Leading University

Assignment On

Trade between Bangladesh and India

International Business
(BUA-321)
Prepared For
Masum Miah Lecturer Department of Business Administration Leading University, Sylhet

Prepared By
Tamima Khanom Ema (0801010058) Abu Saleh Md. Maidul Islam (0801010096) Surajit Datta (0801010102) Mahin Ahmed Chowdhury (0801010110) Nazia Sharmin (0801010121)
18th Batch Department Of Business Administration Leading University, Sylhet

Date of Submission

03 May, 2011

Letter of Transmittal
May 3, 2011 To Masum Miah Lecturer Department of Business Administration LEADING UNIVERSITY, SYLHET Subject: Submission of Assignment on Trade between Bangladesh and India. Dear Sir, Here we are submitting herewith our Assignment conducted in the 9 th semester of BBA Program, for partial fulfillment of the requirements of the BBA Program. We have prepared our Assignment on Trade between Bangladesh and India on the basis of our study on the topic. We have tried our best to furnish all the things what we have learnt during the assignment on queuing analysis also to arrange it sequentially in the assignment for the betterment. We will be highly encouraged if you are kind enough to receive this assignment. Please do call for any clarification regarding the report, if required.

With regards Sincerely Tamima Khanom Ema (0801010058) Abu Saleh Md. Maidul Islam (0801010096) Surajit Datta (0801010102) Mahin Ahmed Chowdhury (0801010110) Nazia Sharmin (0801010121)

Content
LEADING UNIVERSITY..............................................................................................................................1 INTERNATIONAL BUSINESS..............................................................................................................1 INTRODUCTION..........................................................................................................................................5 HISTORICAL DEVELOPMENT OF BANGLADESH-INDIA TRADE RELATIONS........................5 IMPORTANCE OF BILATERAL TRADE WITH INDIA.......................................................................6 COMMODITY COMPOSITION OF TRADE ...........................................................................................6 UNOFFICIAL TRADE BETWEEN INDIA AND BANGLADESH.........................................................7 THE BALANCE OF TRADE BETWEEN BANGLADESH AND INDIA...............................................7 CAUSES FOR THE TRADE DEFICIT.......................................................................................................9 NON-TARIFF BARRIERS FACED BY BANGLADESH.......................................................................10 FUTURE PERSPECTIVE OF BANGLADESH-INDIA TRADE UNDER SAFTA..............................11 RECOMMENDATION TO IMPROVE TRADE CONDITION BETWEEN INDIA AND BANGLADESH ...........................................................................................................................................12 CONCLUSION.............................................................................................................................................13 REFERENCES ............................................................................................................................................14

Introduction
India has been a major trade partner of Bangladesh for long time. Moreover, these two countries also share long history of cultural and social heritage. If we intensively study the trade relations of these two countries, it can be seen that India has always been the dominating partner and Bangladesh maintained a historical trade deficit with India. Bangladesh suffers a huge trade imbalance with India. Apart from the large size of the economy, maintenance of a high protectionist trade regime by India in the forms of tariff and non-tariff barriers have contributed to this imbalance. While Bangladesh has progressed much ahead of India along with its liberalization of trade, India remains slow. Both Bangladesh and India are two major countries of the SAARC and have a long common historical past and similar cultural and social evolution. As far as trade relation is concerned, India is the 2nd largest trading partner of Bangladesh just after USA in 2003. Indias position is at the top for Bangladeshs imports from the world ( IMF: Direction of Trade Statistics, June 2004). Therefore, an analysis of current trade status between the two nations, obstacles and opportunities for mutual trade expansion is very critical for economic development of both countries, especially of Bangladesh, as Bangladesh has been suffering from historical trade deficit with India since its independence. The trade deficit has been increasing exponentially since the recent past. Official data show that compared to 1983, trade deficit in 2003 is more than 46 times higher. This growing deficit is a cause of serious concern for Bangladesh and has important economic and political implications.

