A story of unrealised potentials

India is the closest neighbour of Bangladesh. It can, therefore, be logically expected that there would be close economic interactions between these two countries. There are multiple channels through which economic interactions between countries are mediated. Arguably the most important are trade and investment links. There are many empirical studies which lend support to the view that trade and investment flows among neighbouring countries tend to be large. The experiences of countries belonging to the Association of South-East Asian Nations (ASEAN), European Union (EU) and North American Free Trade Agreement (NAFTA) are illustrative in this context. The present state of intensity of economic interactions between Bangladesh and India belies the expectation generated by the experiences of these regions.
Against the above backdrop this article notes a number of positive developments which have the potential of deepening Bangladesh-India economic relationships as well as constraints which stand in the way and offers some suggestions for remedial actions.
It may be noted here that economic relationship between two neighbouring countries can be fostered both bilaterally and within the framework of multilateral arrangements. As regards the latter, apart from membership of various global organisations, both India and Bangladesh are members of several regional arrangements.
Mentionable among these are South Asian Association for Regional Cooperation (SAARC), Bangladesh-Bhutan-India-Nepal (BBIN) growth Quadrangle and Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation (BIMSTEC). A proactive engagement in these organisations can potentially boost Bangladesh-India economic relationship. A Motor Vehicles Agreement has been signed among BBIN countries, but it has not yet come into force. Within the framework of South Asian Free Trade Agreement (SAFTA) under the auspices of SAARC, India officially allows duty-free access for many products from Bangladesh and the number of items on the sensitive list has been reduced to 25. But, as will be shown later, the result has been less than satisfactory.
On the bilateral front, the land boundary agreement has been finally implemented and the enclaves have been exchanged. India granted a line of credit to Bangladesh amounting to $1.0 billion; this has been followed by another amounting to $2.0 billion. Bus, Railway and Waterway services have been restored. The dispute over the maritime boundary has been resolved. Electricity trade has begun on a limited scale. Transit agreements through river and land routes have been operationalised.
The above-mentioned positive developments notwithstanding, economic relationship between Bangladesh and India remains far below expectation. As regards trade, mutual gains of participating countries have been highlighted in literature since days of Adam Smith. In particular, the existence of a positive relationship between exports and economic growth became embodied in such concepts as trade as an "engine of growth" or "handmaiden of growth". Empirical evidence in this regard was provided by the earlier experiences of Hong Kong, Singapore, Taiwan and the Republic of Korea. This was further buttressed by the subsequent experiences of countries such as Indonesia, Malaysia and Thailand.
As regards trade relationship between India and Bangladesh, it is dominated by one-way flow of imports from India into Bangladesh. India is the second largest source of import for Bangladesh; the value amounted to $5,588 million in FY 15 as against total imports of $40,703 million in the same year. On the other hand, India imported goods and services worth $527 million from Bangladesh. A positive development in this regard is that the growth of exports to India has gained some momentum in recent years. Export to India has grown faster than total export of Bangladesh, but in absolute terms it is still an insignificant amount. Moreover, it constitutes a minuscule proportion of India's total import which is about $500 billion.
Another important channel of economic interaction between nations is through foreign direct investment (FDI). Here again there is considerable empirical evidence to substantiate the view that FDI can be beneficial both for recipient (host) countries and those from which FDI originates (home countries). The host countries may benefit from higher investment and associated employment, promotion of manufactured exports, participation in the value added chain of global production and technology transfer. The home countries benefit from repatriation of profits, enhanced competitiveness by availing of lower production cost in host countries (particularly lower wage cost) and ability to serve the local market, the scope of which may be restricted by host countries' tariff and non-tariff barriers against imports. As regards host country benefits, particular attention has been paid to the contributions of transnational corporations engaged in FDI to manufactured exports from developing countries. Available evidence points to a significant role of TNCs in promoting manufactured exports from many developing countries as diverse as Argentina, Brazil, China, Mexico, Paraguay, the Philippines, Sri Lanka, Singapore and Thailand under a variety of arrangements that encompassed wholly-owned affiliates, as well as majority or minority-owned joint ventures. The destinations of exports were both home countries and the rest of the world. This also points to the importance of trade-FDI nexus. Here also the present reality falls considerably short of expectation. In fiscal year 2015 Bangladesh received FDI valued at $1834 million, only $83 million was received from India. It should be noted that India, besides being a fairly large recipient of FDI, is not an insignificant investor in other countries. Outward FDI from India amounted to $7,501 million in 2015. It is obvious that FDI from India in Bangladesh constitutes a tiny fraction of inward FDI of Bangladesh, and a tinier fraction of India's outward FDI.
