India Bangladesh Trade Relations

7/31/2019 India Bangladesh Trade Relations

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India-Bangladesh Trade Relations: Prospects of aBilateral Free Trade Agreement (FTA)

Organized By

Islamic Economics Research Bureau

By

Professor Ayubur Rahman Bhuyan

Monthly Seminar

on


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Importance of Bilateral Trade with India

1. Indias large size (in terms of both population and GDP) makes ita large export market

2. On the side of import: geographical proximity, abundant naturalresources, and diversified production structure make India a

cheaper and convenient source of supply

3. Importance of bilateral trade is recognized at both official andprivate sector level

4. Official level: the existing trade agreement, SAPTA, SAFTA

5. Private sector level: Strong advocacy by FBCCI and FICCI, MCCIand CII to boost bilateral trade


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Trends in India-Bangladesh Trade

1. Trade between Bangladesh and India is heavily tilted in favour ofIndia.

2. In 2005-06, BDs official imports from India were $1851 million butits exports to India were just $242 million. Exports to India couldpay for only 13% of imports from India

3. Imports from India is growing fast, but exports to India remainedsmall and recorded a modest increase

4. In 2005-06, Bangladeshs exports to India accounted for as little as2.30 percent of its total exports, whereas imports from India in that

year were 12.5% of her total imports

5. Bangladeshs trade deficit with India increased from $962 million inFiscal 2001-02 to $1609 million in 2005-06 (a 1.7 times increase)


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Commodity Composition of Trade

Imports are highly diversified but exports are highly concentrated

Major Imports: textiles, food items, machinery, mineral products,transport equipment, chemical products, fish

Major exports: As few as six products, viz., raw jute, fertilizer, jutegoods, betel nuts, jute yarn and twine, and frozen fish, account for80% of total exports to India


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Unofficial Trade between India and Bangladesh

1. As in official trade, unofficial India-BD trade is essentially one-way

2. Unofficial imports from India are about 20 times larger thanunofficial exports to India

3. Unofficial imports at the present could be about 1.5 times theofficial imports.

4. Livestock and Cattle are the major import item but many othercommodities of everyday use are also imported. Items of unofficial

export are limited

5. Actual trade deficit with India would be much larger if unofficial

trade were included


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Causes of Bilateral Trade Deficit with India

Overvalued Taka vis--vis Indian Rupee makes exports

uncompetitive

Imports become cheaper

Despite import liberalization, unofficial imports remain profitable

A downward adjustment of the Taka/Rupee exchange rate iswarranted

A. Overvalued Exchange rate


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Causes of Bilateral Trade Deficit with India Contd.

Products that Bangladesh can export attract high tariffs in India

Such products include garment, knitwear, leather shoes, fruitjuices, jams and pickles, fish etc

There are also para-tariffs CVD, ADD, SD, additional customsduty, luxury tax, surcharge etc

Moreover, in the FY 2006-07 budget, the GOI raised tariffs onsome major Bangladesh products exported to India (see Table)

B. Tariffs


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Causes of Bilateral Trade Deficit Contd.Duty (CD) imposed by GOI in the FY 2006-07 Budget:

Commodities H.S. Code CD (%)2005-06

CD (%)2006-07

Raw Jute 5303.10.10 15.30 17.34

Frozen/Fresh Fish 0303.19.00 30.60 35.90

Jute Manufactures 6305.10.10 15.30 17.34

Betel Nuts 0802.90.19 100.00 100.00

Soap Toilet 3401.11.10 34.44 36.81

Jute Twine & Yarn 5607.10.10 15.30 17.34

Ceramic Tableware 6911.10.19 34.44 36.81

Copper Wire 7408.11.90 28.51 30.64

Cast Iron Articles 7325.10.00 34.44 36.81

Fruit Juice 2202.10.90 52.24 58.40

Wooden Furniture 9403.30.90 34.44 36.81

Source: Government of India. Annual Budget 2006-07.


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Causes of Bilateral Trade Deficit Contd.

Dispute over Classification of Goods for Customs Purposes

Requirement of Chemical Test

Customs Valuation

Non-acceptance of Certificates of Rules of Origin (ROO)

Arbitrary Imposition of Tariff Values

C. Non-Tariff Barriers (Some of them are State-mandated

Imposition and others are sheer bureaucratic Interference)


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Non-tariff Barriers Contd.

Imposition of CVD and ADD

Health and Quality Standards

Permits and Licences

Condition for obtaining ISI Certificate

Requirement to collect Health Certificate

Sanitary and Phytosanitary Measures

Quarantine Requirements


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Non-Tariff Barriers Contd.

Technical Standards

Inadequate Land Customs Infrastructure

Labeling and Marking Provision

Unexpected harassment like filing false cases for alleged violation of

rules regarding health, weights and measures; refusal to grantSAPTA concessions; rejecting consignments on false pretext


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Causes of Bilateral Trade Deficit Contd.

