Bangladesh Political Turmoil: The Extent of Economic Damage Will Be Known Only After Some Time

But the ongoing crisis would surely jolt the economic momentum gained during the past decade and a half, a period in which the Bangladesh economy has registered an average growth of over 6.5 per cent. Consequently, the country is at the threshold of discarding its label as a least developed country. Furthermore, according to the International Monetary Fund (IMF) estimates, Bangladesh’s per capita income is expected to cross the US$ 4,000 mark before the end of the decade, exceeding that of India’s.

The uptick in Bangladesh’s recent economic performance benefitted India in good measure. India-Bangladesh trade has been quite buoyant since the closing years of the previous decade.

India-Bangladesh Trade

Between 2015-16 and 2021-22, India-Bangladesh trade increased nearly three-fold, making Bangladesh one of India’s top export destinations. This was a significant development, as Indian exporters were able to harness their potential in the market of one of the strategically important neighbours.

Two commodity groups helped in expanding India’s presence in Bangladesh - agricultural products, and cotton and cotton yarn. The latter set of products had long established itself as a provider of yarn to the thriving readymade garment (RMG) industry in Bangladesh. RMG exports accounted for over 80 per cent of Bangladesh’s total exports in 2021-22, cementing the country’s position as the world’s third-largest exporter of these products.

Bangladesh has always been a significant market for India’s cotton yarn, and in 2021-22 it absorbed almost 42 per cent of India’s exports of cotton yarn and over 58 per cent of raw cotton.

Advocates of South Asian economic integration have consistently argued that the establishment of production networks can contribute immensely towards enhancing economic integration within the region, helping the entire region pull itself up with its own bootstraps. The establishment of a production network involving the textiles and garment industries in India and Bangladesh has raised hopes of not only expanding them to other industries in the near future but also extending such networks to include other countries in South Asia.

Agricultural commodities from India contributed significantly towards its export push. Wheat exports from India increased nearly three-fold in 2021-22 and rice exports almost doubled, while sugar exports increased nearly 10-fold. Together with raw cotton, agricultural products accounted for nearly 35 per cent of India’s total exports to Bangladesh. This development took place during a phase in which India was hoping to position itself as an agricultural export hub.

Though India-Bangladesh trade reached a record level in 2021-22, signifying the enhanced level of economic cooperation between the two countries, the momentum could not be sustained. A mix of supply-side bottlenecks faced by India and Bangladesh’s economic uncertainties brought bilateral trade down by nearly 30 per cent in the next two years.

Apprehensions of reduced output of cereals and a growing threat of food inflation forced India to clamp down on its exports of cereals. On the other hand, Bangladesh faced a slew of challenges following the pandemic, including a decline in foreign exchange reserves and the devaluation of its currency - the Taka.

The Central Bank of Bangladesh initiated a number of measures to prevent the depletion of foreign reserves, which adversely affected imports of critical intermediates, including those for the garment industry. Until the political unrest erupted, the expectation was that Bangladesh would be able to tide over its economic uncertainties shortly.

Indian Investments In Bangladesh

The potential of Bangladesh was increasingly recognised by the Indian private sector and several companies established production units across the border. While the FMCG segment has led the way, India’s auto industry was exploring possibilities of establishing joint ventures, seeking to leverage its strong presence in Bangladesh’s two-wheelers market, in which it has a 50 per cent share.

Several Indian business houses - Adani and Reliance in particular, have been involved in Bangladesh’s infrastructure projects, especially in the energy sector. This sector has assumed importance given the country’s ambitious plans to diversify its production base and to reduce its overwhelming dependence on the RMG industry.

Given India’s considerable involvement in the Bangladeshi economy, the spilling over of the political crisis into the economic space can be deeply problematic on several counts. The most visible impact would be on trade flows that are already facing several challenges.

In the past couple of years, the governments of the two countries have been exploring the possibilities of forging a bilateral free trade agreement (FTA), which would have been an ideal opportunity to comprehensively address the impediments to bilateral trade and investment flows.

Hopefully, the new government in Bangladesh will continue to show its interest to forge the FTA with India in the spirit of mutual cooperation that is essential for the betterment of the people in the two countries.

(The author is a former professor of economics at Jawaharlal Nehru University and a distinguished professor of the Council for Social Development -- a New Delhi-based think-tank. Views expressed are personal)