The Hindu Business Line : Free trade pact with Bangladesh not needed: Report

"Without necessarily implementing an FTA, both the country could benefit by cooperating to improve transportation, storage and administrative infrastructure at land border.''

New Delhi , Jan. 3

Even as India is busy wrapping up free trade agreement (FTA) with a host of countries following the failure of multilateral trade talks under WTO, a latest study by the World Bank found "no compelling case for India and Bangladesh to pursue a bilateral FTA".

In a comprehensive report titled `India-Bangladesh trade, trade policies and potential FTA', just released, the Bank economists even cautioned that "if India and Bangladesh were ever to implement an effective FTA, increase in trade would be slowed down or blocked by increases in congestion and the associated increases in `speed money' rents", in the absence of substantial investments in infrastructure and administrative capabilities.

Trading ties

The report stated that the trading ties between India and Bangladesh hold special interest in both countries for a number of reasons. Firstly, there are urgent and longstanding concerns in Bangladesh flowing from perennial, large bilateral trade deficit with India and from the large volumes of informal imports from India across the land border, which avoid Bangladesh import duties.

Secondly, even though India's trading relationship with Bangladesh is muchless significant for it than it is for Dhaka, closer economic integration with Bangladesh is seen as crucial way of reducing economic and political isolation of the North eastern states.

India is by far the largest single source for Bangladesh imports (15 per cent of total in fiscal year 2005), ahead of China and Singapore. But Indian exports face import weighted Bangladesh tariffs of about 29 per cent, suggesting that they compete favourably with imports from the rest of the world.

Specific tariffs

The report found that India's specific tariffs on Bangladesh's major exports (readymade garments) made it difficult for such exports to penetrate the Indian market. Bangladesh exports a miniscule (one per cent) share of India's imports, a negligible share (one per cent) of its own exports and a small range of products (fertiliser and jute goods make up two-thirds of exports).

The report noted that the large volume of informal/illegal trade remained a problem accentuated by poor logistics and infrastructure at land border costs that prompts higher transaction costs for formal imports. Such trade by some estimates could be as high as three quarters of recorded trade.

It is mostly one way — from India to Bangladesh. The study also found the existence of significant volumes of illegal imports into Bangladesh through legal channels (technical smuggling) by under-invoicing, misclassification and bribery of customs.

Simulated cases

For the few industry case studies simulated (cement, light bulbs, sugar, readymade garments) the likely effects of an FTA, for the first three, seem to be an expansion of Indian exports to Bangladesh but no exports from Bangladesh to India. This is because Indian export prices for these products are substantially lower than ex-factory before-tax prices of the same or similar products in Bangladesh. For readymade garments, the simulations show increased Bangladesh exports to India, but also increased readymade garments exports from India to Bangladesh.

The study found a bilateral FTA would provide substantial benefits to Bangladesh consumers by giving them access to cheaper exports from India. But these consumer benefits would far outweigh losses in government revenue or lost profits for local manufacturers.

However, the study states that such benefits could easily be wiped out, if one does not make sure that the incentive systems give the right signals. "By keeping out cheaper third-country imports, the FTA is at risk providing a captive, protected market where Indian producers might collude among themselves or with Bangladeshi importers to artificially jack up prices," it said, adding that cheaper goods from, say, East Asia might be excluded forcing Bangladeshi consumers and businesses to overpay.

Economic benefits

For India, the economic benefits from a FTA would be modest, since its trade with Bangladesh is small, it said, adding that India would stand to profit from the persistence of its policies of unilateral liberalisation — paying due attention to removal of non-tariff barriers, specific duties in textiles and garments and prohibitive tariffs on agricultural products.

Finally, the study said without necessarily implementing an FTA, both the country could benefit by cooperating to improve transportation, storage and administrative infrastructure at land border. Greater harmonisation and cooperation in customs administration, and banking relationships would also be highly beneficial.