The physical contiguity and porus borders with India have led to a significant growth of bilateral trade since the 1990s. India has emerged as one of the most important sources of imports for Bangladesh. The geographical position of Bangladesh acts as a natural feature for imports from this close neighbour.

Trade imbalance
It is reported that the level of bilateral trade deficit as of 1999 is US$2.74 billion. The current level is nearly US$ 3 billion. The trade imbalance between the two countries is a concern for Bangladesh. Such a huge imbalance has given rise to concern both at the policy level and at the level of public perception in Bangladesh. Many quarters in Bangladesh consider it a part of India's "hegemonistic" attitude towards a small neighbour. This perception, although some disagree, seems to be overwhelming among a majority of the population. It is timely that the Indian Minister has expressed a desire to address the gross imbalance of bilateral trade with Bangladesh.

Statistics show that legal and illegal imports from India constitute more than 20 per cent of total imports of Bangladesh. A break-down of imports indicate that 8 per cent of capital goods, 10 per cent of intermediate goods, 13 per cent of primary commodities and 20 per cent of consumer goods come from India. It appears that day by day imports are on the increase.

Reasons for deficit trade
Although the nature of bilateral trade is market driven, it has important ramifications on Bangladesh economy. The question is why have Bangladesh's imports grown exponentially from the beginning of the 90s? The issue is complex and many sided. Some of the reasons deserve mention.

First, import liberalisation of Bangladesh is much faster than that of India. Although Bangladesh is a Least Developed Country, it embarked on liberalisation of trade barriers at the dictates of the Bretton Woods Institutions. Large-scale import liberalisation within a very short period in the 90s exposed the industries in Bangladesh to strong and unequal competition from India. Some economists argue that the process has been too sudden for the long protected industrial sector without any time to prepare for such a measure.

In contrast India's slower pace of liberalisation appears to be the consequence of its global trade strategy. The World Bank, in its report on trade policies in South Asia, (released on 9th November), stated that in terms of openness, trade-GDP 2000, Sri Lanka scored the highest point with 77, followed by Nepal's 44, both Bangladesh's and Pakistan's 33, and India's 19, being the least open.

By 2000-01, the average customs duty was 30 per cent in India, in Bangladesh the average customs duty is much less. Another illustrative example is that the tariff in India for poultry is 35.2 and wheat 50; whereas in Bangladesh it is 26 and 11 respectively for the same products. Furthermore, India uses antidumping or similar countervailing duties excessively more than other member countries of WTO. India has non-tariff barriers, such as, technical standards requirement as well as sanitary and health regulations affecting trade. The dominant view in Bangladesh is that high tariffs and non-tariff barriers in India constrain the expansion of Bangladesh's exports to India.

Second, illegal trade has been flourishing in imports from India. It is a major factor in Bangladesh's imports because of trade restrictions on legal trade in India. Although there is no official estimate of illegal trade on imports, it is widely believed that illegal trade deficit for Bangladesh is at least equal to the amount of legal trade deficit. Some economists say it is around US$ 1.8 billion dollars.

Third, available data show that the real value of the Taka vis a vis the Indian rupee has been appreciating during recent years. This has a significant impact on size of the trade deficit. It is interesting to note from 1974 to 1983, there was depreciating trend in the Taka of about 46.6 per cent against the Indian rupee. Since 1996 the Taka had appreciated by 41.5 per cent against the Indian rupee.

Fourth, productivity differences between Bangladesh and India have effects on trade imbalance as they tend to favour India. Productivity of labour is the determinant factor in prices of goods. In agriculture, India has a higher yield rate for almost all the products than that in Bangladesh. An aggressive subsidisation policy in agriculture in India has kept the Indian prices down artificially. Furthermore the small size of Bangladesh economy is unable to achieve any significant economies of scale, compared to that of India because of its greater size of market.

Fifth, India's goods are available at competitive and affordable prices. This is because large scale economies in India with cheaper utilities and better marketing and financial support can provide competitive prices, while Bangladesh cannot match India's prices. Furthermore, because of its inadequate marketing and distribution facilities in India, Bangladesh cannot currently expand its exports to India that are largely confined to a few limited products, such as raw jute, tea, fish products, fertiliser, jute manufactures and leather products. Manufactured exports from Bangladesh are few and relatively small in volume.

Sixth, there is a vibrant trade in services between the two countries that tend to favour India. Bangladeshi citizens go to India for medical treatment, for education to and visit religious sites ( for example, Ajmer Sharif) and tourist spots.

Finally, garment sector in Bangladesh is a thriving industry and for ready-made-garments, yarn and fabrics are imported from India. The increased demand from Bangladesh has also accelerated trade imbalance with India.

India's trade policy
India's tariff policy is determined by reciprocal arrangements primarily with US, European Union and Japan. Being a member of the World Trade Organisation, such tariff regime also applies to Bangladesh. This results only in respect of commodities on which India heavily trades with her major partners. Accordingly, the commodities that are important in trade for Bangladesh do not figure and are not covered under its liberalisation programme.

Why trade deficit with India is a concern?
Bangladesh has also a huge trade deficit with China as well but it has no political overtones, while its trade imbalance with India is perceived differently. The reasons are not far to seek. One may argue that unresolved bilateral issues with India, absence of both Indian-funded infrastructure projects and joint commercial ventures and frequency of communal riots in India have given rise to negative perception of India among many people in Bangladesh.

Furthermore, there is a view in many quarters that Bangladesh is being "exploited" for India's economic interests. As against this, China has invested in many visible infrastructure projects in Bangladesh and this has been well received by people in Bangladesh.

Another issue that merits attention is that if overall balance of trade and payment with other trade partners of Bangladesh had been in surplus, the current trade deficit with India would not have raised concerns.

Any solution
Bangladesh has to seek faster trade liberalisation on a bilateral basis with India. Unless such bilateral liberalisation involves sectors and commodities across the board, it may end up liberalising trade in respect of commodities in which they are at least likely to compete with each other. This will not help Bangladesh in expanding trade with India.

The next issue is: would Bangladesh welcome a free trade agreement (FTA) with India? Many economists say that the devil is in the details. How extensive will be the coverage of FTA? How large is going to be the negative list of commodities that will be exempt from FTA? Are there items on which only partial liberalisation is undertaken? Are tariffs and non-tariff barriers simultaneously eliminated or reduced? These and similar questions need to be addressed relating to the structure of FTA. It implies FTA is not panacea for Bangladesh's trade deficit.

Conclusion
The bottom line is Bangladesh needs a larger market access to India and the matter is urgent. One could argue that India should have a long-term interest in a prosperous Bangladesh, which in turn will provide a large market for India's exports and investment.

Accordingly, a case based on long term considerations and enlightened self interest is very strong to open up for Bangladesh's exports to India. Considered in this light, India's Commerce Minister's recent assurances reflect a sound platform in the context of evolving a balanced Indo-Bangladesh trade relations in the coming years.

Barrister Harun ur Rashid is a former Bangladesh Ambassador to the UN, Geneva.