Indiabangladeshtrade

India – Bangladesh Trade Relations

A Report On

India – Bangladesh Trade Relations

Prepared By:Manoj Kumar Singh Mob. No. : 9910845011 [email protected]

1 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

Introduction Both Bangladesh and India are two major countries of the SAARC and have a long common historical past and similar cultural and social evolution. There is much that unites the two countries – a shared history and common heritage, linguistic and cultural ties, passion for music, literature and the arts; with Bangladesh, India shares not only a common history of struggle for freedom and liberation but also enduring feelings of both fraternal as well as familial ties. This commonality is reflected in multi-dimensional relations with Bangladesh at several levels of interaction. High-level exchanges, visits and meetings take place regularly alongside the wideranging people-to-people interaction. India’s Missions in Bangladesh issue about half a million visas every year and thousands of Bangladeshi students study in India on self-financing basis and over 100 annual GOI scholarships. These exchanges and interactions serve as an important adjunct to the official-level interaction. India’s land border with Bangladesh – nearly 4,096 km – is the longest that India has with any of its neighbours. Historical Development of India-Bangladesh Trade Relations  Bangladesh 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 signed the first one-year trade agreement on March 28, 1972.In the agreement, fish, raw jute, newsprint and naphtha were identified as the principle exports of Bangladesh to India. India’s major export items to Bangladesh, on the other hand, were cement, coal, machinery and unmanufactured tobacco. The trade between the nations was limited to government level. This agreement also provided border trade between Bangladesh and Neighboring Indian states; and within 16 kilometers of both countries’ border, free trade was allowed for certain commodities.  The expected level of trade was not achieved under the first trade agreement. Also free border trade between Bangladesh and India led to some illegal trade and hence was abolished in October 1972 by mutual consent of the both governments. However, to attain the desired level of trade, the first trade agreement was further extended up to September 27, 1973.  The first trade agreement of 1972 was replaced by another trade agreement for three

years. This agreement was signed on 5 July 1973 and became effective from 28 September 1973. Raw jute, fish, newsprint, etc were identified as major exportable items of Bangladesh to India. On the other hand, major exports of India to Bangladesh were unmanufactured tobacco, cement, coal, raw cotton, cotton yarn, cotton textiles and books. This agreement provided for a system of Balanced Trade and payment Arrangement 2 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

(BTPA) and ‘most favored nations treatment’ to each other. The desired level of trade between the two nations was not achieved by the agreement of 1973, and trade imbalance increased in the very first year. Rupee trade was found to be a barrier in the bilateral trade, and thus abolished rupee trade from 1 January 1975 by a Protocol signed on 17 December 1974. It was decided that trade would be conducted in free convertible currency.  India and Bangladesh signed another trade Protocol on 12 January 1976 for higher volume of trade and long-term arrangements for trade of coal and newsprint. BTPA 4 between Bangladesh and India was extended for another three years till 27 September 1979 on 5 October 1976.  On 4 October 1980, the third trade agreement was signed between these two nations initially for three years. By mutual consent, this agreement was extendable for another 3 years.  On 8 November 1983, Bangladesh and India renewed a Protocol on trade of 1980 for

further three years. In May 1986, the trade agreement of 1983 was extended for another three years till 3 October 1989. Subsequently this agreement was renewed a number of times. Based on available information, this agreement was valid up to 31st March 2009. Problems Causing Indo-Bangladesh Trade Imbalance Although the trade deficit with a particular country is not bad if the overall trade balance is satisfactory, yet from the distribution aspect of trade policies (the distribution of benefits and cots among groups of producers and groups of consumers) the growing trade deficit with India is a great concern for Bangladesh. Bangladesh’s fear is that if this deficit continues, Bangladesh will be dependent only on a few products for its exports, and imports from India displace domestic production to such an extent as to deindustrialize Bangladesh. As a result, it is argued, a severe polarization in Bangladesh and high levels of unemployment will occur. Therefore, increasing trade deficit with India is a problem, and attempts are made here to find out the causes of this problem. Productivity Issues and Structural Factors The productivity differences can also best explain trade patterns between countries. India has productive advantages both in agriculture and industry compared to Bangladesh because of scale economies (Eusufzai 2000). Structurally Indian economy is much larger, more diversified and technologically advanced. Indian products now have become globally competitive both in terms of price and quality. Also geographically India is very closed to Bangladesh, and Bangladesh’s importers are very familiar with Indian products and production capacities. All these factors have made Indian products very competitive in Bangladesh’s market (Hassan 2002). As a result, India’s exports to Bangladesh are more diversified and consists of high value added 3 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

