Monday, October 17, 2011

Sea change in Indo-Bangla business ties

NISHA TANEJA and NEETIKA KAUSHAL

Dhaka has created investment opportunities for India, while New Delhi has agreed to removing entry barriers on Bangladeshi textiles.

Prime Minister Manmohan Singh's visit to Dhaka on September 6-7 has changed the course of Indo-Bangladesh economic relations. To be sure, there were disappointments, such as the delay in arriving at a water sharing accord on the Teesta river due to resistance from the Indian side, and backtracking by Bangladesh on its offer of transit to India through its territory. However, the initiative taken to promote greater investment and trade between the two countries was very promising.

INVESTMENT PACT
In order to enhance investments, the Prime Ministers of both countries issued a joint statement on completion of the talks, paving the way for a bilateral investment promotion and protection agreement. Such an agreement would grant investments made by one country in the other a number of guarantees, which typically include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security.

It is expected that with the signing of this agreement, there will be a substantial increase in investment flows, which so far have been insignificant. Cumulative Indian investments in Bangladesh until 2009 were only US$ 248 million, with only 26 per cent of it having taken place up till 2007. Along with the investment agreement, the announcement regarding establishment of a special economic zone for Indian investments is a complementary measure, which is expected to facilitate Indian investments further.

On the trade front, the Prime Minister, Dr. Manmohan Singh, announced the the Government of India's decision to remove 61 items, including 46 from textiles, from India's negative list for LDCs. This implies that Bangladesh products will now be allowed to enter Indian territory through any port, without paying duty.

TRADE CONCESSIONS
These tariff lines are a part of the list of 164 apparel items in which India allowed duty-free access to Bangladesh up to a limit of eight million pieces in April 2008, and recently raised the limit to 10 million pieces in April 2011.

Bangladesh is India's largest trading partner in South Asia, accounting for 28 per cent of India's total trade with the region. In 2009-10, India's exports were $ 2,434 million; imports were $255 million and its trade surplus with Bangladesh was $2,179 million. For several years, Bangladesh's concern has been its burgeoning trade deficit with India.

Therefore, increased market access has been a core concern for Bangladesh in all its trade negotiations with India, both bilaterally and regionally under the South Asian Free Trade Area. Perhaps, what is of significance is the approach that India has followed in offering these concessions. Instead of negotiating with Bangladesh on the reduction of items in the sensitive list, India requested Bangladesh to send a list of items on which the latter wanted zero duties. Bangladesh requested India to allow duty-free access in the case of 61 items.

Clearly, this novel approach left no room for dissatisfaction on the Bangladeshi side. This unique method has been adopted by India for Bangladesh alone. Such an approach has not been followed by India in any other bilateral FTA.

IMPACT ON TEXTILES
It is not difficult to understand why Bangladesh had problems with India's market access policies. Apparel is a major item of export accounting for about 70 per cent of Bangladesh's total exports.

These items were on India's sensitive list, restricting market access in a category that was of crucial importance to Bangladesh's economy. Now with the agreement in place, Bangladeshi local manufactures, particularly those from the medium and small sectors, expect considerable gains through increased market access to the Indian market. While Indian textile manufacturers may express disappointment because of the fear of influx of Bangladeshi garments, the positive impact of these measures will unfold in the next few years as they will help both countries integrate their textile sectors with global supply chains.

Recent evidence indicates that Indian investments are moving into Bangladesh. This trend is likely to intensify, following the investment measures that have been announced. Since the domestic market in Bangladesh is small, Indian investors in Bangladesh will be targeting export markets. Indian investors will benefit on two counts. First, they will be able to avail the GSP benefits accruing to Bangladesh from the European Union countries.

Second, Indian investors can enter into collaborative ventures to manufacture higher value-added items, in which Bangladeshi firms have developed capabilities in recent years.

Clearly, the trade and investment measures, among several others, will lead to tangible outcomes for both countries. The measures related to duty-free access for Bangladeshi items, increased investment in Bangladesh and setting up of export processing zones seem like a win-win for both countries.

First published in the Hindu Business Line, India, September 20, 2011


Nisha Taneja and Neetika Kaushal are with the Indian Council for Research in International Economic Relations