Historical Development of Bangladesh-India Trade Relations

Bangladesh and India signed the Treaty of Friendship, Cooperation and Peace on March 19, 1972 in Dhaka for 25 years. Owing to this treaty, both countries signed the first one-year trade agreement on March 28, 1972.In the agreement, fish, raw jute, newsprint and naphtha were identified as the principle exports of Bangladesh to India. Indias major export items to Bangladesh, on the other hand, were cement, coal, machinery and unmanufactured tobacco. The trade between the nations was limited to government level. This agreement also provided border trade between Bangladesh and Neighboring Indian states; and within 16 kilometers of both countries border, free trade was allowed for certain commodities. The expected level of trade was not achieved under the first trade agreement. Also free border trade between Bangladesh and India led to some illegal trade and hence was abolished in October 1972 by mutual consent of the both governments. However, to attain the desired level of trade, the first trade agreement was further extended up to September 27, 1973. The first trade agreement of 1972 was replaced by another trade agreement for three years. This agreement was signed on 5 July 1973 and became effective from 28 September 1973. Raw jute, fish, newsprint, etc were identified as major exportable items of Bangladesh to India. On the other hand, major exports of India to Bangladesh were unmanufactured tobacco, cement, coal, raw cotton, cotton yarn, cotton

textiles and books. This agreement provided for a system of Balanced Trade and Payment Arrangement (BTPA) and most favored nations treatment to each other. The desired level of trade between the two nations was not achieved by the agreement of 1973, and trade imbalance increased in the very first year. Rupee trade was found to be a barrier in the bilateral trade, and thus abolished rupee trade from 1 January 1975 by a Protocol signed on 17 December 1974. It was decided that trade would be conducted in free convertible currency. India and Bangladesh signed another trade Protocol on 12 January 1976 for higher volume of trade and long-term arrangements for trade of coal and newsprint. BTPA between Bangladesh and India was extended for another three years till 27 September 1979 on 5 October 1976. On 4 October 1980, the third trade agreement was signed between these two nations initially for three years. By mutual consent, this agreement was extendable for another 3 years. On 8 November 1983, Bangladesh and India renewed a Protocol on trade of 1980 for further three years. In May 1986, the trade agreement of 1983 was extended for another three years till 3 October 1989. Subsequently this agreement was renewed a number of times. Based on available information, this agreement was valid up to 3 October 2001.

Importance of Bilateral Trade with India

1. Indias large size (in terms of both population and GDP) makes it a large export market 2. On the side of import: geographical proximity, abundant natural resources, and diversified production structure make India a cheaper and convenient source of supply 3. Importance of bilateral trade is recognized at both official and private sector level 4. Official level: the existing trade agreement, SAPTA, SAFTA

Commodity Composition of Trade

Imports are highly diversified but exports are highly concentrated Major Imports: textiles, food items, machinery, mineral products, transport equipment, chemical products, fish, Software, Books, Mobile Phone etc. Major exports: As few as six products, RMG, Cement. Textile fabrics, Soybean Oil, Glass Sheet, Plastic goods, Furnace oil, Pharmaceuticals, raw jute, fertilizer, jute goods, betel nuts, jute yarn and twine, and frozen fish etc.

Unofficial Trade between India and Bangladesh

As in official trade, unofficial India-BD trade is essentially one-way Unofficial imports from India are about 20 times larger than unofficial exports to India Unofficial imports at the present could be about 1.5 times the official imports. Livestock and Cattle are the major import item but many other commodities of everyday use are also imported. Items of unofficial export are limited Actual trade deficit with India would be much larger if unofficial trade were included

The Balance of Trade between Bangladesh and India

As mentioned earlier, Bangladesh had always trade deficit with India since its independence, and recently it has increased significantly. Table provides the bilateral trade situation between Bangladesh and India for 37 years, 1973-2009. This table clearly indicates the unfavorable trade balance of Bangladesh with India. In 1990s, especially in the 2nd half of the decade, trade deficit of Bangladesh increased very sharply. In 2003, the trade deficit reached to US$ 1, 435.9 million, which is about 4 times higher, compared to 1993, and more than 46 times higher compared to 1983. In 2009 the trade deficit reached to US$ 2562.4 in 2008 it was US $3384.3 which is more then 2009. The value of exports compared to that of imports is always quite low, and in 2002 and 2003, it was 3.4 and 3.6 percent respectively. This is really a disappointing picture for Bangladeshs bilateral trade financing as, according to economic theory, countrys exports are to be used to pay for its imports. Though the export-import relationship should be looked at the world trade level rather than bilateral level, yet this trade imbalance still has some economic and political implications for Bangladesh.