manufactured goods. On the other hand, India’s imports from Bangladesh are limited to a few items, as Bangladesh does not have a large supply base to offer a wide variety of products to India. The obvious result is an increase of trade imbalance between the two nations.

Recent High Level Contacts  On 9th Feb 2009, India and Bangladesh inked two trade deals to further strengthen

economic ties between the two South Asian neighbours. Indian External Affairs Minister Pranab Mukherjee, who was on a daylong visit in Dhaka, signed the Bangladesh India Trade Agreement and the Bilateral Investment Promotion and Protection Agreement after official talks with his Bangladesh counterpart Dipu Moni. Commerce Minister Faruk Khan and Industries Minister Dilip Barua signed the two deals on Bangladesh's behalf. The deals would help the two neighbours bridge the existing huge trade imbalance in favour of India and encourage fresh investment in both countries. Once the agreement comes into being, India and Bangladesh will be allowed to transport their goods using their water, rail and road routes for transportation of goods. India has been enjoying limited transit facilities only on water routes through Bangladesh. The agreement on mutual investment promotion and protection will give most-favoured-nation status to each other.  India has continued to constructively engage the Caretaker Government in Bangladesh

that assumed office after the imposition of emergency in the country on January 11, 2007. The External Affairs Minister (EAM), Shri Pranab Mukherjee, visited Bangladesh on February 19, 2007 and extended an invitation to Bangladesh to participate in the 14th SAARC Summit in New Delhi. During the visit, he held detailed discussions with President Dr. Iajuddin Ahmed, the Chief Adviser of the Caretaker Government, Dr Fakhruddin Ahmed and Foreign Affairs Advisor Dr. Iftekhar Ahmed Chowdhury. In the context of bilateral relations, both sides agreed to take steps to place bilateral relations on an “irreversible higher trajectory”.  Prime Minister Dr. Manmohan Singh met Bangladesh Chief Adviser Dr Fakhruddin Ahmed on April 2, 2007 in New Delhi during the 14th SAARC Summit. During the meeting, the two leaders held discussions on all major bilateral issues.  EAM, Shri Pranab Mukherjee, again visited Bangladesh on December 1, 2007 to announce India’s support to Bangladesh in the wake of Cyclone Sidr, as also to undertake a tour of cyclone-affected area. During his visit, EAM announced India’s decision to waive ban on export of five lakh tonnes of rice to Bangladesh and proposal to adopt ten severely affected villages for rehabilitation. Bilateral Trade 4 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

