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India & Bangladesh:Trade, Synergies & China

India & Bangladesh:Trade, Synergies & China

As per estimates available from Bangladesh Bank, as in 2016-17 (July-June); India was the second largest Import destination for Bangladesh (after China). However, India contributed barely 1.9% ($672 million) of Bangladesh’s 34.65 billion export revenue). Naturally, India was nowhere in the list of the top export destinations released by Bangladesh Bank.

The indications are clear. Though India dismantled the duty barrier for imports from Bangladesh, as early as in 2011; there was not much trace of cross-border value chain creation. One reason behind is India’s low FDI stock of $533 million (9th largest) as in March 2018 and Bangladesh’s inability to attract more than $2 billion FDI a year.

The other reason is, Bangladesh is primarily textile (Ready-made garment or RMG) country, contributing 85% of its export revenue (other major areas are frozen food 1.36%, agri 2.2% and Leather products 3.57%). Unfortunately for them, India is strong in this sector. Though our apparel exports are nearly half of Bangladesh’s, Indian producers have better command over the textile value chain (as it has better access to inputs) and are catering the vast domestic market to the maximum possible extent. All put together, India’s garment imports (total) are very low $773 million in 2017-18 (April-March), thereby offering limited scope to Bangladesh.

Add to this the overemphasis of Bangladeshi garment makers in catering demands in Europe and USA and, the value chain between two industries is limited in Bangladesh’s import of intermediaries (like cotton yarn, fabric, accessories etc) from India. As in 2016-17 (July-June), nearly 26% of Bangladesh’s cotton (all types) import was from India.

Having said this there are some welcome changes in the scenario in the recent past especially since the introduction of GST in July 2017. Abolition of 12% countervailing duty under GST and, the recent escalation of import duty on textile products from destinations other than FTA countries; offered a tremendous opportunity to Bangladesh.

The latest estimates released by Bangladesh Bank show, during January-March 2018, India was ranked ninth top export destinations of Bangladesh – a clear improvement in trade opportunities. In the three-month period, Bangladesh exported $195 million worth of goods to India. This was 37% higher than the same period in 2017.

The credit goes primarily to textiles. From July 2017 to May 2018; Bangladesh’s total exports to India increased by $201 million, which is 30% more than the country’s total export in the full year (July-June) of 2016-17. Unofficial estimates suggest that roughly $147 million export boost came from ready-made garments.

As I see it going forward, Bangladesh may optimise its locational advantage and the recent connectivity boost between the two countries, to grab a bigger share of India’s apparel imports. The growth may primarily come at the cost of other import-destinations. This has also opened serious opportunities in cross-border value chain creation. According to trade associations in Bangladesh MNC fashion retailers like Zara or H&M are now as a sourcing point to cater Indian market. While I do not know the flow of trade, chances are top retailers will source inputs and intermediaries from India and use Bangladesh as a finishing destination, meaning the benefits are shared between the two countries. For Bangladesh, this is also a chance to move up on the value ladder in terms of value contribution than merely being the low-cost finishing destination (when compared to India). Such cross-border value chain exists between India and Sri Lanka. Considering Bangladesh’s comparative strength in garments, and the improving logistics, they can surely make the most in apparels.
Meanwhile, Bangladesh’s dependence on Indian cotton inputs may also witness a rise as a result of the US-China trade war. Bangladesh currently imports 18% cotton (all types) from China, which is a cotton deficient country. A more integrated value-chain creation, therefore, may find, India and Bangladesh harnessing mutual advantages.