladesh Bank, Annual Import Payments, relevant issues.
Data on exports by commodities are shown in Table 3. Exports to India are highly concentrated in a few items. In FY06, the top six products accounted for 80.6 percent of the country’s total exports. These are raw jute (23.0%), chemical fertilizers (22.5%), jute goods (12.9%), betel nuts (9.6%), jute yarn and twine (6.4%), and frozen fish (6.2%). A few other minor items of export are: accumulator battery and parts, copper wire, leather, toilet soaps, PVC bags, plastic hanger, and fruits, which together account for another 9% of the country’s exports to India. The small volume of the country’s exports mainly reflects a narrow industrial base but in part also the Bangladesh exporters’ inability to enter the Indian market because of high tariff and non-tariff barriers.
Table 3
Commodity Composition of Bangladesh’s Exports to India, Fiscal 2005-06
Commodity / Value in thousand US $ / % of total / Average annual growth rate(2005-06 over 2002-03)
1. Raw jute / 55694 / 23.00 / 19.8
2. Chemical fertilizer / 54435 / 22.48 / 26.5
3. Jute manufactures / 31205 / 12.88 / 111.1
4. Betel Nuts / 23218 / 9.59 / 98.2
5. Jute yarn and Twine / 15402 / 6.36 / 532.0
6. Frozen fish / 15126 / 6.25 / 77.1
7. Accumulator battery & parts / 8029 / 3.32 / 353.6
Commodity / Value in thousand US $ / % of total / Average annual growth rate
(2005-06 over 2002-03)
8. Copper wire / 6171 / 2.55 / -
9. Leather / 3140 / 1.30 / 16.8
10. Soap toilet / 2352 / 0.97 / 144.5
11. Polythene Sheet / 2190 / 0.90 / -
12. Other Engineering products / 1319 / 0.54 / 275.1
13. P.V.C. Bags / 1002 / 0.41 / 102.3
14. Plastic Hanger / 894 / 0.37 / 200.3
15. Fruits / 881 / 0.36 / -
16. Cement / 837 / 0.35 / -
17. Textile fabrics / 826 / 0.34 / 116.0
18. Fruit Juice / 818 / 0.34 / -
19. Woven garments / 730 / 0.30 / 5.0@
20. Audio-video cassette / 718 / 0.30 / -
21. Machinery / 698 / 0.29 / -
22. Stainless steel ware / 643 / 0.27 / 69.9
23. Plastic goods / 591 / 0.24 / -
24. Ceramic Tableware / 124 / 0.05 / 49.6
Total, including others / 242189 / 100.00 / 48.32
Source: Bangladesh Export Promotion Bureau. Export Statistics, relevant issues.
Note: @ Between 2001-02 and 2005-06.
2.3 Unofficial Trade between India and Bangladesh
Data on informal (unofficial/illegal) trade of Bangladesh with India are dated but all available studies indicate that such trade is essentially one-way, unofficial imports from India exceeding unofficial exports to that country by a factor of 20 or more (Bakht, 1994; Chaudhury, 1995; MARC, 1999; Rahman and Razzaque, 2002). The magnitude of Bangladesh’s trade deficit with India would thus be much bigger if the cross border unofficial trade were taken into account.
Livestock and cattle are the most important item of unofficial import from India. Other products in the unofficial import basket are items of everyday use and include cotton saree, sugar, cereals, fruits and nuts, spices, salt, drugs, shawls etc. As against imports, only a limited number of items are unofficially exported to India. These include indigenous items like fish, jute, cowhides, fertilizer, RMG products, and fabrics woven with imported synthetic yarn, as well as third country products like electronics, synthetic fabrics, cigarettes, plastic products, brass and copper.
Available studies on smuggling conducted both in Bangladesh and India and popular perceptions of smuggling indicate that the absolute volume of informal imports from India into Bangladesh continues to increase although the rate of increase may have slightly declined due to greater vigilance on both sides of the border. Yet, there is a general feeling that unofficial imports into the country at the present could be about 1.5 times the official imports, as against the 1.7 times estimated for 1998 in the aforementioned study (MARC, 1999).
Informal exports to India, perhaps, have also declined because of stronger law enforcement on the Indian side of the border as well the declining demand within India for such popular items as electronics, as a recent Indian study indicates (GOI, 2002). Nevertheless, such exports are believed to be at least a third higher than the official exports, compared to 1998 when these were about 50 percent higher (MARC, 1999).
Unofficial trade thrives in an environment of excessively protected trade regime when relative prices of tradable goods between the partner countries differ because of various trade-restrictive measures.
In theory, trade liberalization measures, by reducing the border price differential of tradables, would induce a fall in unofficial trade (as illegal flows would now have the incentive to enter the country through official channels), but this has not happened in the case of India-Bangladesh trade.
Despite significant trade liberalization in Bangladesh, the existing duties and taxes on imports are still high, and quantitative restrictions (QRs) remain on a number of products, which provide enough incentives for unofficial imports (Bakht and Sen, 2001). Such trade is also encouraged by restrictions imposed by India on some of their exports (for example, the ban on the export of cattle), which keep Indian domestic prices of those commodities lower than comparable world prices (Khanna, 2001). In fact, the sizable increase in the illegal import of cattle into Bangladesh in recent years has been the result of the ban on the legal export of cattle from India (GOI, 2002).