Year 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Export Import Deficit Exports (Millions of (Millions of (Millions of Percentage of US$) US$) US$) Imports 23.3 114.8 91.5 20.3 0.4 82 81.6 0.5 5.3 83.3 78 6.4 7.1 58.5 51.4 12.1 0.6 55.2 54.6 1.1 2.3 43 47.7 5.4 12.1 40 27.9 30.3 8 55.6 47.6 14.4 20.2 64 43.8 31.6 20.3 43.3 23 46.9 6.9 37.9 31 18.2 28.3 60.1 31.8 47.1 29.6 64.9 35.3 45.6 7.7 57.2 49.5 13.5 11 74.4 63.4 14.8 8.7 90 81.3 9.7 10.7 120.7 110 8.9 22 170 148 12.9 23 189 166 12.2 4 284 280 1.4 13 380 367 3.4 24 467 463 5.1 36 994 958 3.6 20 1138 1118 1.8 37.2 795.6 758.4 4.7 55 1178.8 1123.8 4.7 49.5 1023.8 974.3 4.8 50.1 945.5 895.32 5.3 60.8 1195.5 1134.7 5.1 39.3 1145.8 1106.5 3.4 52.9 1488.7 1435.9 3.6 89.3 1598.4 1509.1 5.6 143.7 2009.1 1865.4 7.2 242 1850.9 1609 13.1 289.4 2227 1937.6 13 358.1 3384.3 3026.2 10.6 276.6 2839 2562.4 9.8 Table: The Balance of Trade of Bangladesh with India (1973-2009)

Causes for the trade deficit

Bangladesh has historically faced trade deficit with India. And there are many reasons for these imbalances in trade. Some of the important points are pointed out in this section. India, being a large country, has diversified its trade composition, encouraged technologically advanced industries, has a large capital base, and improved human resources which in turn produced high quality export oriented products. On the other hand, Bangladesh has not yet improved its technology, or product base to compete with Indian product. Moreover, Bangladeshs capital base is very small and human resources are not efficient enough to meet he world standard. As a result, Bangladesh, in many sectors, often does not have enough productive capacity to meet the Indias large demand and also face difficulties in competing with Indias quality products. Indias products, compared to Bangladeshi ones in many cases do not meet the standards and for that reason being rejected by the Indian consumers. Major exported items of Bangladesh to India are Raw Jute, Jute Goods, Chemicals, Frozen Foods, Leather, Tea, and Battery. Bangladesh enjoys preferential treatment from India. Most of the exported items mentioned above do not face any tariff barrier. For example, the standard tariff rate for chemicals is 15% leather it is 15%, but our exporters are exempted from these tariff barriers as Bangladesh and India are both members of South Asian Preferential Trading Arrangement (SAPTA). However, Bangladeshi exporters face a tariff rate of 100% less 26 paisa per kg for exporting tea to India under preferential trading scheme, where the standard tariff rate is 100% for the non preferential countries. Although Bangladesh is supposed to get preferential treatment from India, recently India imposed import tax on Bangladeshi Fish, including Hilsa violating the Bangkok pact of 1996. However, Bangladeshi exporters do not complain about the tariff barriers as much as they do about the non-tariff barriers they face from India. It is generally agreed that Bangladesh has initiated the program of tariff liberalization earlier than India in mid 1980s and the speed of liberalization is much faster in Bangladesh than India. Recently, Indian commodities, compared to worlds commodities, faces lower average tariff restrictions in Bangladesh. On the other hand, there are many non-tariff barriers in India that Bangladeshi exporters faced to enter Indian market. Infrastructural bottlenecks and Rules of Origin problem warrant to be solved for huge trade deficit of Bangladesh with India. As the manufacturing base of Bangladesh is not strong enough as India, this rule of origin criterion limits the Export expansion of Bangladesh to India. This is particularly true for exports of some cosmetic goods and toiletries, whereas Bangladesh has achieved noteworthy proficiency, and India has profitable market for these products. Bangladesh lacks infrastructure facilities in all land routes, except Benapole. A limitation also exits in the storage facilities thus hindering export growth to India. A railway transport system between these countries would have been ideal, but there exists none.

