Implications of Upheaval in Bangladesh on its Trade Relations Relations with India

Context:

Since Sheikh Hasina assumed office as the Prime Minister of Bangladesh in 2009, the country has emerged as a crucial ally of India. Her leadership has brought about substantial progress in bilateral relations, particularly in areas such as infrastructure development, connectivity, and trade. However, the recent political turmoil in Bangladesh has sparked concerns regarding the future of this vital partnership.

Relevance:

GS2- India and its Neighborhood- Relations

Mains Question:

The sudden turn of events in Bangladesh have raised concerns about the potential impact on trade, economic stability, and the broader geopolitical dynamics in the context of India- Bangladesh ties. Discuss. (10 Marks, 150 Words).

Political Crisis in Bangladesh:

• On January 8, 2024, Sheikh Hasina announced that her top priority for the next five years would be to boost Bangladesh’s economy.
• Despite these ambitions, by August 2024, the country was gripped by widespread and violent protests over a quota system for government jobs, which triggered a severe domestic political crisis.
• As the situation worsened, Sheikh Hasina stepped down from her position and sought refuge in India, raising serious questions about Bangladesh’s stability and the potential repercussions for Indo-Bangladesh relations.

The Evolution of Indo-Bangladesh Relations:

• Over the past decade, India and Bangladesh have cultivated a robust economic partnership, with infrastructure and connectivity projects serving as the cornerstone of their relationship.
• Since 2016, India has provided Bangladesh with $8 billion in credit to support the development of critical infrastructure, including roadways, railways, shipping routes, and ports.
• These investments have been pivotal in enhancing connectivity and fostering closer ties between the two nations.
• In addition to infrastructure, the two countries have collaborated in various sectors, including medical tourism, business expansion, and the international garment trade.
• Bangladesh, a significant player in the global garment industry, depends heavily on cotton imports from India to sustain its production.
• The textile and garment sectors are especially important, accounting for 56% of Bangladesh’s total exports to India, underscoring the country’s role as a key trading partner in South Asia.
• The financial year 2023-24 saw bilateral trade between India and Bangladesh reach an impressive $13 billion, as reported by the Union Ministry of Commerce.
• This figure highlights the deep economic integration between the two countries and the mutual benefits derived from their close cooperation.
• However, the recent political instability in Bangladesh could pose a threat to this flourishing partnership, raising concerns about the future trajectory of Indo-Bangladesh relations.
•  As the situation unfolds, both nations will need to navigate these challenges carefully to preserve the gains made over the past decade and ensure continued collaboration in the years to come.

The Impact on Trade:

• Under Sheikh Hasina’s leadership, trade between India and Bangladesh experienced significant growth, resulting in a substantial trade surplus for India.
• However, the ongoing political unrest in Bangladesh poses a serious threat to this economic partnership.
• The civil disturbances and deteriorating economic conditions have raised security concerns that could disrupt Indian exports, commercial activities, and infrastructure projects in Bangladesh.
• One of the major challenges lies in the area of bilateral trade. After reaching $12.21 billion in 2022-23, India’s exports to Bangladesh declined to $11 billion in 2023-24.
• Similarly, Bangladesh’s imports from India decreased from $2 billion in the previous fiscal year to $1.84 billion in the most recent year.
• Indian exporters are increasingly worried about the instability in Bangladesh, fearing that the ongoing crisis could have a detrimental effect on commerce between the two countries.
• A critical issue contributing to these trade disruptions is the severe dollar shortage in Bangladesh.
• According to the Global Trade Research Initiative (GTRI), this scarcity has already significantly limited Bangladesh’s ability to import goods, particularly from India.
• The reduced availability of foreign currency is straining the country’s capacity to meet its import needs, which in turn is affecting trade volumes between the two nations.

Uncertainty Surrounding the Free Trade Agreement:

• In October 2023, India and Bangladesh explored the possibility of a free trade agreement (FTA) during a Joint Working Group (JWG) on Trade meeting held in Dhaka.
• An FTA could simplify regulations, encourage investment, and boost commerce by potentially removing customs tariffs, thereby enhancing trade between the two countries.
• According to a 2012 World Bank working paper, a full-product FTA could increase Bangladesh’s exports to India by as much as 182%, while a partial FTA might still achieve a 134% growth.
• Such an agreement would not only bolster Bangladesh’s trade and transport infrastructure but also significantly strengthen its commercial links, leading to a considerable rise in exports.
• However, the current political crisis has cast a shadow of uncertainty over the future of these FTA discussions.
• With Sheikh Hasina’s resignation, the momentum behind the FTA may slow down or even come to a halt.
• This could stall the expansion of trade and commerce between the two nations, particularly in new and emerging sectors.
• The potential benefits of the FTA, such as increased market access, reduced trade barriers, and enhanced economic cooperation, now hang in the balance as both countries navigate the uncertainties brought on by Bangladesh’s internal turmoil.
• The political instability in Bangladesh thus presents a dual challenge: not only does it threaten the immediate trade relations between India and Bangladesh, but it also puts at risk long-term strategic initiatives like the FTA that could have greatly benefited both economies.
• The outcome of this crisis will be crucial in determining the future trajectory of Indo-Bangladesh economic relations.

Challenges for the Textile and Garment Industry:

• The ongoing political crisis in Bangladesh threatens to severely impact several key sectors, with the textile and garment industry being one of the most vulnerable.
• In the fiscal year 2021-2022, Bangladesh exported garments worth $42.613 billion, establishing itself as the second-largest apparel exporter in the world.
• However, recent incidents, including the burning of factories, have cast a shadow over the future of this critical industry.
• Many of these textile units are owned by traders with ties to the Awami League Party, making them prime targets amidst the current political unrest.
• The disruption in Bangladesh’s garment sector could have far-reaching consequences, not just for the country but also for global supply chains.
• The instability is creating uncertainty for international buyers who rely on Bangladesh’s vast garment manufacturing capabilities.
• This could lead to delays, cancellations, and a loss of confidence among global retailers who have long depended on Bangladesh for affordable and high-quality apparel.
• India, with its robust textile and garment industry, could potentially step in to fill the gap left by Bangladesh.
• As a neighboring country with a well-established manufacturing base, India is well-positioned to supply garments to developed economies if Bangladesh’s production falters.
• However, there are significant challenges to this shift. Bangladesh enjoys the benefits of being classified as a Least Developed Country (LDC), which allows its exports to enter many markets with zero-duty advantages.
• In contrast, Indian goods often face tariff barriers, making them less competitive in the global market.
• If the political situation in Bangladesh leads to prolonged border closures or the suspension of duty-free export-import activities, there could be an increased demand for Indian garments.
• However, the complexities of global trade mean that any shift in demand may not be immediate or straightforward.
• Indian exporters would need to navigate tariff barriers, establish new supply chains, and possibly adjust pricing strategies to remain competitive in markets that have been dominated by Bangladesh.
• Moreover, while India could benefit from increased demand in the short term, the long-term implications are uncertain.
• The instability in Bangladesh could also lead to shifts in global sourcing strategies, with buyers diversifying their supplier base to reduce dependence on any single country.
• This could create opportunities for other garment-producing nations as well, further complicating the landscape for Indian exporters.

Conclusion:

While there is potential for India to capitalize on the disruptions in Bangladesh’s textile and garment industry, the situation remains fluid. The advantages that Bangladesh currently enjoys as an LDC, coupled with the uncertainties surrounding the crisis, make it difficult to predict the exact opportunities and gains that might emerge. The coming months will be crucial in determining how the textile and garment industry in South Asia evolves in response to these challenges.