How economic integration could help India and Bangladesh fulfil the expectations of their people

Bangladesh’s economic growth means that New Delhi needs a new approach.

Media narratives that describe foreign power and influence over Dhaka gaslight Bangladeshis. Those narratives don’t speak to their experience.

Meanwhile, stakeholders’ efforts to securitise economic relations only alienate friends in Dhaka. The government there is already criticised for pandering to New Delhi.

The failure of these ideas, however, has created room for more constructive discourse.

Researchers, analysts, and bureaucrats have taken inspiration from historic trade flows – rather than merely dwelling on them – to advocate regional connectivity and trade. Their work has paved the way for market opportunities that are becoming more tangible.

The Bangladesh, Bhutan, India, Nepal Motor Vehicles Agreement is the most concrete example. The agreement will ease personal, passenger, and cargo vehicle travel across the four countries once fully implemented. It has attracted broad support since the four members signed the agreement in 2015.

Indians and Bangladeshis have the most to gain.

The agreement will increase economic activity substantially. This will raise real income levels in India between 1.4% and 5.6%, and income in Bangladesh between 3.4% and 11.3%, according to the World Bank’s Connecting to Thrive: Challenges and Opportunities of Transport Integration in Eastern South Asia.

Income levels could rise by as much as 15% in West Bengal, 28% in Chittagong, and 40% in Dhaka.

Reduced transport and trade costs for traders will lead to consumer savings. This will be most pronounced in Indian states that border Bangladesh – particularly in West Bengal, where the price of goods could decrease by more than 4.5% – as well as every district in Bangladesh.

No similar study assesses the impact of enhanced maritime connectivity specifically. But there is reason to be similarly optimistic about these long-neglected routes.

India and Bangladesh have worked out several maritime agreements. Coastal trade agreements for shipping across the Bay of Bengal. Inland transit and trade agreements for river trade. Transshipment facilities connecting India to its northeast through Bangladesh’s ports and rivers.

Improved maritime connectivity should have a Motor Vehicles Agreement-like chain effect. More trade and transit inspire new economic activity that raises income and lowers costs for businesses and consumers.

Rail connectivity may prove more difficult.

India primarily uses broad gauge, while Bangladesh has a mix of broad and meter gauge railways. Four of the eight border stations connecting the countries aren’t operational. The countries are, however, committed to restoring links severed decades ago.

Taken together, it shows something many choose to ignore: the will to integrate South Asia.

Pushing forward

The Motor Vehicles Agreement serves as a case in point. After Pakistan stymied India’s Motor Vehicles Agreement proposal at a South Asian Association for Regional Cooperation summit in 2014, the Bangladesh, Bhutan, India, Nepal Initiative took up the proposal.

Bhutan hasn’t ratified the agreement. But it didn’t stop India, Bangladesh, and Nepal from pushing the initiative forward. Bhutan, meanwhile, is seeking to create domestic political support.

There is also the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation. It includes Thailand, Myanmar, Bangladesh, Bhutan, Nepal, India, and Sri Lanka.

The two-decade old grouping has been reinvigorated in recent years.

A Bimstec Conclave of Ports agreement now links Thailand’s Ranong Port with ports in Chennai, Vishakhapatnam, and Kolkata. They are also studying two more ambitious deals. A Bimstec Coastal Shipping Agreement and a Bimstec Free Trade Agreement.

A Bimstec Free Trade Agreement would bring 1.67 billion people – 22% of world’s population – together into an economic region with a combined $3.71 trillion GDP – roughly equal to Germany’s GDP.

It is all administered from Bimstec’s secretariat in Dhaka.

Three years ago, in 2018, Bimstec officials projected a Free Trade Agreement to increase inter-regional trade from $40 billion to $240 billion. That’s a 500% increase in trade between Bimstec member countries.

Bangladesh in December signed its first bilateral trade agreement with Bhutan, a Bimstec member. Reports suggest trade agreements with Thailand and Nepal, two other members, are near.