Non-tariff Barriers Faced by Bangladesh

In this section, the focus will be on an intensive analysis of the non-tariff barriers faced by the Bangladeshi exporters from India. The barriers are as follows:

1. Testing Requirements and Standard Requirements

India has not recognized any of the laboratories of Bangladesh yet, which is crucial to removing the barriers arising from Testing Requirements. Exporters who export to West Bengal or North East India has to fulfill the testing requirements from laboratories which are far away from the import points. Indian Rupees 3000 are required to perform each test. Again, in general it takes 15-20 days to get the test results. However, Bangladesh sent 10 testing laboratories for recognition by India and India has not responded to it yet. Bangladesh mainly faces barriers from India in exports of jute bags, complex registration procedure for export of pharmaceuticals chemical test for leather and leather products, quarantine requirement for jute products, standard certification need for export of cement and sanitary and photo-sanitary requirements for agro-processed and food products. The Bangladeshi exporters feel it becomes extremely difficult to conduct export operations when faced with such kind of barriers. These barriers also act as a wrong signal to the business communities of both countries and works as a deterrent to improve economic cooperation in other areas. Products such as cement, steel tube, electrical and electronics items, steel products, leather products, etc. are subject to mandatory compliance with the standards set by Bureau of Indian Standards (BIS). The exporters have to register with the BIS and get certificates about the product standard before exporting to India. However, registration with the BIS is very cumbersome, expensive and time consuming. These all act as nontariff barriers for exporting to India.

2. Customs Valuation/Classification
Arbitrary decisions of the Customs authority of India on valuation/price of imported products for assessment are sometimes imposed on the importers of Bangladeshi products. Exporters also face difficulties in customs classification of products from Bangladesh. Therefore, the customs authority sometimes refuses to give customs concessions, available under SAPTA for different items, by classifying the exported products under different product-heading, where there are no SAPTA concessions. Frequent occurrence of these types of incidents creates vulnerability of Indian importers to make long term commitments for marketing Bangladeshi products.

3. Infrastructure Facilities at Land Customs Point

Another significant barrier faced by Bangladeshi exporters is the lack of infrastructural facilities in the trading routes. This has hindered the growth of Bangladeshs exports to India over time. There exists a potential to increase export to North Eastern States of India. If the potential is materialized, this could help reduce the trade gap. However, to tap this opportunity, infrastructural facilities at land customs stations should be developed. Bangladesh Government has identified three border points for development of infrastructural facilities. The border points are Banglabandha (Bangladesh)/ Fulbari (India), Akaura (Bangladesh) / Agartala (India) and Sheola (Bangladesh) / Sutakandi

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(India). The Banglabandhu Fulbari route is especially important for facilitating trade with Nepal, Bhutan and North Eastern States of India. Bangladesh Government has already developed a land port at Banglabandha and requested India to develop adequate facilities at their Fulbari Customs Point.

4. Facilitating Banking Services

The North East of India has 84 percent of its common border with Bangladesh. The banking facilities in the North Eastern States of India are not adequate for handling international trade. There are a limited number of banks that are authorized to deal with foreign currency transactions and open L/C. Moreover, these banks cannot carry out transactions directly with banks in Bangladesh. They are required to operate through banks located in Kolkata. This is one of the greatest constraints for promoting international trade between Bangladesh and North Eastern India. L/C margin of 100% to 110% are required to provide by the importers of North Eastern India. Hence, such a high margin discourages import from Bangladesh.

Future Perspective of Bangladesh-India Trade under SAFTA

In January 2004, the SAARC member states signed the SAFTA agreement. The decision to strengthen the regional integration is undoubtedly a positive step. Under this integration, Bangladesh and Indias trade integration and Regional Cooperation has given some hope to Bangladeshis to improve their trade balance with India. Although Indias Sensitive List under SAFTA includes 763 products which is significantly high for LDCs like Bangladesh to gain by exporting to India under SAFTA, here the focus will be on some of the sectors of the Bangladesh economy on which Bangladesh can capitalize and may reduce the trade deficit between these two countries by further negotiating with India to give free access of the products in Indian market.

1. Agro-based Industries
Bangladesh has a vast supply of raw materials for the agro-based industries. The commodities includes- fresh fruits and vegetables, cooked semi cooked food items, canned juice, dairy and poultry, and livestock and fisheries. Alluvium soil, no snowfall, adequate rainfall and water supply and abundance of cheap labor are some of the main factors that have blessed this sector.

2. Textile Industry
Bangladesh has a competitive advantage in the region for textiles and garments because of low cost labor, preferential trade status and beneficial global market access. Moreover, Bangladeshs RMG industry has earned strong competitiveness as a global standard RMG source. Bangladesh imports yarn and cotton, which is a major input from India. So through exchange provision under SAFTA Bangladesh can export large amount of RMG to India.

