Dialogue  October-December 2008 , Volume 10 No. 2

Expanding Indo-Bangladesh Trade Relation: Need to Look beyond the Merchandise Trade

M. P. Bezbaruah and Ratul Mahanta*

Introduction

Independence of Bangladesh in 1972 aroused considerable positive expectations in India as India looked forward to close and cordial relationship with the newly independent neighbour. But even before a decade had passed, frictions started to surface in the Indo-Bangladesh relationship. Sources of contentions ranged from economic issues such as the sharing of Ganga water in the lean season to other issues such as illegal immigration from Bangladesh and harbouring of insurgents from Northeast India in Bangladesh. Politics being what it is, one obvious area of mutually profitable cooperation between the two countries should have been trade, especially as both countries undertook in the 1990s several reform measures including moving over to a floating exchange rate making their economic systems more conducive for participation in international trade. This paper is an attempt to look into the trend and composition of trade between the two countries over the post economic liberalisation period with the goal of exploring and identifying mutually beneficial areas of economic cooperation.

India-Bangladesh Formal Trade

       Available statistics reveal that the volume of trade between the two countries has been increasing since the early 1990. During these years India emerged as a major trading partner for Bangladesh. In 1990, India ranked 4th among the countries from which Bangladesh imports. But since 1995 India has been holding first rank in this regard1. India’s strong position in Bangladesh’s international trade can be seen from Table 1.

         Table 1: India’s share in Bangladesh’s Global and SAARC trade

Year                                                                                   1990   1995 2000   2003

India’s share in Bangladesh’s global trade                   3.6    10.7    7.6      9.2

India’s share in Bangladesh’s global exports              1.3      1.1    1.0      0.7

India’s share in Bangladesh’s global imports              4.7    15.3 11.3    15.5

India’s share in Bangladesh’s trade with SARRC     60.6    83.5    86.8   91.7

India’s share in Bangladesh’s exports to SAARC     36.6    43.3    56.1   53.5

India’s share in Bangladesh’s imports from SAARC 66.1   86.3   89.4    94.1

    Source: Rahman (2006)

      India’s share in Bangladesh’s global trade increased from 3.6 percent in 1990 reached the peak of 10.7 percent in 1995 and then marginally declined to 9.2 percent in 2003. In fact India’s share in Bangladesh’s global import increased from 4.7 percent in 1990 to 15.5 percent in 2003. But her share in Bangladesh’s global export remained quite low   throughout the same period and indeed the share had a declining trend. Thus in terms of shares in global trade India is an important partner for Bangladesh while in terms of existing trade patterns Bangladesh is far less significant a partner for India.  However within the SAARC region Bangladesh appears to be a much more significant partner of India than any other country in the region. The same picture is depicted in table 2 from Bangladesh’s point of view.

Table 2: Bangladesh’s share in India’s Global and SAARC trade

Year                                                                                1990    1995 2000 2003

Bangladesh’s share in India’s global trade              0.74     1.59  0.94 1.13

Bangladesh’s share in India’s global exports          1.67     3.14  1.94 2.42

Bangladesh’s share in India’s global imports          0.06     0.23  0.10   0.08

Bangladesh’s share in India’s trade with SAARC53.42  59.64 38.14 40.91

Bangladesh’s share in India’s exports to SAARC 60.98 62.17 42.61 49.64

Bangladesh’s share in India’s imports from SAARC 15.4 6 39.914.43   8.42

    Source: Rahman (2006)

      Despite India being a major trade partner of Bangladesh, one concern in the trade relation between the two countries is the large and persistent trade deficit Bangladesh have been running over the years. The graphs in figure 1 show how India’s exports to Bangladesh have been rising especially since the early 1990s, while imports from Bangladesh have hardly taken off ever, contributing to widening of India’s surplus or Bangladesh’s deficit in the balance of trade between the two countries. However in the last couple of years there has been a sharp decline in India’s export to Bangladesh which has narrowed the trade deficit considerably.

                                                       Fig. 1

Informal Trade between India and Bangladesh: Volume and Composition

      The statistics on formal trade discussed in the previous section do not fully reflect the volume of exchanges of goods between the two countries as the informal cross-border trade is reportedly substantial in volume [Rao et al. (1996); Pohit and Taneja (2000), Indian Institute of Entrepreneurship (2001) and World Bank (2003)]. According to World Bank (2003) total smuggled exports from India to Bangladesh was around US $ 500 million, which was about 42 percent of Bangladesh’s recorded imports from India in 2002-03 or about 30 percent of total imports (recorded and smuggled).

    The larger part of the informal trade with Bangladesh takes place through States of Assam, Meghalaya, Mizoram and Tripura in Northeast India which share long international boundary with Bangladesh but linked with the rest of India through a narrow corridor. Indian Institute of Entrepreneurship (2001) estimated the volume of Indo-Bangladesh informal cross border trade to be of the tune of Rs106.14 crores in the year 2000.

        Another study by Baruah (2000) gives an idea about the composition of the informal cross border trade which is presented in table 3. The figures however relates to the trade across Assam-Bangladesh border only.