Bangladesh is an important trading partner for India. Bilateral merchandise trade has been growing steadily over the last few years. It grew by 145 % in the last five years from about US $ 1 billion in 2001-02 to US $ 2.55 billion in 2006-07. While Bangladesh’s imports from India grew by 124 % in the last five years (2001-2007), its exports to India grew by 480 % in the corresponding period. India is the 10th largest export destination for Bangladesh, and the largest export destination among the developing world. Zero Duty Access/Tariff Concessions Granted by India to Bangladesh Substantial duty concessions have been extended to Bangladesh under SAFTA, SAPTA and APTA. Pursuant to announcement made by the Prime Minister at the 14th SAARC Summit held in New Delhi in April 2007, there is zero duty market access wef January 1, 2008 for products originating from SAARC LDCs, including Bangladesh, except for some items in the sensitive list. The sensitive list is also being pruned. Furthermore, with a view to, inter-alia, addressing trade imbalance, India has agreed to extend duty-free access to eight million pieces of readymade garments from Bangladesh every year under SAFTA. An MOU on Procedural Arrangements was signed in Dhaka in September 2007, and customs notification issued by Indian Department of Revenue on April 21, 2008. Institutional Framework for Facilitating Trade and Economic Cooperation The first Trade Agreement between India and Bangladesh was signed in 1972. The revised IndiaBangladesh Trade Agreement signed in March 2006 governs the present trading arrangements between the two countries. Other Agreements/MOUs for facilitating trade and economic linkages include: (i) Protocol on Inland Water Transit and Trade (IWTT); (ii) Bilateral Air Services Agreement between India and Bangladesh; (iii) Bilateral Agreement on the Establishment of Joint Economic Commission (JEC); (iv) India-Bangladesh Convention for the Avoidance of Double Taxation; (v) India-Bangladesh Agreement for the Regulation of Motorvehicle passenger traffic; (vi) Agreement on Revised Travel Arrangements between India and Bangladesh; (vii) Rules for Interchange of Traffic between India and Bangladesh; (viii) MOU between BIS and BSTI for cooperation in the area of standards; (ix) MOU for cooperation in the field of agriculture; (x) MOU for cooperation in the field of science and technology; (x) Protocols for operation of passenger bus service between Dhaka & Kolkata, and Dhaka and Agartala. Discussions are also underway for concluding revised agreement on regulation of passenger and cargo vehicular traffic. Trade Related Bilateral Forum Trade related issues are discussed between the two Governments under following main bilateral mechanisms, which meet periodically: (i) Joint Working Group on Trade (JWG); (ii) Joint Group of Customs Officials (JGC); (iii) Protocol Renewal Committee and Standing Committee to review implementation of Protocol on Inland Water Transit and Trade; (iv) Inter- Governmental 5 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

Railway Meeting; (v) Commerce Secretary Level Talks; (vi) Foreign Office Consultations; and (vi) Joint Economic Commission (JEC) at the Ministerial level. Mutual Investments Besides merchandise trade, efforts are underway to promote mutual investments and technology collaborations. There are significant proposals from large Indian industrial groups (Tata, Essar etc.) to invest in Bangladesh. There are other Indian small and medium sized firms, who are interested in investing in Bangladesh. A large number of Indian firms from both public and private sector have been working on different turn key projects in Bangladesh in sectors such as power, transmission lines, textiles, chemicals and pharmaceutical, glass and plastics, engineering. To encourage increased investment flows, discussions on bilateral investment protection and promotion agreement (BIPPA) have almost been completed, and the agreement is expected to be signed shortly. In November 2007, Government of India has removed the prohibition on investment into India by citizens of Bangladesh or entities incorporated in Bangladesh, allowing investments that have prior approval of the foreign investment policy board of the government of India. A total 181 FDI and joint venture investment proposals from India worth over us $ 435 million have been registered with the Board of Investment, Govt. of Bangladesh in sectors such as agro industry, textiles, chemicals and engineering industries. Out of 181 projects, more than 57 are already in production stage. Trade Infrastructure and Connectivity •

The movement of goods by road is through more than 20 operational land customs stations (LCSs) along the border. Government of India has taken up upgradation of seven LCSs in two phases, and their development as integrated check-posts (ICPs). These ICPs include Petrapole, Hili, Changrabandha, Agartala, Dawki, Sutarkandi and Demagiri. Petrapole, which accounts for more than two-thirds of Bangladesh-India trade, will be developed in the first phase. A Sub-Group under the Joint Working Group on Trade has been set up in November 2007 to look into ways and means of strengthening border trade infrastructure in a more coordinated way.