These bilateral agreements will smooth the way towards a Bimstec Free Trade Agreement. It could also allow Bangladesh to begin to enjoy some of the benefits of the trade region before an agreement is finalised.

And it’s a good thing. Bangladesh really needs a more competitive trade network.

The country enjoys trade privileges under several multilateral agreements. Namely, the Asia Pacific Trade Agreement and South Asian Free Trade Area. But its duty-free access to key markets may expire in 2026, when it has fully transitioned from low-income to a middle-income status.

Dhaka is reportedly targeting 11 Preferential Trade Agreements, Free Trade Agreements or Comprehensive Economic Partnership Agreements by 2026.

Dhaka examined trade deal proposals to three trade blocs and more than a dozen countries to prepare for this initiative. Negotiators appear to be pursuing Free Trade Agreements wherever trade deficits aren’t threatening, and pivoting to Preferential Trade Agreements whenever Free Trade Agreements negotiations become too cumbersome.

A bellwether

India, for its part, agreed to study a Comprehensive Economic Partnership Agreement with Bangladesh. It could be more comprehensive than an Free Trade Agreement.

The Comprehensive Economic Partnership Agreement is a bellwether for India-Bangladesh relations.

Before the Motor Vehicles Agreement, the World Bank projected a Free Trade Agreement to increase India’s exports to Bangladesh by 126%, and Bangladesh’s exports to India by 182%. The World Bank now projects the Motor Vehicles Agreement and the Free Trade Agreement to increase India’s exports to Bangladesh by 172%, and Bangladesh’s exports to India by 297%.

That means the $8.24 billion in India’s exports to Bangladesh in 2019 would grow to $22.41 billion. The $1.19 billion in Bangladesh’s exports to India would become $4.72 billion.

This achievement would make each country a leading trade partner for the other.

It would also clean-up the shambles – described in Connecting to Thrive – that has made it cheaper to conduct trade with Germany from India or Bangladesh than it is to trade between India and Bangladesh.

There will be challenges though.

Free trade has become a taboo in India. Throughout 2018 and 2019, special interest groups lobbied against India joining the Regional Comprehensive Economic Partnership.

The Regional Comprehensive Economic Partnership is the world’s largest trade bloc. It includes all of Asean’s members, except Timor-Leste, as well as South Korea, Japan, China, Australia, and New Zealand. The free trade area covers 2.2 billion people who produce a combined $26.2 trillion GDP.

The Regional Comprehensive Economic Partnership could have been bigger: India participated in negotiations for close to a decade.

But the anti-trade lobby stoked fears of a surge in imports that would ruin farmers and shutter businesses. They evoked a long history of protectionism in India.

And they were effective. India pulled out at the last minute in 2019. It foreshadowed changes to come.

Protectionist measures

In 2018, Indian Prime Minister Modi likened protectionism to terrorism during a Davos speech. Two years later, in 2020, he called for an Atmanirbhar Bharat or self-reliant India.

Protectionism paid political dividends in the 2019 general election. Later, it complemented efforts to deter investment from China in 2020.

But its proven unpopular among economists. Including, most notably, Arvind Subramanian, who was Modi’s chief economic adviser between 2014 and 2018.

Subramanian and Shoumitro Chatterjee, an assistant professor at Pennsylvania State University, wrote, “India’s market is too small to sustain any kind of serious import substitution strategy or even as a way of offering investors the domestic market as bait and incentivising them to export”. They concluded, “to embrace atmanirbharta is to choose to condemn the Indian economy to mediocrity”.

India’s “turn inward” – the euphemism for that which can’t be said – polarised politicians and technocrats. It’s a development crudely reflected in the government’s own messaging on Bangladesh.

Home Minister Amit Shah dominates headlines with bigoted diatribes against Bangladeshis, while the high commissioner to Bangladesh, Vikram Doraiswami, explains the benefit of connectivity and trade.

Even the most callous observer must consider how Shah’s statements – such as his threat to hunt and drown “illegal” Bangladeshis in the Bay of Bengal – affect intergovernmental and bilateral relations.

