Weaving a friendship

Trade concessions to Bangladesh are good economics and diplomacy

Coming after more than a decade, the bilateral visit of an Indian prime minister to Bangladesh is being viewed by many in both countries and the region as “important”, perhaps even “historic”. A clutch of agreements intended to benefit both countries, including territorial exchange of enclaves, providing India greater access to its north-eastern states and lifting the ban on India’s exports of yarn and fabric, is in the works. India’s decision to provide duty-free access to textile imports from Bangladesh, a long-standing demand from Bangladesh, will be an important concession, as an agreement on Teesta waters. Having taken tough action against anti-India elements in that country, including insurgents and terrorists, the government of Prime Minister Sheikh Hasina hopes to get these concessions as a return gift. India should be generous, despite some grumbling by lobbies at home, since these gestures make both economic and diplomatic sense. The textile industry is Bangladesh’s economic lifeline, comprising almost 80 per cent of its manufacturing and virtually all its exports.

The decision to provide duty-free access to Bangladesh textiles to a huge and rapidly growing market (India’s market for readymade garments alone is estimated to be of the order of $25 billion) is bound to provide a shot in the arm to a country struggling to stay afloat owing to depressed demand for its products in its traditional export markets in Europe and North America. The decision has led to loud protests from domestic textile manufacturers, who fear being swamped by cheaper Bangladesh textiles, particularly knitwear and jeans. This argument is not without foundation: sharply lower wages will give products from Bangladesh an edge in the short run. However, the sooner Indian manufacturers realise that the key to sustained competitiveness lies not in hiding behind tariff barriers but in enhanced productivity, the better. With the World Trade Organisation rules – some of which are already in operation – and with a more stringent regime underway, protectionism may offer little respite in the days to come. Indian industry has geared up to face competition before: textile manufacturers only have to look to the domestic auto and white goods industries for inspiration.

The increase in textile imports from Bangladesh is unlikely to significantly alter a trade balance that is currently heavily in India’s favour. While bilateral trade between the two countries is of the order of $4 billion, India’s exports constitute $3.5 billion of the total. Also, investment relations between the two countries, mainly in the energy sector, are being steadily ramped up. NTPC’s decision to construct a thermal power plant in Bangladesh, with a fixed quota being distributed domestically and the surplus being exported to India, is hopefully the first of many such investments. Moreover, the two countries are situating bilateral economic relations in a regional context, clearly manifested in chief ministers of five north-eastern states accompanying Prime Minister Manmohan Singh. With similar arrangements on the anvil with Nepal and Bhutan and the green shoots of serious economic engagement with Pakistan emerging, the possibility of a vibrant South Asian Free Trade Agreement is finally taking shape and this kind of give and take is part of the deal.