D. Failure of SAPTA to Enhance Trade

E. Weak Production Structure:

Export production in Bangladesh is narrowly based

India itself is a big producer and exporter of most of the productsthat Bangladesh can export

Undiversified production base rather than Indias restrictive tradepolicies is the root cause of BDs slow growth of exports to India


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Rationale for a Bilateral Free Trade Agreement with India

1) Reduction of Trade Deficit (by increasing Exports)

2) Forced Reduction of Imports to Improve Trade Balance will beSelf-Defeating

3) There is hardly any scope to cut down essential imports from Indiawithout jeopardizing growth

4) Piecemeal efforts by Government in the past to obtain tradeconcessions from India failed to raise exports

5) A free trade agreement (FTA) might offer a solution


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Official Level Discussion on FTA Talks began at Commerce Secretary Level in March 2003

India circulated a draft of the proposed agreement on bilateral FTA

India-Bangladesh JEC formed a Joint Working Group (JWG) in July2003 at the level of Joint Secretaries to begin negotiations on theFTA

The JWG met on four occasions so far but produced no result


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Opinion of the Free Trade Group (FTG)

FTA should provide for a true market access for Bangladeshproducts, free of all tariff, non-tariff and para-tariff barriers, and openup opportunities for investment

The principle of asymmetry and non-reciprocity should berecognized

The Group compiled a List of 180 products on which Bangladeshwill offer 100% tariff concession to India. It compiled a List of 3228

items on which Bangladesh will seek 100% tariff concession fromIndia

India should provide 50% tariff concession on signing of theAgreement and 100% exemption by the end of the first year.Bangladesh will phase out the duties over a period of 12 years

The FTG, formed by the MOC of GOB in September 2003,recommended, among others, the following:


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Likely Impact of the FTA on Bangladesh Economy

Despite high tariffs, Indian exporters can successfully compete inBangladesh market. In a free trade situation, they will enjoy asubstantial price advantage. Bangladeshs imports from India mighttherefore rise

Loss of government revenue and lower protection to local industries On the positive side, duty free imports from India will create

economic welfare benefits in the form of lower prices and betterquality products for Bangladesh consumers

Low-duty imports will bring down cost of production, and local

industries will be competitive Fall in import duty will be outweighed by increased revenue through

VAT and excise duty

These welfare benefits will considerably exceed the economicwelfare losses to Bangladesh producers

Effects on Bangladeshs Imports:


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Likely Impact of FTA Contd.

All major Bangladesh exports to India currently attract high importduties. In an FTA when there will be no tariffs, exports in thesegoods would increase

Long term benefits would be much higher

In an FTA environment, the entrepreneurs will be encouraged not

only to raise investment in existing export activity but also set upnew industries and produce new products for the large Indianmarket

Effects on Exports:


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Likely Impact of FTA Contd.

The FTA is very likely to attract investment and joint ventures byIndian entrepreneurs in the country

This happened in Sri Lanka and Nepal, and may happen toBangladesh as well

Effects on Investment:


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Likely Advantages of FTA

Cheaper imports of raw material will generate more manufacturingactivity and additional employment

FTA will make manufacturing production globally competitive asproduction cost will be lower

Government revenue from VAT/Excise will increase and outweighthe revenue loss from CD

Falling prices and costs will increase consumer welfare

Investment, both foreign and local, will get a boost

competition will force domestic industries to raise efficiency andcompetitiveness


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Probable Disadvantages of FTA

Certain sectors may face threats as protection will be lowered

To neutralize the adverse effects of FTA, safeguards measures willneed to be incorporated in the agreement


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Recommendations for Policy

1) Government may seriously consider signing the proposed FTAagreement, provided there is guaranteed market access (liberalrules of origin, no tariff and non-tariff barriers)

2) Fast Track Liberalization. Tariffs on fast track items should be

eliminated immediately

3) Normal Track Liberalization. Trade barriers on products of thenormal list could be phased out over an agreed timeframe 12years for Bangladesh, and a shorter period of not more than 2

years for India

4) Negative List. Products of export interest to Bangladesh shouldnot be in Indias Negative List


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Recommendations Contd.5) Dismantle all NTBs and Para-Tariffs

6) Safeguard Provisions. The Agreement should include asafeguard clause to protect Bangladeshs infant industries

7) Rules of Origin. The rules of origin should be more favourablethan under the India-Sri Lanka FTA

8) Expand Production Base


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Recommendations Contd.

9) Build Export Capacity. There is the need to build export capacity

in various products, which have good demand in India

10) Introduce an Export Development Assistance Scheme toassist exporters, the EPB, and the Business Chambers in theirexport promotion effort

11) Improve Trade Facilitation


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Infrastructural facilities should be improved at the land customsstations (LCS) on both sides of the border

The improvement in infrastructure would need to be done in acoordinated way there would no point if the infrastructure wereimproved on one side of the border but bottlenecks were toremain on the other side of the border

Petrapole-Benapole LCS should work 24 hours and 7 days a

week

New land customs stations for bilateral trade should be openedbetween Bangladesh and the neighbouring Eastern and North-Eastern Indian States

12) Improve Infrastructure


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13) Investment Liberalization. The FTA should provide for

liberalization of investment. The two countries may sign anInvestment Promotion and Protection Agreement and DoubleTaxation Avoidance Agreement

14) Remove State Government-imposed levies, for example luxury

tax, on Bangladesh Exports


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India Bangladesh Trade Relations