Diplomats and trade negotiators are doing the hard yards to create the $17.7 billion in trade promised by the Motor Vehicles Agreement and Comprehensive Economic Partnership Agreement. The same goes for the $200 billion in trade promised by the Bimstec Free Trade Agreement. It would be shame if the home minister’s racism threatened those opportunities.

Principle hasn’t inspired politicians to show better judgement. But the risk of lost trade revenue might. The stakes are high and growing higher.

Many consumers now expect companies to define brand values and speak out when they are challenged. US politicians found this out the hard way over the past year. It flies in the face of traditional business orthodoxy. But consumers have changed and businesses have too.

It’s not far off for India. Ratan Tata was writing about it in 2013. Star bureaucrat Amitabh Kant was talking about it in 2018. Disrupters Ola and Zomato got the ball rolling on social media. Legacy brands Bajaj Auto and Parle-G let their advertising budgets do the talking. Now WhatsApp is suing the government of India.

The trend looks set to accelerate.

Special interest groups will need to change their tune before long. Protectionism has divided politicians and technocrats, companies and consumers. It hasn’t been a smooth ride for anyone.

Varying experiences

India’s experience has been very different from Bangladesh’s experience.

Trade agreements aren’t politically divisive in Bangladesh. Dhaka enjoys more continuity and consensus when it comes to economic development. It’s remarkable given political changes that have occurred.

Dhaka can then afford to think big when it looks at South and Southeast Asia.

For example, the bilateral agreements its pursuing within the Bay of Bengal region can lead to a Bimstec Free Trade Agreement. The bilateral agreements its pursuing within Southeast Asia could lead to an Asean Free Trade Agreement. The bilateral agreements look like a stepping stone towards more ambitious trade bloc agreements.

Dhaka’s dealings with Brussels and Washington DC, on the other hand, are more complicated. It has to follow roadmaps for agreements with the European Union or the United States.

This represents something of a test for Dhaka. The European Union and US are Bangladesh’s largest export markets. The European Union accounted for 61% of the country’s total exports in 2020, while 18% went to the US.

At present, Dhaka is attempting to meet eligibility requirements for the European Union’s GSP+ facility or Generalised System of Preferences.

GSP+ would allow Bangladesh to enjoy the tariff exemptions it now enjoys after it becomes a middle-income country. Dhaka will, however, need to meet 27 international conventions.

These include four good governance conventions, seven UN human rights conventions, eight environmental conventions, and eight International Labour Organisation conventions.

If Dhaka fails to implement them, Bangladesh’s exports to the EU will drop by 5.7% annually. Low-margin exporters are unlikely to be able to absorb lost revenue if the GSP expires.

In contrast to its approach to the European Union, Dhaka reportedly studied, and then abandoned, its interest in a trade agreement with the US. A commerce official said a Free Trade Agreement would require too many reforms.

Dhaka would need to make intellectual property and public procurement reforms, in addition to addressing labour and human rights concerns. Those concerns are part of the reason Washington DC hasn’t reinstated Bangladesh’s Generalised System of Preferences trade benefits suspended in 2013.

It’s not clear whether Dhaka examined the cost of not enacting the reforms.

The loss of the US Generalised System of Preferences benefits had a limited financial impact on exports. But a well-tailored Free Trade Agreement would have strong up-sides. Particularly for a service sector, the country needs to create new jobs and exports. The lack of enthusiasm for a Free Trade Agreement with the US caps the country’s export potential unnecessarily.

Dhaka might need to bite the bullet on reforms it needs for trade deals with larger markets. Some changes might just come to Bangladesh whether Dhaka wants them or not.

The US-China trade war and Covid-19 pandemic accelerated trends investors were watching – like supply chain shifts away from China – and catalysed others – like developing ethical supply chains.

These factors are converging in ways that will put pressure on Dhaka to act.

For example, consumer and industry interest in sustainable sourcing means fashion brands – who led Bangladesh’s growth as a sourcing destination – are taking greater interest in their supply chains.

