India and Bangladesh have a long history of bilateral ties. However, since 2002, China's trade with Bangladesh has increased manifold, surpassing India's trade. This slowing down of economic relations between India and Bangladesh, coupled with strained and uncertain political relations, is cause for concern.
India's economic ties with Bangladesh are an important mechanism for stable and peaceful neighborhood relations. Therefore, the External Affairs Minister, Mr. S M Krishna, must focus on some of key issues that affect bilateral economic relations, during his visit to Bangladesh.
India's Trade
Chinese exports to Bangladesh have accelerated at a rapid pace, surpassing India's exports since 2002 For example, India's exports as a percentage of China's exports to Bangladesh were more than 150 per cent in 1991 but stood at 30 per cent by end of 2010.
Given the similarity in export baskets of China and India to Bangladesh, Chinese exports are seen to be replacing Indian exports. However, China imports less than India from Bangladesh, resulting in a higher trade balance in favour of China than India. India's concessions to Bangladesh under APTA, SAFTA and recently declared zero tariff on all products other than the sensitive list to all LDCs in SAFTA have not improved the trade relations between two countries.
China has captured Bangladesh's market in industries like textile and textiles articles, footwear and head wear, machinery & mechanical appliances industry where India also enjoys comparative advantage.
While Chinese products in these industries are highly price competitive, economic and non-economic factors are responsible for turning the tables in favour of China.
As claimed by Bangladesh traders and industry bodies, Bangladesh traders face non-tariff barriers such as delays, bureaucratic harassment, limited routes, customs harassment and visa problems while trading with India which increases the cost and creates mistrust among the Bangladesh traders. Non-tariff barriers are too high while trading with India, and exacerbated by corruption at the border, rigid bureaucracy, too much of security concern and lack of infrastructure. In fact, infrastructure connectivity through sea from China is more efficient and takes less time than importing from India.
China Factor
Unlike India, China is very aggressive in the Bangladesh market. Apart from price competitiveness of Chinese products, the welcoming attitude of Chinese traders and officials at the customs is encouraging to Bangladesh traders. Visa is never a problem in the case of China; China invites enterprises from Bangladesh to participate in exhibitions for better information on Chinese products. Chinese exporters are ready to redesign branded products on the request of Bangladeshi importers to cater to the price sensitive local market in Bangladesh. Further, Chinese business houses attend to logistics, trade difficulties, and consistently follow up on complaints. In most industries, China is ready for technology transfer, whereas Indian industries are not.
India is not just losing its grip over trade ties, but also has a negligible investment presence in Bangladesh.
Though Bangladesh has not discouraged Indian investments, there was mutual mistrust partly because of the Indian ban on Bangladesh investment in India till 2007. However, India lifted the ban and allowed Bangladesh FDI since 2007 in expectation of easing Indian investment in major deals, such as the Tata and Essar projects.
Though the Bilateral Investment Promotion and Protection Agreement was signed between India and Bangladesh in February 2009, this has not translated into significant capital flows. As in the case of India, China's investment is low. But China is giving development assistance and project loans to create goodwill between the two countries. It has constructed six friendship bridges, besides the Bangladesh-China Friendship Conference Centre in Bangladesh.
China is looking for natural gas reserves in Bangladesh and Dhaka has offered exploration rights to China at Barakpuria. It has also gained naval access to Bangladesh's Chittagong port, which India had been eyeing for several years.
The two countries are also cooperating on the Bangladesh-Myanmar-China road link through Kunming to further increase economic cooperation. On the contrary, India-Bangladesh collaboration in gas exploration in Bangladesh and in Myanmar has failed. Though Indian government regularly transfers assistance to Bangladesh in the form of grant, loans and transport assistance, it is substantially lower compared with China's assistance.
Steps Forward
Given the slowdown in exports to Bangladesh even in industries where India used to dominate markets, there is a pressing need to reduce non-tariff barriers. Another way is to invest, transfer technology, create long-term business and goodwill with Bangladesh through project financing and soft loans. Improved economic ties would certainly help in establishing lasting diplomatic and political relations.
(The author is Associate Professor, Institute of Economic Growth, Delhi. )