Tapping on the trade-investment nexus for improving bilateral economic cooperation between Bangladesh and India

Selim Raihan and Farazi Binti Ferdous

Bangladesh and India have long bonds in culture and history. Despite such bonds and neighborly proximity, economic cooperation between the two countries has remained far below potential. A number of studies have shown that bilateral trade and investment offer immense opportunities for accelerating growth and reducing poverty in Bangladesh and India. These studies suggest that India could become a major player for accelerating the growth of intra-industry trade and uplifting foreign direct investment (FDI) inflow to Bangladesh. Also, for India, Bangladesh could become an additional source of trade as well as a critical destination for investment thus addressing many concerns relating to the economic isolation of its backward Eastern and North-Eastern states. Furthermore, better connectivity between Bangladesh and India through multi-modal transport and transit facilities will further enhance the strength of the economic relations between these two countries.

Although it experiences annual volatility, the overall trade between Bangladesh and India has increased over time, and the balance of trade remained heavily in favor of India. Total exports from Bangladesh to India increased from US$ 50.2 million in 2001-02 to US$ 527.2 million in 2014-15 (which was only 0.1% of India’s total import). The share of Bangladesh’s exports to India in the country’s overall export increased from 0.3% to around 1.5% during the same period. On the other hand, India’s exports to Bangladesh increased from about US$ 1019 million in 2001-02 to US$ 5.8 billion in 2014-15 (around 2% of India’s total export). At present, India is the second largest import source for Bangladesh. In 2014-15, the share of Bangladesh’s import from India was around 16% of the country’s total import from the world.

Looking at the product details we find that in recent years Bangladesh’s exports to India (Figure 1) have been dominated by readymade garments (RMG) (HS code 6) and jute products (HS code 5). Bangladesh also exports products like textile articles, edible fruit and nuts, salt, fish, inorganic chemicals, mineral fuels and raw hides and skins. In contrast, large parts of Bangladesh’s import from India have been raw materials and capital machineries (HS codes 5 and 8) (Figure 2) which are used in Bangladesh’s export oriented and domestic industries. At the product details, Bangladesh’s import from India for last decade were chiefly cotton, vehicles and parts and accessories, machinery, cereals, man-made staple fibres, iron and steel, electrical machinery, organic chemicals, tanning or dyeing extracts and plastics.

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Though exports from Bangladesh were supposed to increase significantly as the Indian government offered Bangladesh duty-free benefit for all products except 25 alcoholic and beverage items since November 2012, exports did not increase much after 2012. A number of challenges can be made responsible for such weak export response which are related to Bangladesh’s limited export capacity, lack of diversification of export baskets, and various non-tariff measures (NTMs) and procedural obstacles (POs) due to inadequate infrastructure and lack of support facilities both at home and in the Indian market.

It is noteworthy that readymade garments (RMG) has become the major item in Bangladesh’s export to India on account of duty-free market access granted by India. In 2009-10, the share of RMG was more than 28% in total export of Bangladesh to India, which rose to 34.3% by 2014-15. However, studies have shown that there are many products in which Bangladesh has large export capacities, but actual exports to India are either very low or zero. For example, Figure 3 shows that though for products in the HS categories of 02, 16, 24, 41, 46, 64, 65 and 67, Bangladesh has either the full or significantly partial export capacities to meet India’s import demand, actual exports to India are zero. Similar observation also holds for Indian exports to Bangladesh. Therefore, there is enormous scope for raising bilateral trade between the two countries. There is a need to explore carefully, how different NTMs and POs and lack of trade facilitation affect such prospects. Necessary measures should be taken to improve the scenario. In order to address the trade infrastructural problems at the border, lately, there are some initiatives by the Government of India to set up Integrated Check Posts (ICPs) at major entry points on the land borders between Bangladesh and India. Two such ICPs have been launched recently, and they are expected to boost bilateral trade.

Bangladesh and India have to tap on the trade-investment nexus for improving their bilateral economic cooperation. The horizontal and vertical integration of Indian and Bangladeshi industries could help to improve scale economies, especially for Bangladesh, and help Indian firms gain from the use of cheap labor in Bangladesh. However, in terms of sources of FDI inflow in Bangladesh, the US, the UK, and South Korea top the list of countries, and FDI from India is still very low.

