It was 50 years ago when Bangabandhu Sheikh Mujibur Rahman, the then Prime Minister of Bangladesh, visited the Indian capital, New Delhi, at the invitation of Indira Gandhi, the then Prime Minister of India. The five-day visit from May 12 to 16, 1974, was the second and the last and most critical official visit to India. Two years before, he visited Kolkata from February 6 to 8, 1972. In between the two trips, many critical developments took place. These include Indian PM Indira Gandhi's visit to Bangladesh from March 17 to March 19, 1972; the singing of the Treaty of Friendship, Cooperation and Peace between the two countries in 1972; the singing of the bilateral trade agreement in 1972, and the singing of the protocol on Inland Water Transit and Trade in 1972.
During Bangabandhu's visit to India in 1974, several critical issues were discussed by the heads of the two governments. Regarding the bilateral trade issue, two parties agreed to set up two joint commissions to improve the jute sector and curb unauthorised transactions. The two parties also agreed to make the optimal use of a Balanced Trade and Payments Arrangement (BTPA). The arrangement was included in the three-year bilateral trade agreement, which replaced the first bilateral trade agreement, signed in 1972 and expired in September 1973. The agreement provided an opportunity for border trade between the two countries. It allowed people living up to 16 km on either side of the border to dispose of their goods daily. There was no customs and currency regulation for the border trade. The only restriction was the specific number of commodities. The agreement also provided an opportunity for a balanced rupee trade worth Rs. 250 million (or US $35 million) each way annually. In the new three-year trade agreement that became effective after the expiration of the first agreement in September 1973, two parties agreed to enhance the balanced trade to Rs. 305 million (US$ 42 million) worth of exports each way during the first year of the deal.
Later, in December 1974, two countries signed a protocol to settle trade payments in free convertible currency. After its independence in 1971, Bangladesh started with a pegged exchange rate policy, and the Taka was pegged to the Pound Sterling and set at par with the Indian Rupee. Globally, the US went off the gold standard, and there was a dislocation of the Bretton Woods system in 1971. The Indian Rupee (INR) was pegged to the US dollar.
Again, for the first time, the Indo-Bangla trade agreement recognised the most favoured nation (MFN) treatment of each other in line with the GATT principle in 1974. Bangladesh formally joined the General Agreement on Tariffs and Trade (GATT) in 1972. All these initial efforts to increase bilateral trade were crucial to address the complexity of trade and remove the barriers as both countries were almost closed-economies at that time. The governments in these countries initially focused on state-to-state trade and deliberately prevented private trade mainly due to their socialist approach. Nevertheless, the active presence of Indian merchants and traders in Bangladesh was visible during the period, indicating that without the private players, no trade was possible.
Five decades after the initial efforts to smoothen the bilateral trade, many changes have occurred. Both countries have liberalised the tariff regimes significantly, paving the way to free trade in goods and services. Economic cooperation between the two neighbouring countries expanded significantly, and the economic relationship has reached a new peak in terms of trade and investment. Two countries have settled some disputed issues, removed several barriers to trade and enhanced connectivity. Bilateral trade in goods crossed the $15 billion mark. However, foreign direct investment (FDI) from India is still low. During the last decade, the annual average inflow of FDI from India stood at $110 million against $287 million from China.
Official statistics showed that bilateral trade had started to gain momentum after 2010 due to various factors, including wider market access to India. However, the trade balance is heavily tilted towards India despite the rise in exports from Bangladesh to India. In the fiscal year 2009-10 (FY10), bilateral trade was only $3.50 billion, of which less than 10 per cent was Bangladesh's exports to India. In FY19, exports from Bangladesh to India crossed the $1 billion level for the first time, and within five years, it further crossed the $2 billion mark by reaching $2.13 billion in FY23. The ratio of exports to total trade also increased to 22 per cent in the last fiscal year. Imports from India, however, crossed the $10 billion mark in FY22 and stood at 13.70 billion when exports to India were $1.99 billion. Thus, the trade deficit with India surged to $11.70 billion, the highest ever. As Bangladesh adopted various steps to restrict overall imports to contain the rapid depletion of the foreign exchange reserve, it also affected imports from India like other major sources, including China.
The two neighbouring countries are now negotiating the Comprehensive Economic Partnership Agreement (CEPA), and there is a move to complete it by 2026. It will be Bangladesh's first-ever comprehensive bilateral free trade agreement. CEPA is expected to enhance Bangladesh's exports to India by 190 per cent, adding 1.72 per cent to the gross domestic product (GDP). For India, exports to Bangladesh are likely to increase by 188 per cent.
Both countries have also agreed to settle a part of bilateral trade transactions in Indian Rupee (INR) instead of US dollars. The process has started since July last year, and little progress has been made so far due to some challenges. Traders in both the countries are yet to fully understand the mechanism and benefits of the trade settlements in local currencies. It is the latest addition to the dynamics of the Bangladesh-India bilateral trade.
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