Table 3: Composition of Informal Exports and Imports across Assam-Bangladesh Border estimated for the year 1996

Items                 Percentage Share             Items            Percentage Share in

                           in the Value of                                       the Value of Imports                                Exports  

Food items                27.45                        Metals                           25.71

Spices                        22.77               Electronic goods                  18.62

Engineering goods  15.07               Stationary goods                  17.88

Cloth                          14.50                     Livestock                        16.76

Medicine                   10.59               Consumer goods                  12.72

Livestock                   4.48                          Cloth                             3.68

Narcotics                    2.66                     Food items                        3.67

Miscellaneous           2.48                  Miscellaneous                     0.96

Total                         100.00                        Total                           100.00

        Source: Basic data taken from Baruah (2000)

    While informal export from the Indian side consisted mostly of essential consumer goods produced in India but the outside the Northeast region, the informal imports to the Indian sides are manufactured products coming from a third country. Thus the informal trade is significant to both Northeast India and Bangladesh more as a source of supply than as a source of earning from production of exportable.

   In the pre-Uruguay Round Agreement period, when most manufactured consumer goods used to be in India’s negative list of imports and tariff rates used to be high on non-negative list items, electronic consumer goods used to be smuggled extensively into the Northeast across Indo-Bangladesh as well as Indo-Myanmar border. Following removal of quantitative restriction in 2000 as per WTO agreement and progressive reduction of customs rate, smuggling of such consumers goods have sharply come down. Since such goods used to constitute a significant part of total informal imports to India from Bangladesh, it is quite probable that the informal imports from Bangladesh to Indian have been severely dented in the recent years. It is widely ascertained that with India, Bangladesh has been running a deficit in the balance of informal trade too. It is therefore no surprise that World Bank (2003) survey found that against cattle and sugar being the main items smuggled from India to Bangladesh gold, silver and currency are the main items smuggled from Bangladesh to India.

A Possible Way Forward:

    As mentioned above large and persistent deficit in Bangladesh’s balance of trade with India has been a hiccup in the trade relation between the two countries. While it is not necessary for a country to balance trade with each country, or for that matter even to balance the overall trade in goods, so long as the overall balance of payment is not seriously in deficit, it appears to be an issue with the Bangladesh side. Accordingly some conscious steps were taken in the past to correct the balance trade between the two countries. However such ad-hoc measures are not likely to give a permanent solution. The more lasting and mutually beneficial solution seems to lie in putting the agenda of Indo-Bangladesh economic cooperation in a wider perspective which is not confined only to merchandise trade but includes trade in services as well as other forms of cooperation.

     Indeed with both countries having more or less similar resource base, complementarities may not be too many for trade in goods to ever acquire a significant proportion. Yet geographical congruity between the two can be a source of opportunities for fruitful exchanges especially in invisibles. By providing transit facilities through it in a more regular basis, Bangladesh can export the services of transportation, hospitality and all associated services with the transit traffic. India, especially the Northeast region can in return benefit from reduced transport cost with the rest of the country and the world. India can also export the services of health care and education. Moreover, despite illegal immigration from Bangladesh being a contentious issue, there is no denying the fact that relatively cheaper labour supply from the immigrants can be useful for execution of the infrastructure project badly needed for acceleration of economic growth in the Northeast region. The idea of issuing work permit to immigrant workers has now been in discussion in the policy and academic circles for quite sometime. There is a scope for exploring the work permit as a means of Bangladesh exporting labour and India using the supply without causing social turmoil. Geography being what it is, it will be mutually beneficial for both India and Bangladesh to resolve the areas of conflict and mistrust, and work towards activating mutually beneficial economic cooperation. Both the processes can progress simultaneously rather than in a sequential way. Indeed progress in economically beneficial cooperation can create vested interest in both the countries to resolve the other contentious issues expeditiously

References:

1.     Baruah Srinath (2000), ‘Certain Observations on Informal Border Trade with Neighbouring Countries and Economic Prospects of the North Eastern Region’ in GuruDas Das & R.K. Purkayastha (ed.) Border Trade: North-East India and Neighbouring Countries, Akansha Publishing House, New Delhi

2.     Centre for Monitoring Indian Economy (2008), Foreign Trade and Balance of Payments.

3.     Indian Institute of Entrepreneurship (2001), Border Trade with Bangladesh and Myanmar: Pre Investment Feasibility Report, Guwahati.

4.     Pohit S. & Taneja N. (2000), India’s Informal Trade with Bangladesh and Nepal: A Qualitative Assessment, ICRIER working paper No. 56, New Delhi.

5.     Rahman M. M. (2006), Bangladesh India Bilateral Trade: Causes of imbalance and Measures for improvement, http://www.etsg.org/ETSG2005/papers/rahman accessed on 5th November 2008.

6.     Rao V. L. et al. (1997), India’s Border Trade with select Neighbouring Countries, Research and Information System for the Non- Aligned and Other Developing Countries, New Delhi.

7.     World Bank (2003), India-Bangladesh bilateral trade and potential Free Trade Agreement, www.worldbank.org.bd/bds  accessed on 5th November 2008.

Footnotes

1 IMF (various years), Direction of Trade Statistics