Lately, there have been a number of initiatives between Bangladesh and Indian governments to improve the investment situation. The Bangladesh Power Development Board and the Indian National Thermal Power Corporation have signed a memorandum of understanding in 2010 to set up two coal-fired power plants, each of which will have a capacity of 1,320MW, with partnership shared equally between them. Furthermore, recently, Bangladesh has offered India to establish two Special Economic Zones (SEZ) for Indian companies. Launching of these SEZs is expected to substantially increase Indian FDI into Bangladesh.

In 2015, Prime Ministers of India and Bangladesh contracted international gateway of internet service in Agartala and supply of 100MW power to Bangladesh from Tripura. India is already supplying 500 MW of power to Bangladesh, and supply of another 500 MW was also announced during Indian Prime Minister’s visit to Bangladesh in 2015. On the other hand, the bandwidth connection came as Bharat Sanchar Nigam Limited (BSNL) and Bangladesh Submarine Cable Company Limited (BSCCL) signed an agreement for leasing of international bandwidth for Internet at Akhaura. As a result, Agartala has become third station connected to submarine cable for Internet bandwidth after Chennai and Mumbai. The internet bandwidth export to India from Bangladesh will enable reliable and fast Internet connectivity for the people of Tripura as well as other parts of India’s northeastern region.

It is expected that the latest shipping arrangement between Bangladesh and India would make faster movement of goods between these two countries. Currently, such shipments are routed via Colombo or Singapore. Also, it takes around 20 days for a shipment by land. However, the direct shipping is expected to reduce the time to around 7 days, as there is no longer a need for transshipment at Colombo. The service will play a vital role in decongesting the border points and bringing down the cost and transit time involved. This improved arrangement of connectivity would bring better efficiency and thus provide the best competitive freight rates to the advantage of the industries.

The aforementioned analyses point to the fact that there are heightened political commitments among the governments of both Bangladesh and India to improve bilateral economic cooperation through different initiatives. Such initiatives need to be materialized at the earliest. As for Bangladesh, to make the most out of such initiatives, there are a number of challenges though. The country needs to significantly improve the business environment for attracting FDI, as the latest World Bank’s ranking of the ease of doing business shows that Bangladesh’s position dropped two steps to 174 out of 189 countries due to stalled regulatory reforms.

Finally, besides abovementioned economic issues, still there are some bilateral issues between Bangladesh and India, which need to be resolved for enriching mutual trust and confidence for greater economic cooperation. For example, border killing is an issue that strains India-Bangladesh relations as the victims are often ordinary people of Bangladesh living in border areas. This needs to stop, for which a political decision at the highest level is necessary. Also, the water-sharing issue between India and Bangladesh is yet to be solved properly, which undermines a lot of the developmental prospects. However, it can be hoped that these issues will be solved with the heightened commitment among political elites of the two countries for a deeper economic cooperation.

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Sub-regional cooperation can be the answer to the deadlock of regional integration in South Asia

Though there is a strong demand for a deeper regional integration in South Asia, the progress has been rather slow. Actual implementation of agreements often does not match the declared ambitions, and in this context, lack of political will and leadership, institutional weaknesses and capacity and resource constraints have been argued to be the major impeding factors. The political rivalry between India and Pakistan has often constrained the SAARC to be a functional regional forum. The recent cancellation of the SAARC summit is such an example.

In order to take forward the regional integration process in South Asia a good and effective initiative is the Bangladesh, Bhutan, India, Nepal (BBIN) initiative, which is a sub-regional coordinative architecture of countries in South Asia. BBIN operates through Joint Working Groups (JWG) comprising official representation from each member state to formulate, implement and review quadrilateral agreements. Areas of cooperation include water resources management, connectivity of power grids, multi-modal transport, freight and trade infrastructure. Focused on the subcontinent’s north east, it endeavored to cooperate on trade, investment, communication, tourism, energy and natural resources development. Its objectives have been expanded over years to incorporate substantial land and port connectivity.

