B2B relationships hold key for optimisation of Indo-Bangla economic ties

(The following post is a reproduction of my guest article in October 19, 2014, issue of the FirstNews, Dhaka )  

Pratim Ranjan Bose 

The small island nation of Taiwan (Republic of China) was separated from mainland China (People’s Republic of China) in 1949.

And, since then the political relationship between democratically elected leadership at Taipei and a totalitarian regime in Beijing remained sore.

The mutual distrust was evident in August, when the Taiwanese President sacked a senior minister, who was negotiating free trade agreement (FTA) with Beijing, describing him as a “spy of China”.

Such frivolous allegations should have stalled trade talks for years, in the Indian subcontinent. But, this week, China and Taiwan were back to the negotiation table.

The reason lies in business-to-business (B2B) relation. The industries in two nations are so integrated that China’s exports to Europe are often dependent on imports from Taiwan.

This is definitely not the ideal ground for political acrobatics.

Lack of B2B initiative

 

The argument holds good in explaining India’s improving economic ties with neighbouring China.

Politically there are many differences between these two rivalling superstars of Asia. But, the business in either nation is integrated. And that ensures that no one will rock the boat.

But, why such B2B relations do not flourish between next door neighbours India and Bangladesh, which were part of the same nation till 1947, and share the longest land-border with each other?

The question is intriguing.

Officially, Bangladesh was liberalised in 1982, a decade before India opened up its economy in 1991. Ideally this should have changed the dynamics of business-politics relationship in the region, over the last quarter of a century.

The change is visible in India. While business now has greater say on the country’s politics, either in domestic or international arena; the growing pressure from voters has also forced the politics to pay heed to economic realities.

The changing economic environment is reflected in India’s drastic one-sided reduction in tariff barriers between 2007 and 2011. The reduction is so sharp, that India hardly has any negative list of imports from Bangladesh.

Politically there are movements too, from either side.

India offered $ 1 billion line of credit to meet infrastructure gaps in Bangladesh. But what is more significant is Delhi’s decision to sell cheap thermal power to Dhaka.

The electricity - now flowing to Dhaka - is produced on subsidised fuel that was mined displacing Indian citizens and, causing environmental damage both on account of mining as well electricity generation.

To put it straight; the true economic value of this deal is far higher than what Bangladesh pays and, will be paying over years or decades.

I do not mean everything is hunky-dory on political front. But, politically China and Taiwan are not friends, either.

Its true that India is slow in implementing some purely political deals like water sharing agreement or land boundary agreement.

But, it is also true that things are moving in a positive direction. Ganga water is now shared. Tin-Bigha corridor is a reality.

The complex federal structure of India has surely come in the way of faster implementation of some agreements struck in 2011. But, that is perhaps a necessary evil of democracy and, even Barrack Obama is faced with such obstacles from the US Congress.

The point is: Developments since 2007 has surely created an environment for greater economic integration between the two neighbours. Yet, we don’t see much action on B2B front that is the real driver for movement of capital and goods.

As a smaller economy with limited product bouquet, Dhaka surely is not in a position to access the Indian market in a big way. Which means, the trade balance may remain positive in India’s favour (Dhaka has a bigger trade deficit with China), in the foreseeable future.

But Dhaka can turn it to its advantage by inviting Indian capital in setting up shop in Bangladesh, either for sourcing products, or to use it as an a gateway to access other South Asian markets. This will reduce the gap in Dhaka’s overall trade balance and ease balance of payment scenario.

Unfortunately though, things are yet to gain pace in that direction.

Exide Industries, India’s top automotive battery maker, planned a JV in Bangladesh more than a decade ago. A much bigger investment was proposed by Tata Group, one of the largest and most admired Indian conglomerates. Both were called off, for reasons beyond business.

And, that is irrespective of the fact that during this period Indian corporate sector was found investing in large numbers across the world.

Automobile a classic example

A classic example of the missed opportunity is visible in Automobile sector.

India is hub of extremely fuel efficient small car production.

And, Dhaka surely needs small cars to decongest its disastrously slow traffic and put a check on consumption of fuel.  

The economic significance is tremendous. Petroleum products are the single largest import item of both India and Bangladesh. Any savings on fuel therefore is a boon to the economy.

(Dhaka tried to replace demand for petroleum products by subsidised domestic natural gas, as auto-fuel. The policy led to a bigger economic drain.)

Yet, I find automakers in India are hardly enthusiastic about the prospect of Bangladeshi market. They have surely entered there to maintain a footprint. But, the scale is too low to set up even an assembling unit, meaning such cars are now disproportionately costly in Dhaka.

The cost is more disproportionate because Dhaka imposes same import duty on the used cars and new cars. The end result is: Bangladesh has become an importer of large second-hand fuel-inefficient cars, mostly from Japan.

The government is not merely missing the opportunity to help grow domestic auto industry, that is considered a major employment generator, but is probably also earning less on import duty, due to under-invoicing of the second hand cars.

Economics will come first

The distinctive feature of Indo-Bangla economic relation is: Half of it is largely informal in nature.

While the formal trade is estimated at $ 6.6 billion in 2013-14; the actual trade volume is as high as $ 14 billion (Muchkund Dubey, former foreign secretary of India, “Indo-Bangladesh, Economic Relations”, Mainstream, March 23, 2013). The estimates are more or less in line with an ADB report, issued earlier.

The close co-relation between the two sides at the grass root levels can be understood from two specific examples.

The estimated $ 4-5 billion informal cattle trade is a lifeline for Bangladesh’s meat processing and leather industry. Similarly, Indian private healthcare sector earns significant revenue from medical tourists from Bangladesh.

While official records quote an inflow of 10,000-12,000 patients (from Dhaka) a year; unofficial estimates suggest a substantial majority of over 7 lakh Bangladeshi tourists, visiting India annually, avail healthcare facilities.

The aim should be to add legitimacy to this mutual dependence by enhancing the share of the formal trade and encouraging more B2B activities.

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(Disclaimer: Graphics are collected from the web, may be removed in case of any objection)

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