Interview on Trade Relationship between Bangladesh & India with Pratim Ranjan Bose, Chief of Bureau of The Hindu Business Line, Kolkata.

Pratim Ranjan Bose:The synergy between businesses on both sides is low.

As per estimates available from Bangladesh Bank, as in 2016-17 (July-June); India was the second largest Import destination for Bangladesh (after China). However, India contributed barely 1.9% ($672 million) of Bangladesh’s 34.65 billion export revenue). Naturally, India was nowhere in the list of the top export destinations released by Bangladesh Bank.

The indications are clear. Though India dismantled the duty barrier for imports from Bangladesh, as early as in 2011; there was not much trace of cross-border value chain creation. One reason behind is India’s low FDI stock of $533 million (9th largest) as in March 2018 and Bangladesh’s inability to attract more than $2 billion FDI a year.

The other reason is, Bangladesh is primarily textile (Ready-made garment or RMG) country, contributing 85% of its export revenue (other major areas are frozen food 1.36%, agri 2.2% and Leather products 3.57%). Unfortunately for them, India is strong in this sector. Though our apparel exports are nearly half of Bangladesh’s, Indian producers have better command over the textile value chain (as it has better access to inputs) and are catering the vast domestic market to the maximum possible extent. All put together, India’s garment imports (total) are very low $773 million in 2017-18 (April-March), thereby offering limited scope to Bangladesh.

Add to this the overemphasis of Bangladeshi garment makers in catering demands in Europe and USA and, the value chain between two industries is limited in Bangladesh’s import of intermediaries (like cotton yarn, fabric, accessories etc) from India. As in 2016-17 (July-June), nearly 26% of Bangladesh’s cotton (all types) import was from India.

Having said this there are some welcome changes in the scenario in the recent past especially since the introduction of GST in July 2017. Abolition of 12% countervailing duty under GST and, the recent escalation of import duty on textile products from destinations other than FTA countries; offered a tremendous opportunity to Bangladesh.

The latest estimates released by Bangladesh Bank show, during January-March 2018, India was ranked ninth top export destinations of Bangladesh – a clear improvement in trade opportunities. In the three-month period, Bangladesh exported $195 million worth of goods to India. This was 37% higher than the same period in 2017.

The credit goes primarily to textiles. From July 2017 to May 2018; Bangladesh’s total exports to India increased by $201 million, which is 30% more than the country’s total export in the full year (July-June) of 2016-17. Unofficial estimates suggest that roughly $147 million export boost came from ready-made garments.

As I see it going forward, Bangladesh may optimise its locational advantage and the recent connectivity boost between the two countries, to grab a bigger share of India’s apparel imports. The growth may primarily come at the cost of other import-destinations. This has also opened serious opportunities in cross-border value chain creation. According to trade associations in Bangladesh MNC fashion retailers like Zara or H&M are now as a sourcing point to cater Indian market. While I do not know the flow of trade, chances are top retailers will source inputs and intermediaries from India and use Bangladesh as a finishing destination, meaning the benefits are shared between the two countries. For Bangladesh, this is also a chance to move up on the value ladder in terms of value contribution than merely being the low-cost finishing destination (when compared to India). Such cross-border value chain exists between India and Sri Lanka. Considering Bangladesh’s comparative strength in garments, and the improving logistics, they can surely make the most in apparels.

Meanwhile, Bangladesh’s dependence on Indian cotton inputs may also witness a rise as a result of the US-China trade war. Bangladesh currently imports 18% cotton (all types) from China, which is a cotton deficient country. A more integrated value-chain creation, therefore, may find, India and Bangladesh harnessing mutual advantages.

Pratim Ranjan Bose : Bangladesh has very low or negligible base in manufacturing due to variety of reasons, starting from low access to finance (project finance is nearly non-existent and whatever is done through State-owned banks mostly on political considerations leading to the creation of bad debts) to poor transport infrastructure (the country is almost divided in two by the river Padma with limited rail interconnection), limited access to electricity, policy failures in the past to scarcity of land (barring a few island nations, it has the maximum population density in the world).

Energy cooperation with India, huge investment in infrastructure, (which includes a nearly $7.2 billion Indian line of credit) including the upcoming Padma bridge built with $3 billion Chinese finance and the decisions to set up SEZs (including three allotted for Indian companies) is creating foundations for future growth in manufacturing. In the days to come, Bangladesh has to work on reforming its banking sector, reduce high duty barrier (Bangladesh’s average applied tariff rate was the highest in South Asia and much higher than those of the countries in Southeast Asia) for optimising growth opportunities.

Branded retail is a classic example in this regard. Due to the high duty wall, Bangladesh couldn’t attract sufficient investment from branded retailers of apparels, from India or elsewhere. The net result is such goods are taking the informal route to Bangladeshi market. Bangladesh is losing the revenue and market optimising potential.

I am not an expert on artificial intelligence. But the way I see it is, Bangladesh has to create an efficient manufacturing sector. To achieve this goal Bangladesh has to continue with its reform initiatives. Considering its proximity to India – both by land and sea- and the LDC status (which attracts fewer duty restrictions in global trade); Bangladesh should attract Indian FDI to be a part of the value chain.

The conducive atmosphere over the last 10 years saw Indian FDI growing despite the aftershock of the 2004-5, (when a big bang investment proposal from Tata Group failed to take off due to non-cooperation or inability of the then government in Dhaka). But the flow should grow faster. As an LDC, Bangladesh has a tremendous opportunity to promote itself as an export hub for Indian companies, which is yet to happen.

Pratim Ranjan Bose : Politically, Bangladesh emerged as an important ally of India over the last 10 years. As contiguous geographies there are many areas to work with, starting from agri-horticulture technology to weather forecasting or transport logistics. For example, India’s bid to optimise cheap river transport potential to North East will not be successful without Bangladesh. The gains are shared. Just as cement can be transported to North East India from Kolkata at a cheaper cost; Bangladesh can use the opportunity to tap opportunities in river-logistics sector.

At the government level, the two countries are increasingly expanding the areas of cooperation. However, a couple of problems are still persisting in this regard.

Harmonising standards: Due to long political isolation, there is a wide variance in standards and rules and regulations in two countries. For example, Bangladesh doesn’t release HS-code based trade figures, which is an international practice. Similarly, lower axel-load restriction in Bangladesh is a hurdle for containerised trade.

Logistics gaps in India. While logistics gaps in Bangladesh affects every exporting nation; in so far as India’s trade with neighbours is considered, the logistics gaps in India become a serious hurdle in optimising the opportunity. In the prevailing road based India-Bangladesh trade goods travel way longer distance inside India. Naturally, inefficiencies on our side make trade costly.

To give one example, a small Kolkata-based exporter got an order to supply rails to Bangladesh for their Nuclear power project. But the unfavourable terms put by Indian Railways in carrying the consignment to Gede(India)-Darshana(Bangladesh) border, may cost him the opportunity.

Safe play of Indian investors and traders. The Indian investors are still Westbound, as is amply proved by India’s low FDI stock not only in Bangladesh but across the neighbourhood. Between 2006 and 2016, Indian business invested barely $2.2 billion in BIMSTEC countries that include a thriving Thailand. Chinese are way ahead in this respect. To optimise potential in the neighbourhood, vis-a-vis China, Indian businessmen have to look a little longer than mere trade opportunities.