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

India-Bangladesh Trade Relations: Prospects of a Bilateral Free Trade Agreement (FTA) Monthly Seminar on By Professor Ayubur Rahman Bhuyan Organized By Islamic Economics Research Bureau

Importance of Bilateral Trade with India • India’s large size (in terms of both population and GDP) makes it a large export market • On the side of import: geographical proximity, abundant natural resources, and diversified production structure make India a cheaper and convenient source of supply • Importance of bilateral trade is recognized at both official and private sector level • Official level: the existing trade agreement, SAPTA, SAFTA • Private sector level: Strong advocacy by FBCCI and FICCI, MCCI and CII to boost bilateral trade

Trends in India-Bangladesh Trade • Trade between Bangladesh and India is heavily tilted in favour of India. • In 2005-06, BD’s official imports from India were $1851 million but its exports to India were just $242 million. Exports to India could pay for only 13% of imports from India • Imports from India is growing fast, but exports to India remained small and recorded a modest increase • In 2005-06, Bangladesh’s exports to India accounted for as little as 2.30 percent of its total exports, whereas imports from India in that year were 12.5% of her total imports • Bangladesh’s trade deficit with India increased from $962 million in Fiscal 2001-02 to $1609 million in 2005-06 (a 1.7 times increase)

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, jute goods, betel nuts, jute yarn and twine, and frozen fish, account for 80% of total exports to India

Unofficial Trade between India and Bangladesh • As in official trade, unofficial India-BD trade is essentially one-way • Unofficial imports from India are about 20 times larger than unofficial exports to India • Unofficial imports at the present could be about 1.5 times the official imports. • Livestock and Cattle are the major import item but many other commodities of everyday use are also imported. Items of unofficial export are limited • Actual trade deficit with India would be much larger if unofficial trade were included

Causes of Bilateral Trade Deficit with India • Overvalued Taka vis-à-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 is warranted A. Overvalued Exchange rate

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, fruit juices, jams and pickles, fish etc • There are also para-tariffs – CVD, ADD, SD, additional customs duty, luxury tax, surcharge etc • Moreover, in the FY 2006-07 budget, the GOI raised tariffs on some major Bangladesh products exported to India (see Table) B. Tariffs

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

Causes of Bilateral Trade Deficit Contd. C. Non-Tariff Barriers (Some of them are State-mandated Imposition and others are sheer bureaucratic Interference) • 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

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

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 grant SAPTA concessions; rejecting consignments on false pretext

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 products that Bangladesh can export • Undiversified production base rather than India’s restrictive trade policies is the root cause of BD’s slow growth of exports to India

Rationale for a Bilateral Free Trade Agreement with India • Reduction of Trade Deficit (by increasing Exports) • Forced Reduction of Imports to Improve Trade Balance will be Self-Defeating • There is hardly any scope to cut down essential imports from India without jeopardizing growth • Piecemeal efforts by Government in the past to obtain trade concessions from India failed to raise exports • A free trade agreement (FTA) might offer a solution

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 July 2003 at the level of Joint Secretaries to begin negotiations on the FTA • The JWG met on four occasions so far but produced no result

Opinion of the Free Trade Group (FTG) The FTG, formed by the MOC of GOB in September 2003, recommended, among others, the following: • FTA should provide for a true market access for Bangladesh products, free of all tariff, non-tariff and para-tariff barriers, and open up opportunities for investment • The principle of asymmetry and non-reciprocity should be recognized • The Group compiled a List of 180 products on which Bangladesh will offer 100% tariff concession to India. It compiled a List of 3228 items on which Bangladesh will seek 100% tariff concession from India • India should provide 50% tariff concession on signing of the Agreement and 100% exemption by the end of the first year. Bangladesh will phase out the duties over a period of 12 years

Likely Impact of the FTA on Bangladesh Economy Effects on Bangladesh’s Imports: • Despite high tariffs, Indian exporters can successfully compete in Bangladesh market. In a free trade situation, they will enjoy a substantial price advantage. Bangladesh’s imports from India might therefore 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 better quality 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 economic welfare losses to Bangladesh producers

Likely Impact of FTA Contd. • All major Bangladesh exports to India currently attract high import duties. In an FTA when there will be no tariffs, exports in these goods 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 up new industries and produce new products for the large Indian market Effects on Exports:

Likely Impact of FTA Contd. • The FTA is very likely to attract investment and joint ventures by Indian entrepreneurs in the country • This happened in Sri Lanka and Nepal, and may happen to Bangladesh as well Effects on Investment:

Likely Advantages of FTA • Cheaper imports of raw material will generate more manufacturing activity and additional employment • FTA will make manufacturing production globally competitive as production cost will be lower • Government revenue from VAT/Excise will increase and outweigh the 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 and competitiveness

Probable Disadvantages of FTA • Certain sectors may face threats as protection will be lowered • To neutralize the adverse effects of FTA, safeguards measures will need to be incorporated in the agreement

Recommendations for Policy • Government may seriously consider signing the proposed FTA agreement, provided there is guaranteed market access (liberal rules of origin, no tariff and non-tariff barriers) • Fast Track Liberalization. Tariffs on “fast track” items should be eliminated immediately • Normal Track Liberalization. Trade barriers on products of the normal list could be phased out over an agreed timeframe – 12 years for Bangladesh, and a shorter period of not more than 2 years for India • Negative List. Products of export interest to Bangladesh should not be in India’s Negative List

Recommendations Contd. • Dismantle all NTBs and Para-Tariffs • Safeguard Provisions. The Agreement should include a safeguard clause to protect Bangladesh’s infant industries • Rules of Origin. The rules of origin should be more favourable than under the India-Sri Lanka FTA 8) Expand Production Base

Recommendations Contd. • Build Export Capacity. There is the need to build export capacity in various products, which have good demand in India • Introduce an Export Development Assistance Scheme to assist exporters, the EPB, and the Business Chambers in their export promotion effort • Improve Trade Facilitation

Recommendations Contd. 12) Improve Infrastructure • Infrastructural facilities should be improved at the land customs stations (LCS) on both sides of the border • The improvement in infrastructure would need to be done in a coordinated way – there would no point if the infrastructure were improved on one side of the border but bottlenecks were to remain 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 opened between Bangladesh and the neighbouring Eastern and North-Eastern Indian States

Recommendations Contd. • Investment Liberalization. The FTA should provide for liberalization of investment. The two countries may sign an Investment Promotion and Protection Agreement and Double Taxation Avoidance Agreement • Remove State Government-imposed levies, for example luxury tax, on Bangladesh Exports

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