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The Protocol on Inland Water Trade and Transit (IWTT) has been operational since 1972. It permits movement of goods over barges/vessels through the river systems of Bangladesh on eight specific routes between points in West Bengal & Bangladesh; Kolkata and points in Assam (Dhubri, Karimganj) and between points in Assam. The protocol was renewed in 2007 for period up to March 2009.

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There are four points along border for movement of goods by train. Forty-three years after a similar train service was discontinued in March 1965, direct passenger train service between Kolkata and Dhaka commenced its operation on April 14, 2008 (Bi weekly) following the signing of the Inter-Governmental Agreement in Dhaka on April 10, 2008. There is direct bus service between Dhaka and Kolkata (started in 1999) and

6 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

Dhaka - Agartala (since 2003). India has requested for a direct bus service between Agartala and Kolkata via Dhaka. •

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Under the bilateral India-Bangladesh Air Services agreement, a total 61 flights per week are permitted to operate by designated carriers from both sides. Bangladesh Biman, Air India, Indian, GMG Airlines, Jet Airways are operating services on Kolkata-Dhaka, and Delhi-Dhaka sectors. Airlines from both sides have plans to expand their operations on these sectors as well as include new destinations. Besides 61 flights per week to metropolitan cities, since 2006 India has offered an open sky policy to SAARC member states to 18 tourist destinations in India. A number of proposals for improving trade infrastructure and boosting connectivity (between India and Bangladesh and North-East states of India) are at various stages of discussion between the two governments. For example, India has proposed movement of containers through riverine route and rail; access to Chittagong Port for use by North East States of India, development of Akhaura-Agartala rail link, declaration of Ashuganj as new Port of Call under IWTT, and opening of new trade routes including Kawrapuchchiah/Demagiri (India) – Thegamukh (Bangladesh) and Sabroom (India) – Ramgarh (Bangladesh). The response from Government of Bangladesh is awaited on these proposals.

Technical Cooperation Bangladesh is an important ITEC partner country, and a number of participants from Bangladesh have availed of training courses under the ITEC programme. In the last three years, more than 400 participants from Bangladesh have undergone training in India under ITEC programme and Tata Consultancy Services (TCS) under Colombo Plan. Under a special “Train the Trainer Programme in Information Technology” sponsored by the Government of India, about 500 participants from Bangladesh have visited India in the past two years for the six weeks long training courses conducted by TCS. ICC Offers SEZ to Bangladesh On 6th April 2009 in Dhaka, the Indian Chamber of Commerce delegation from India offered to set up a Special Economic Zone to attract investments from India and assured an investment worth $5 billion from India towards developing the proposed SEZ and has requested a suitable plot of 150 acres of land for this purpose. The ICC also suggested opening of a Deputy High Commission office at Guwahati or Shillong. The suggestion was received positively by Prime Minister Sheikh Hasina, who felt that opening of a Consulate or Deputy High Commission office in North-East would significantly contribute towards improving trade and tourism relations between the two countriesSectors such as energy, power, steel, telecommunications, healthcare, fertiliser, oil and gas, limestone and forest-based industries such as paper, export of plantation 7 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