In the light of above, the following suggestions are offered on the basis of an earlier World Bank study to expand the opportunities of trade-investment nexus between Bangladesh and India.
Bangladesh
* Extend application of Automated System for Customs Data (ASYCUDA) to all trade and move toward paperless clearance system with minimum personal interaction between traders and customs inspectors
* Introduce effective green channels for accredited traders
* Develop modalities for off-dock clearance of containers, and bonded movement of un-cleared containers by road
* Allow bonded warehousing for wholesalers, paying duty at the time of sale
* Remove restrictions on foreign freight forwarding companies to encourage the introduction of modern logistics systems
* Develop restructuring plan for the existing terminal facilities at Chittagong
* Implement major organisation and management restructuring at the port of Chittagong, reducing labour costs and introducing private sector participation
* Increase the movement capacity of the Chittagong-Dhaka rail corridor and establish higher capacity rail ICD at Dhaka
* Complete restructuring of Bangladesh Railways (BR) with a business approach, seek private sector participation in increasing rail container services
* Construct a high capacity highway within the Chittagong-Dhaka corridor
* Facilitate establishment of road-based Inland container depot (ICDs)
India
* Complete the roll-out of Indian Customs and Central Excise Electronic Data Gateway (ICEGATE) and its development into a fully paperless clearance system
* Ensure effective Risk Management Systems and post-clearance audit and verification procedures
* Review terminal concession and tariff regulation in the port sector
* Ensure rail track capacity for increasing container trains on main corridors
* Provide level competitive framework for the container rail sector
* Ensure that container terminal capacity keeps pace with container demand
* Provide adequate port draft for the next generation of vessels that may use Indian ports, 13.5 - 14.0 metres
* Construct the dedicated freight corridor, Delhi - Mumbai
* Establish a joint public-private programme to streamline overall trade-transport facilitation throughout the corridor
* Complete construction of a high speed, high capacity, controlled-access highway network along major trade routes
* Eliminate or streamline interstate tax and administrative check-posts
* Review and streamline export incentive/trade control regimes to streamline the entire trade documentation and procedures system which remains hugely cumbersome
Bangladesh -India
* Establish a bilateral taskforce to prepare proposals for streamlining intra-regional trade-transport through the Benapole-Petrapole crossing
* Extend fully the computerised customs clearance systems, operating at the international gateway ports to the major land customs stations  
* Agree to arrangements for the cross-border movement of containers by both road and rail
Some other actions are needed in addition to the above. First, there are frequent complaints from traders regarding non-transparent application of non-tariff barriers. These include phyto-sanitary standards, quality certification and stringent rules of origin requirements. Countervailing duties are imposed occasionally. The scores of both Bangladesh and India are rather low in terms of global indicators relevant for trade and investment such as the World Bank's governance and ease of doing business indicators and World Economic Forum's competitiveness index. Besides, it cannot be denied that there exists some degree of trust deficit. Its root lies in illegal immigration, smuggling, border killings, failure to reach agreement on sharing Teesta river water and concerns regarding the likelihood of a river-interlinking project in India. All these problems should be resolved soonest to optimise mutual gains from an effective trade-investment nexus.
Dr Mirza Azizul Islam is a former Adviser to Caretaker Government for the Ministries of Finance and Planning and presently a Visiting Professor at BRAC University.
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