The economic needs and drivers for a deeper integration in the BBIN sub-region are more prominent compared to these countries’ integration with the rest of South Asia. Especially, a deeper integration among the BBIN countries is very important to place BBIN as the gateway for further integration with China and Southeast Asian countries. The political economy drivers also seem to be more favorable. In the context of some structural factors, especially the political rivalry between India and Pakistan which has confined the progress of SAARC, and landlockedness of Nepal and Bhutan, the BBIN sub-regional initiative has seen a great interest from the political elites from these four countries. The extra-regional drivers for BBIN are also favorable as there are growing interests from the international organizations like the Asian Development Bank (ADB) and the World Bank for improvement in connectivity and infrastructural development in this sub-region.

As far as intra-BBIN trade is concerned, there are substantial potentials for the rise in intra-regional trade. However, despite that India has already provided almost full duty-free-quota-free of its market access to exports from South Asian LDCs, Bangladesh, Nepal and Bhutan are facing escalated challenges to at least secure and then to increase their exports to the Indian market. These challenges are related to their limited export capacities, lack of diversification of their export baskets, and various non-tariff measures (NTMs) and procedural obstacles (POs) due to inadequate infrastructure and lack of support facilities both at home and in the Indian market. However, streamlining of NTMs and removal of associated POs are very important as such actions are likely to intensify further market integration in the BBIN sub-region through development of regional value chains. These will also encourage larger intra and extra regional investments in the BBIN sub-region which can be instrumental for growth integration among these countries. To make these happen there is a need for policy integration among the BBIN countries.

Domestic capacities of the exporters in Bangladesh, Bhutan and Nepal need to be improved to meet different international standard requirements. Unless and until these exporters develop their capacities, they will not be able to diversify exports and become competitive in the regional and international markets. A number of supply side factors at home can actually undermine the exporters’ competitiveness and constrain economic and export diversification. These factors are directly associated with the domestic production and investment environment. Most prominent of these factors are access to finance, weak physical infrastructure, inefficient ports and high transport costs, shortage of skilled workers, technological bottlenecks, lack of entrepreneurship and management skills, lack of information, and high costs of doing business.

There are some signs of heightened ‘new’ commitment among political elites of the BBIN countries. The recent speedy resolution of land boundary agreement (LBA) between Bangladesh and India, the positive reception of the India-Bangladesh Maritime Arbitration Award announced in July 2014, establishment of border haats along the border between India and Bangladesh, and the BBIN Motor Vehicle Agreement are signs of such ‘new’ political commitments.

However, the aforementioned ‘new’ commitments have not yet been translated much to resolve the issues related to NTMs and POs discussed above. There is a need to put renewed emphasis on this. There are some recent initiatives by the Government of India to solve the trade infrastructural problems at the border by setting up of Integrated Check Posts (ICPs) at major entry points on the land borders between Bangladesh and India. Two such ICPs have been put in place recently. Such ICPs need to be established at the borders between India and Nepal and India and Bhutan.

There is also a need for cooperation among different institutions in the BBIN countries to deal with NTMs and removal of POs. Cooperation is needed in a number of areas for harmonization of TBT and SPS measures, Mutual Recognition Agreements (MRAs) among respective organizations of these countries, and for introduction of increased automation of their customs clearance procedure.

Demystifying non-tariff barriers in South Asia

In the initial years of SAARC in the 1980s, the popular hypothesis for the reason behind limited intra-regional trade was the prevailing high tariff rate among the member countries. High tariff rates have come down substantially over the years since the formation of SAARC, due to increased globalisation of trade, and establishment of the WTO regime and the South Asian Free Trade Agreement (SAFTA). Despite significant reduction in tariff rates in the region, the intra-SAARC trade has been as static as before, i.e. about only 5 percent of the total trade of this region. Now the popular hypothesis is that it is not the high tariff rates, but the Non-Tariff Measures (NTMs) and the resulting trade barriers, i.e., Non-Tariff Barriers (NTBs) which are the main reasons behind limited intra-regional trade in South Asia. This view is reflected in many contemporary studies and documents.