crops were some of the areas that could drive strong bilateral economic relationship between the two countries, the ICC team observed. BIMSTEC The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) comprising Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand established in 1997 is a $810 billion economy, sharing about 22% of world population and 3.64% of surface area. The seven-country forum aims to achieve its own free trade area by 2017. BIMSTEC is largely free from any security or political baggage of the past like South Asia Association of Regional Cooperation (Saarc). On the contrary, it gives an excellent opportunity to provide a bridge between SAARC and Association of South East Asian Nations (Asean). The progress in BIMSTEC has great positive implications for development of India’s northeastern region transforming it from a security dilemma to India’s gateway to the East. India needs to take lead in making BIMSTEC a prosperous region by promoting integration within the region and thus having a greater say, both regionally and globally. Trade and Transaction Costs The Petrapole crossing in India handles by far the largest share of the recorded India-Bangladesh land border trade. Petrapole is on a major road 95 kilometres from Kolkata. The neighbouring town on the Bangladesh side of the border is Benapole, which in turn is linked by a highway to Jessore and Dhaka. The infrastructure deficiencies and procedural hazards at Petrapole include inadequate and congested roads, absence of government bonded warehouses, irregular power supplies, inadequate sanitary facilities and drinking water, prevalence of theft and other crimes, frequent strikes, prevalence of speed money, a single border gate which handles all truck and other traffic as well as individual travelers and which is wide enough for only one truck at a time to pass through. Investments need to be made for improving the infrastructure and facilities at Petrapole and at the other land border Customs stations. For Bangladesh the present system involves substantial terms of trade losses, since the landed costs of imports from India of products such as wheat, rice, fruit, cattle feed, bauxite and other products appear to be much higher than they would be if the congestion were removed. Bangladesh exporters and potential exporters also have an obvious interest in faster and less expensive commodity movements across the border. If the required investments are not made, congestion will increase with the general growth of trade, and would largely cancel or offset economic benefits that would otherwise occur if tariffs or other trade barriers were to be reduced. Without very substantial investments in infrastructure and administrative capabilities, increases in trade would be slowed down or blocked by increases in congestion and the associated increases in economic rents, and an FTA would become ineffective. Hence, both countries will need to improve the infrastructure – physical and administrative-at their land border Customs posts. This would need to be done in a coordinated 8 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

way-there would no point if the infrastructure were improved on one side of the border but bottlenecks were to remain or even increase on the other side of the border. Energy Cooperation The last caretaker government had decided to initiate talks with India on interconnecting the national power grid of Bangladesh with the north-eastern power grid in India based on the feasibility study of the USAID, Asian Development Bank (ADB) and SARI Energy co-operation. Bangladesh could bring 200 MW of electricity from Tripura or Assam, where India has hydroelectric plants. India has also offered to link Bangladesh to its electricity grid and sell it power to help it overcome persistent shortages in peak demand periods. At the DCCI 50th Anniversary conference held in November, Indian State Minister for Power, HE Jai Ram Ramesh stated that Bangladesh could buy electricity from plants in Tripura, where generation capacity exceeds demand, and other north-eastern Indian states bordering Bangladesh. "India is ready to pen a deal with Bangladesh to sell up to 1,000 MW of electricity." “India+1”: Bangladesh attracting diversification investment from India Another major opportunity for Bangladesh is to pursue an “India+1” strategy in the same way that Vietnam has attracted $40bn of FDI in 2008, in part by being an effective “China+1”. By this, we mean that Bangladesh can be an alternative manufacturing hub for global companies and investors who already have overreliance on India for a wide range of services and products, from IT outsourcing to truck assembly and auto parts. The government should commission a detailed analysis of which companies and investors have entered India in the past 5 years and then have a targeted strategy to persuade them to consider setting up similar facilities in Bangladesh in industries where we have, or can develop, a competitive advantage. References: http://commerce.nic.in/eidb/default.asp  http://www.wto.org/english/tratop_e/region_e/region_areagroup_e.htm  http://www.thefinancialexpressbd.com/search_index.php?page=detail_news&news_id=21355  http://www.hcidhaka.org/pdf/Political%20and%20Economic%20relations.pdf  http://www.hcidhaka.org/indbangla/index.html  http://www.observerindia.com/cms/export/orfonline/modules/orfdiscourse/attachments/ba ngla_1210851392822.pdf  http://www.iioa.org/pdf/15th%20Conf/sikdar_chakraborty.pdf  http://www.bilaterals.org/article.php3?id_article=13682  http://www.blonnet.com/2009/04/04/stories/2009040451301000.htm  http://www.mincom.gov.bd/ 9 | Manoj Kumar Singh @ Fortune Institute of International Business

India – Bangladesh Trade Relations

 http://www.imf.org/external/country/BGD/index.htm

10 | M a n o j K u m a r S i n g h @ F o r t u n e I n s t i t u t e o f International Business