The Hindu Business Line : India-Bangladesh FTA prospects

Coordinated improvements in infrastructure facilities associated with transport, storage and administration at and adjoining the India-Bangladesh land border, as well as from harmonisation of, and cooperation in, Customs administration and banking arrangements can be beneficial for both countries.

In recent days — especially after the political upheaval in Bangladesh which has now stabilised somewhat with the formation of a military-backed caretaker government — there have been signs that Dhaka is more open to `normalising' relations with New Delhi which, to observers of the bilateral ties between the two countries, is undiluted good news. This is because, in the past, political compulsions have forced most Bangladeshi regimes (military or otherwise) to adopt policies unhelpful to the forging of closer economic and political ties with this country, which have affected adversely the regional `interface' of both nations.

Since the present dispensation in Dhaka is, by declared design, a temporary arrangement, it remains to be seen whether the new line it has adopted vis-à-vis India will gain any permanence — that is, after the promised elections in 2008. It would of course be quite unfortunate if the `line' is disrupted later (owing to political reasons) because there is no doubt whatsoever that closer economic links between the two economies cannot but help the average citizen of the two countries (the Bangladeshi more so than the Indian) attain a better standard of living, mainly by enabling him to buy products at a cheaper rate than is the case now, and also by providing him with a wider choice of products on shop-shelves.

Which Route?

But what sort of `closer economic link' should the preferred route of future cooperation between the two countries be? Should it be confined to just easier trade arrangements or should the interface be extended to a much wider canvas, which could include the entire gamut of economic relations such as investment, which, among other things, would have the effect of integrating the two economies even more thoroughly?

In other words, the choice is between the Free Trade Agreement (FTA) route and that favouring a Comprehensive Economic Cooperation Agreement (CECA), a subject that is already being probed (and acted upon) in the context of economic relations with other countries, which have declared that they are prepared to cooperate even more closely with India.

In fact, there are already signs that New Delhi would like to broaden the scope of economic cooperation with Dhaka with the Union Minister of State for Commerce letting it be known that moves are afoot to allow Bangladeshi foreign direct investment in India.

Early this month, just before the SAARC summit in New Delhi, Mr Jairam Ramesh was quoted as saying that a couple of meetings had already been held on the issue and that a formal announcement was expected shortly subject to the satisfaction of the security agencies.

This is very good news indeed because, apart from anything else, a wider investment cooperation agreement between the two countries would encourage larger Indian investments in Bangladesh which, ultimately, would have the effect of increasing Bangladesh exports to India thereby reducing the large trade deficit which Bangladesh suffers vis-a-vis this country.

Things apparently are in an advanced stage and it appears that only hurdles put up by the security agencies are probably standing in the way of removing Bangladesh from the negative list of investment sources. To quote Mr Ramesh: "We have sent a note to the Prime Minister who is looking at the issue seriously. In the context of the current bilateral trade, there is nothing much Bangladesh can export to India. But if Indian investment takes place, their exports to India could increase."

The example of Sri Lanka has been cited to buttress the sensibility of such a policy move with regard to Bangladesh. It has been said that, till five years ago, Sri Lanka was on the negative investment-source list along with Pakistan and Bangladesh. But since the ban was lifted, not only has Indian investment flowed into Sri Lanka, exports from that country to India have increased substantially.

World bank Take

Roughly the same point has been argued by a recent World Bank paper on the subject (Paper No 13 in the Bangladesh Development Series), which studies the pros and cons of an FTA between the two countries. To quote from the report, there is little doubt that consumer welfare gains in Bangladesh would far outweigh losses in government revenue or producer surplus, provided infrastructure and administrative capacities are expanded at the borders.

But welfare gains could disappear if, after gaining a captive protected market under an FTA, Indian exporters colluded amongst themselves or with Bangladeshi importers. The report says that Bangladesh would be better served in pursuing similar welfare gains through multilateral trade liberalisation.

Seen from the Indian side, the report says that, since trade with Bangladesh is rather small compared to the country's total trade, the economic welfare gains from an FTA would be modest, largely stemming from gains in producer surplus following bigger export flows. The report concludes unequivocally that India would gain much more from a continuation of its policy of unilateral liberalisation, paying special attention to the removal of non-tariff barriers, specific duties on textiles and garments, and prohibitively high tariffs on agricultural products.

Benefits for Both Sides

Having said this, the overall conclusion of the study (as articulated in its executive summary) is that, irrespective of whether there is an FTA or not, there are substantial benefits for both sides from coordinated improvements in infrastructure facilities associated with transport, storage and administration at and adjoining the India-Bangladesh land border, as well as from harmonisation of, and cooperation in, Customs administration and banking arrangements.

The point must be made that there is nothing new in all this mainly because it is based on common sense which however — as the well-known adage puts it — is not all that commonly found. And yet, such aspects of trade facilitation and cooperation in other spheres between the two countries — so essential to the future well-being of the two economies — have been conspicuous by their absence in bilateral economic ties.

Of importance is the point that, since politics is the principal culprit, there is no guarantee that the bilateral waters will not be muddied once again after current interregnum in Bangladesh's governance ends.

Does this then mean that there is nothing much to do now by way of taking concerted steps to improve economic cooperation between the two countries, whether through the FTA route or a CECA?

Given the experience of the past, perhaps this is what would appear to be the sensible, and efficient, course of action to adopt as far as New Delhi is concerned.

While realists may opt for this line, inveterate dreamers and optimists would most certainly dub it as being inordinately pessimistic, perhaps even disastrous. They would probably argue that the latest concessions made by New Delhi to the less developed countries in the SAARC fold (which includes Bangladesh) are timely and should be followed up with similar initiatives as quickly as possible at the bilateral level with Dhaka.

In summing up, the point can perhaps be made that while the caretaker government lasts in Dhaka, the average Bangladeshi should be given a chance to see for himself that there is after all another, more fruitful, way of dealing with Big Brother India than the path of animosity and belligerence espoused for decades by the country's mainstream politicians barring honourable exceptions.

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