Let’s mend fences with Bangladesh

The Hindu Business Line, August 31, 2014
India has erected too many non-tariff walls, in the process pushing Bangladesh to explore the China market

On paper, India provides tariff-free access to almost all Bangladeshi products. That should make Bangladesh’s giant neighbour its biggest market as well.

In reality, though, it seems Bangladeshi manufacturers and exporters are not comfortable penetrating the large market of their next-door neighbour. Rather, they are happier with China, tapping the benefits of the preferential trade arrangement offered by Asia’s biggest economy.

This is starkly reflected in the latest trade figures. For the first time ever, in the fiscal year ended June 30, 2014, Bangladesh’s exports to China overtook its exports to India, that too by a huge margin.

At the same time, exports to India actually declined significantly. Official statistics, released by the Bangladesh Export Promotion Bureau (EPB), also show that Bangladesh’s exports to China are growing at a much faster rate and increased fourfold within four years.

In contrast, after getting the duty-free access to the Indian market in November 2011, Bangladesh exports to India dropped in FY12 by 5 per cent from FY11. Exports surged by 15 per cent in FY13 and again declined by around 19 per cent in FY14.

Burden of history

The bilateral trade balance has always tilted heavily towards India, leading to the perception that India doesn’t want Bangladeshi products to enter its big market. Over the last decade, Bangladesh, however, gradually increased its exports to India.

Responding to Bangladesh’s longstanding demand, India announced tariff-free access for nearly all Bangladeshi products during the Saarc summit in the Maldives in November 2011, except a restricted list of 25, which includes alcoholic products.

The then Indian Prime Minister Manmohan Singh announced reduction of the ‘sensitive list’ of goods for South Asian Least Developed Countries (LDCs) to 25 from the earlier 480, providing zero duty market access for 99.7 per cent of goods from South Asian LDCs including Bangladesh, Nepal, Bhutan and the Maldives.

On the other hand, China has allowed tariff-free access to 4,888 products for the LDCs since 2010, which covered around 90 per cent of Bangladeshi exportable items.

The only condition to avail the tariff preference is 35 per cent local value addition. Against this backdrop, the key question is why Bangladeshi exporters are tapping China more than India, where they have wider access.

The grey areas

The big depreciation of Indian currency against major currencies, as well as the Bangladeshi currency, is one reason for the decline in Bangladesh’s export to $456.6 million in the last fiscal year, from $563.9 million in FY13.

But an unfavourable exchange rate for a certain period can’t tell the full story.

Bangladeshi exporters are facing several non-tariff measures (NTMs) as well as non-tariff barriers (NTBs) imposed by India. Many Indian NTMs are nevertheless compatible with World Trade Organisation (WTO) rules on standards, and hence failure to comply with these standards by Bangladeshi exporters can’t be denoted as trade barriers.

But the slow progress in removal of already recognised NTBs and easing procedural barriers has disappointed Bangladeshi businessmen.

In fact, for the past five years, India and Bangladesh have been in a process of having mutual recognition of standards.

Although India has provided some technical assistance to improve the capacity of the Bangladesh Standards and Testing Institution (BSTI), full accreditation is still uncertain. Thus standard testing while entering India is a hassle for exporters.

Problems compounded

Lack of proper storage facilities in different land ports and customs stations in India increase difficulties. The prolonged time for testing of sample consignments also increases the cost of trade.

Five years ago, a trade body in Bangladesh suggested sending the test result from the lab to border customs by email or fax to reduce the time.

Existing Indian law, however, mandates such official despatch though the Indian Postal Service. Some Indian customs officials are not efficient.

By applying their discretionary power irrespective of rules, they have also caused trouble, mostly to small and medium exporters.

For instance, a consignment of fruit drinks was once blocked by an Indian border official on the plea that manufacturing and expiry dates have to be mentioned on the bottom of the packet, not on the front. But previous consignments of the same product had been released without any restriction. Even Indian importers have complained that the Bureau of Indian Standards (BIS) has been changing standards frequently.

The marketing angle

While NTMs or NTBs are cited regularly, the lack of marketing effort by Bangladeshi manufacturers and exporters is another reason for not enhancing exports to India. The effort to expose Bangladeshi brands is still insignificant.

There is also a lack of understanding of the demand of Indian consumers, especially in West and South India. These parts of India could become a good market for some Bangladeshi products including apparel.

China is a contrasting story. There are almost no NTMs or NTBs to entering the market. As China gradually withdraws from production of lower category apparel, Bangladesh is trying to meet the vacuum. Its knitwear and apparel exports to China in FY14 jumped 64 per cent and 88 per cent, respectively. Jute, leather and some other textile items are also entering the Chinese market at a faster rate — total exports to China surged 63 per cent to $746.1 million in FY14 from FY13.

Not that this huge increase in exports has helped reduce the yawning trade gap with China. Preliminary statistics indicate that import from China has surged further in FY14 and thus pushed Bangladesh’s bilateral trade deficit over $6 billion.

The trade gap with India also crossed $5 billion in FY14 due to a big increase in imports from India.

Given the difference in size between the two economies, this may not seem unusual. But the impediments in Bangladesh’s effort to increase its exports to the world’s tenth largest economy needs some serious attention.

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