NTMs are generally defined as policy measures other than ordinary customs tariffs that can potentially have an economic effect on international trade in goods, changing quantities traded or prices, or both (UNCTAD, 2013). In contrast, NTBs are thought to be policy measures that surely affect the quantity traded and prices, and have proven discriminatory effects against foreign firms (as pointed out in a paper by A. Nicita and Peters for the WTO workshop titled ‘The Effects of NTMs on the Exports of Small Economies,’ Geneva, October 23, 2013).

The UNCTAD classification of NTMs comprises technical and non-technical measures, such as sanitary or environmental protection measures, technical barriers to trade (TBTs) and other traditional instruments of commercial policy, e.g. quotas, price control, exports restrictions, or contingent trade protective measures, as well as other behind-the-border measures, such as competition, trade-related investment measures, government procurement or distribution restrictions. This classification acknowledges the existence of measures and does not judge on legitimacy, adequacy, necessity or discrimination of any form of policy intervention used in international trade (United Nations Conference on Trade and Development, Geneva, 2013).

Detailed information, and appropriate and specific analysis is required for better understanding of the impacts of NTMs on trade. It is important to emphasise that many NTMs are legitimate and thus cannot be negotiated away. For example, sanitary and phytosanitary (SPS) measures and TBT are there to protect consumers and environment; pricing and licenses are there to regulate domestic markets; anti-dumping duties, subsidies, quotas are there to protect domestic firms; and rules of origin is there to avoid unintended trade deflections.

Regardless of whether NTMs are imposed with protectionist intent or to address legitimate market failures, NTMs often impose additional costs on trading, and thus may have substantial effects on trade (Nicita and Peters, 2013). And these costs may be higher for some countries or firms than for others. For example, compliance costs are often fixed costs when small firms are in a disadvantageous position. Most of the small and medium-sized firms in South Asia face this challenge, especially with respect to meeting the SPS and TBT standards. Therefore, there is a need to develop the capacities of these firms so that they can meet the justified SPS and TBT standards in other countries. In this regard, technical assistance in their production and export processes is required, and different aid for trade and similar initiatives should be put in place on a priority basis. Also, there is a need to strengthen the capacities of the National Standards Authorities so that certificates issued by them are accepted in other countries. Furthermore, there is a need for harmonisation of standards, custom procedures and establishing mutual recognition principles in South Asia through regionally coordinated efforts.

Cost of complying is often dependent on infrastructure. Since the intra-regional trade in South Asia happens predominantly through land borders, a large part of the NTM-related complaints in South Asia are linked to weak infrastructure at land custom stations in South Asian countries, as well as to the lack of testing and laboratory facilities near the stations. In this process, many legitimate NTMs turn into NTBs, affecting the intra-regional trade. Therefore, improvements in relevant infrastructure should be a top priority.

Due to various procedural obstacles, which are related to complicated bureaucratic process, delays, corruption, and frequent changes in the policies, many legitimate NTMs turn into NTBs. In South Asia, a significant part of the NTBs is related to procedural obstacles. Therefore, policy efforts are critical to ensure that NTMs serve their intended legitimate purposes.

Policymakers in respective countries of South Asia, while negotiating for streamlining NTMs and reducing NTBs at the regional level, need very clear analysis, information and updated data on NTMs/NTBs for all South Asian countries. These data and analysis need to be relevant with concrete examples so that effective measurable actions can be undertaken. Analysis should emphasise on the respective roles and responsibilities for both home and partner countries in solving the problems.

Published at the Thinking Aloud on 1 October 2015

Published at The Daily Star on 3 October 2015

 

Towards a new regime of regional integration in South Asia

There are strong arguments for deeper regional economic integration in South Asia. It is believed to have potential for generating significant intra-regional trade and welfare gains for the countries involved. Deeper regional integration is supposed to provide countries in the region improved market access in each other’s markets, and thus help boost their exports. These will facilitate intra-regional trade and associated investment flows which will generate more trading opportunities among the countries involved since there will be tariff differentials due to the most favoured nation (MFN) vis-à-vis regional tariff regimes. These are static gains that the countries involved would be able to realise. Dynamic gains could be even greater due to the possible expansion of the scale of operation owing to easy access to the large regional market buoyed by increased investment and more efficient allocation of regional resources.