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3. Frozen Food
The frozen food export is the second largest export sector of the country. After some initial difficulties in terms of quality achievement, exporters have earned credibility and trustworthiness in the global market (Graph 13: section 9.2.13). This export orient industry can also be a good export item to India under SAFTA. The sub sectors are hatcheries, feed meals plants, processing unit for value added products, etc.

4. Ceramic Industry
Bangladeshs ceramic tableware has a good status to the international market like North American and EU countries. Moreover, Bangladesh has achieved technical expertise on ceramic tableware manufacturing. Historically, tableware industries were labor-intensive and Bangladesh has skilled manpower in this sector. In addition, clean gas required for this industry is a great competitive advantage that Bangladesh possesses. So, this commodity can well be a good export earning item for Bangladesh in trading with India, under SAFTA.

5. Natural Gas-based Industries

It includes Electricity, Fertilizer, Petrochemicals and CNG distribution network. Bangladesh has a net receivable gas reserve of approximately 16 TCF and undiscovered reserve of 32 TCF. So, Bangladesh, by developing new plants, can move towards this gas based industry and can export to India under SAFTA. However, experts say that the recoverable reserve will be used up by 2019 under the forecast level of usage, and hence there is a general feeling in the country that gas should not be exported, at least not in unprocessed form. In fact, the export of gas has become politically sensitive

6. Leather Industry
The labor-intensive leather industry is well suited to Bangladesh having low cost and being labor abundant country. Bangladesh has a good supply of quality raw materials, as hides and skins are a by-product of large livestock industry. Bangladesh leather industry is dominated substantially by the domestic investments that are mostly export oriented. Bangladesh can well expand their capacity and can increase export of leather goods to India under SAFTA.
Recommendation to Improve Trade Condition between India and Bangladesh

Bangladesh govt. along with the individual business people must take corrective action to enhance the countrys productivity and capacity of the industrial sector. There are no alternatives than to increase productivity and the capacity of the countrys growing sectors. Because, if the productivity does not increase no matter what kind of regional integration we enter into that will serve no good for the country. Government can give

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various kinds of financial (like decrease the import duty of the inputs) and non financial incentives to the growing sectors of the country, so that they come up and prove themselves. In addition, a competitive and open economic environment must also be created and promoted through which the most efficient sectors can be identified and promoted as such they can export their goods beyond the regional boundary. Moreover, recent and updated production technology must also be used, because the output in turn would be low cost and would be able to meet the world standard. And, also to improve the quality of the of the human resources better education, job specific training, and teaching the workers with high quality foreign expertise will convert the human resources of the country very valuable and they in turn as well will enhance the countrys capacity to produce quality products and face the competition with the Indian producers. It is important to note that one can not expect a dramatic reduction of trade deficit between these countries in a short span of time, even though required policies and designs are implemented. But, by having sustainable policies it is quite possible to reduce this gap in years to come.

Conclusion
The trade deficit of Bangladesh in the recent past has increased exponentially. And the factors being identified for these imbalances are productivity factor, limited product base, in efficient human resources, infrastructural obstacles etc. Recently, as Bangladesh move towards the implementation of SAFTA in a more useful manner, the country needs to improve its positions by removing all the obstacles that it is facing and improve the trade balance of with respect to India. Improving the position is utmost necessary because the economic conditions of Bangladesh which is heavily dependent on the trade position and relation with India as India accounts most of Bangladeshs imports and they are the major trading partner of Bangladesh in the SAARC region. So, if Bangladesh can improve its trade relation with India, it will generate many employments, increase the competitiveness of its local goods and most importantly will increase the economic and social welfare of the country. In addition, a special focus also need to given on the Non tariff barriers, because that is the part most of the Bangladeshi exporters complain about. All these obstacles need to be removed to gain from the bilateral trade with India. Thus, if Bangladesh cant improve the situation now, the country will merely become a market for Indian products, trade status will worsen and country will not be able to exploit the window of opportunities arising from the regional integration SAFTA.

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References
http://eprints.usq.edu.au/6061/2/Rahman_ETSG2005_AV.pdf http://www.ierb-bd.org/wp-content/uploads/2010/03/India-Bangladesh-TradeRelations.ppt www.ierb-bd.org/wp.../03/India-Bangladesh-Trade-Relations.ppt www.scribd.com Research Business & Economics www.scribd.com/.../Bangladesh-India-Relation-Bangladesh-India-Relations http://mezbahuddin.files.wordpress.com/2008/04/submittedfinalcopy.pdf

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