Overseas consumers and brands have contributed to radical social and economic change in Bangladesh. But the pace and scale of the country’s development has lost relevance overseas.

Rana Plaza Never Again, #WhoMadeMyFabric?, and Clean Clothes Campaign, among others, are pressing brands to improve working conditions across supply chains.

Vogue, of all places, published an article entitled, “8 Years After the Rana Plaza Disaster, We Still Aren’t Doing Enough to Protect Garment Workers.”

Brands and unions from abroad, as well as suppliers and workers from Bangladesh, are already struggling to extend their landmark Accord on Fire and Building Safety in Bangladesh.

Now overseas consumers want them to go further.

Tall orders

Dhaka will likely become involved, one way or another. Whether industry continues to self-regulate, or rights groups go to court, the trade agreements Dhaka is pursuing will necessitate reform.

New Delhi and Dhaka both face tall orders. It won’t be easy for them to close a Comprehensive Economic Partnership Agreement. But their efforts to improve connectivity provide a strong foundation.

And they have lots of reasons to cooperate.

Informal trade between the countries has grown because people want to trade legal goods, but don’t have the facilities to do business as efficiently as possible.

It’s created a sizeable grey market.

A 2002 survey suggested that as much as 30% of India’s exports to Bangladesh were smuggled. More recent studies suggest the value of informal trade may be equal to the formal trade balance.

This means consumers are gouged by retailers selling smuggled goods at uncompetitive prices. The public and private sectors are losing revenue on business they don’t know they’re doing.

It also means there is a lot money to be made for first-movers.

New trade routes are lowering trade costs. And per capita income levels are now similar on both sides of the border. This changes the cost-benefit of formal trade. Companies can consider lowering their dependence on domestic consumers with new revenue streams from markets close to home.

Businesspeople may also be able to take advantage of the “flying geese model”.

Manufacturers in Bangladesh will pursue more capital-intensive, value-added production at some stage. Low-cost, labour-intensive production can then migrate to destinations that haven’t industrialised.

Indian businesspeople in Dhaka are already looking at their options, according to a United News of India report by Biswendu Bhattacharjee.

“If we set up factories somewhere in south or west Tripura, bringing raw materials and exporting finished products via Chittagong seaport would be easier, less expensive, and time effective,” one said.

What inspired this thinking? A new bridge.

IT-BPO players have new options as well. Costs increased in mainland India as the industry matured. Businesses that need to expand may find Bangladesh and North East India are cost-efficient alternatives.

Dhaka is installing a third submarine cable to increase bandwidth, improve speed, and prepare for 5G. Bandwidth will be available for export to North East India through an existing linkage.

This infrastructure allows businesses to consider the opportunity-cost of developing new talent pools. Businesses setting up in Bangladesh find un-tapped IT talent. Those who set up in northeast India are closer to the English-speaking talent they need to provide more competitive voice services.

There are more dynamic opportunities too.

Take, for example, the recent US ban on cotton products sourced from the Xinjiang autonomous region. The sanction targeted China for its use of forced labour, amid other human rights abuses.

Analysts expect the ban to encourage ready-made garment manufacturers in China to shift to other sourcing hubs like Bangladesh. But that would make little sense if Bangladesh’s reliance on Chinese cotton imports comes under scrutiny. China accounted for 37.5% of Bangladesh’s cotton imports in 2019.

India-Bangladesh connectivity agreements mean it’s now more feasible for ready-made manufacturers in Bangladesh to increase imports from its second largest source of cotton – India. It’s a move that allows businesses to undercut regional competitors, and swing trade flows in their countries’ favour.

Connectivity and trade create the kinds of relationships that people need to thrive.

This glass half-full view contrasts with more cynical depictions of South Asia. But it’s a vision that bureaucrats are working towards. A vision businesspeople are capable of realising. And a vision that can help meet expectations held by many Indians and Bangladeshis.

This is the last in a five-part series on the India-Bangladesh relationship. Read the rest of the series here.

Adam Pitman is an analyst and editor based in South Asia. Follow him on Twitter @ar_pitman.