Regrettably, intra-regional trade in South Asia has hovered around 5.0 per cent for the past decade. This is significantly lower when compared to other regional arrangements such as the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN), and the European Union (EU). The current regime of regional integration in South Asia has primarily focused on the rise in intra-regional trade in goods.

“..the new regime will require clear and visible leadership from India in taking the agenda forward. Other countries in the region should not be only at the receiving end but also have to take part actively and effectively. The new regime will call for all South Asian countries to balance what effectively they can offer and what they can expect in the deeper integration process.”

However, South Asia is on the verge of a new regime of regional integration which should involve four integration processes: (i) market integration: integration in trade in goods and services; (ii) growth integration: integration in economic growth processes of the South Asian countries; (iii) investment integration: promotion of regional investment and trade nexus; and (iv) policy integration: harmonisation of economic and trade policies. A new regime on regional integration in South Asia calls for these four integration processes through responding to four fundamental questions.

On the first question “Why is there a need for a deeper regional integration in South Asia?” the answer is: there are now convincing evidences that deeper regional integration is needed for generating and sustaining economic growth in the South Asian countries, i.e. regional integration will be a critical factor in the future growth processes of these countries. This is required for larger employment creation and alleviation of poverty in a region which has the highest number and density of poor people. For the promotion of inclusive growth, regional integration will be an effective instrument.

Ensuring food security is a challenging issue, and intra-regional trade in agricultural and food products will be immensely critical. Deeper regional integration through trade and transport facilitation will increase competitiveness of these countries to better participate in the global trade. Promotion of regional supply chain will be critical in developing dynamic comparative advantages of these countries. Finally, the peace dividends, through intra-country stable political relations, will be immensely high.

On the second question “How to achieve deeper regional integration in South Asia?” the answer is: despite all shortcomings, the South Asian Free Trade Area (SAFTA) is a landmark achievement, and deeper integration has to take lessons from it. Intra-regional trade in South Asia has been low, but there are signs of huge potential. There is a need to move beyond the SAFTA; and the new regime has to put much weight on regional investment and trade nexus. Promotion of intra-regional investments and attracting extra-regional FDIs in goods and services sectors in general, and energy and infrastructural sectors in particular will be the key driver in the new regime.

On the third question “What to do?” the answer is: a comprehensive assessment is needed on achievements of the SAFTA so far. For deeper market integration in goods, full implementation of the SAFTA is needed with emphasis on further liberalisation of intra-SAARC tariffs, reduction in sensitive list, relaxing the rules of origin, and establishing effective mechanisms to deal with the NTMs/NTBs. There is a need to link intra-regional liberalisation with enhanced intra-regional investment in different services sectors. Regional and sub-regional efforts have to be promoted for different trade and transport facilitation measures, for cooperation in energy generation and transmission, and for linking energy cooperation and trade and transport facilitation with investment and growth processes of these countries. The focus should also be on promotion of regional supply chains. The new regime will call for greater integration in trade, macro, financial and industrial policies with the aim for removing different policy and structural barriers. Short-term and medium term realistic targets should be spelled out. The new regime will re-emphasise on the importance of concrete regional efforts in the diversification of the export structures of the smaller and weaker countries for them to effectively integrate with the regional economy.

On the fourth question “Who will do and what?” the answer is: the new regime will require clear and visible leadership from India in taking the agenda forward. Other countries in the region should not be only at the receiving end but also have to take part actively and effectively. The new regime will call for all South Asian countries to balance what effectively they can offer and what they can expect in the deeper integration process. Regional institutions, like SAARC Secretariat, have to be institutionally reformed and reoriented. Business associations and civil society organisations have to understand and take part in the political economy process of pursuing regional integration agenda in South Asia more than ever under the new regime.

First published at the Thinking Aloud on 1 July 2014

Published at The Financial Express on 6 July 2015