Emerging Issues and Ways Forward

India and Bangladesh, with their geographical contiguity, have a great potential for strengthening their trading instruments. Over the years, India and Bangladesh (and other South Asian countries) have taken a number of initiatives to remove "invisible" trade barriers such as elimination of tariffs and nontariff restrictions at the unilateral, bilateral, and regional levels (Pandian, 2002; RIS, 2004). Despite these initiatives, the intra-South Asia trade is not growing at the expected pace. Therefore, the region’s "visible" trade barriers should be removed by strengthening and interlinking the region’s trading instruments. Even South Asian countries depend on transport infrastructure in a major way but interlinked networks in the region are clearly absent. While India and Bangladesh have cooperation in IWT, that between India and Pakistan is not yet formulated. Similarly, in the road sector, although Bangladesh, India, and Nepal have a treaty for allowing free flow of trade through a tiny transit corridor at Phulbari (in West Bengal) between Bangladesh and Nepal, for unknown reasons this route is not even functioning properly. In today’s world where competitiveness is the key factor for a country’s or a region’s success or failure, strengthening bilateral or regional trading infrastructure networks will pave the way for faster enhancement of bilateral and regional integration, thereby promoting international competitiveness. To improve the competitiveness, India and Bangladesh have to cooperate with each other and share their experiences in building and operating cross-country infrastructure facilities such as rail, road, airport, port, and waterways. For example, cooperation in road networks would help Nepal and Bhutan access ports of Bangladesh; similarly, India, through Bangladesh, can access its NER. ¹⁸ Again, incurring huge road transportation costs, some of the break-bulk items generated in Northern India, such as cycle parts, newsprints, and spare parts, are exported to Bangladesh by roads through border-trade points. A major part of denim and related items, originating in Western India, are also transported overland to Bangladesh. Ideally, this entire cargo can easily be transported by rail at lower costs to Bangladesh if an integrated and harmonized railway network is in place between the two countries. Cooperation in the emerging issues in the infrastructure sector is thus very important for integrating the South Asian economy.

India has a large legal and illicit border trade with Bangladesh. However, there are poor or no-border-infrastructure facilities for cross-border trade. Much of North East India’s trade with Bangladesh is informal.

With respect to bilateral negotiations on trade and broader economic relations between India and Bangladesh, several outstanding issues persist. These include Bangladesh’s highly unfavorable trade balance, links from Bangladesh to Nepal, and road or rail connections from West Bengal to the NER through Bangladesh.

These new issues also have the potential of strengthening bilateral relations because of substantial complementarities that characterize the economic structures of India and Bangladesh. Bangladesh could become an economic hub in Eastern South Asia¹⁹ on the backdrop of India’s growing integration with Southeast and East Asia, provided the country attempts to widen its cooperation with India. In a sense, these synergies now being rejuvenated center around a shared vision toward economic development. In view of the above discussion, the following important areas of bilateral and regional cooperation need special attention from the governments and policymakers of this region.

(i) Improvement of Road Networks

In the last decade, roads in South Asia have prominently grown as a means for moving people and goods. With a 3.82 million km road network in 2002, South Asian countries share 10% of the world’s road network. Even though 1 km of road now serves each square kilometer of surface area in South Asia, a portion of the roads in some countries such as Bangladesh, India, and Sri Lanka are still of dubious quality, particularly those stretches of roads leading to borders in South Asia. To date, no expressway immediately starts from or finishes at the border customs points between India and Bangladesh. Goods have to travel extra miles and people have to expend time, expense, and effort to get access to highways. Therefore, India and Bangladesh have to extend their highways up to the border custom points instead of ending them at pre-border checkpoints. Also, road standards and carriageway capacity in South Asia require further investigation.²⁰An interministerial regional advisory committee, taking representatives from road and highway ministries of South Asian countries, will not only look after the region’s road standard convergence but will also be involved in the planning and execution of new road projects. The best example to follow is the ASEAN, where a similar arrangement has helped LDCs in ASEAN improve their road networks, thereby raising intra-regional trade. There is a need to develop international highway systems that will link the national grids of Bangladesh, People’s Republic of China (PRC), India, Myanmar, and Thailand, with an emphasis on a multimodal approach that will include railways, ports, and air services. This will enhance cross-border land trade in the region.

(ii) Improvement of Railway Networks

The railway network in South Asia is one of the largest railway systems in the world. Before 1947, railways historically played an important integrating role in the social and economic development in South Asia. The penetration of the railway network in South Asia is much lower than that of the road sector. India and Pakistan have a stable, broad gauge railway network whereas that of Bangladesh is miserably poor, fragmented, and unstable.²¹ In Bangladesh, only 33% of the total railway network is broad gauge, making it the least developed railway system in South Asia (CPD, 2003). Nepal, Bhutan, and Maldives still do not have a railway system.

Except for some periodic trial runs, exports and importers were never encouraged to use the railway system for their trade in South Asia. For instance, no container train runs between India and Pakistan, and between India and Bangladesh. As a matter of fact, trade in bulk items between India and Pakistan and India and Bangladesh is not gaining the expected momentum. Had an adequate system been established in the region, the cost of intraregional movement of goods such as cement, logs, food grains, and salt would have been cheaper.

Unlike the European Union (EU), where a uninterrupted and uniform railway network alone carries the majority of intra-regional merchandise and people, South Asia suffers from lack of harmonization of railway standards. In general, the India–Bangladesh border trade occurs through roadways, and very negligible freight is carried by railways. A cross-country railway network is completely missing between India and Bangladesh, though it was fairly established before 1947. While the railway gauge between India and Pakistan is similar to some extent, such convergence is missing between India and Bangladesh. Mutual cooperation among these countries will pave the way for a "one-track one-system" in South Asia.

South Asian countries need to follow the EU model in setting up a uniform railway network. India, with its vast experience, can play a major role in totally overhauling the railway systems in South Asia in general and Bangladesh in particular, and extending railway networks up to all border customs points.²² An inter-ministerial committee of railway ministries of South Asian countries can be formed to look after the development of railway networks in the region. The recent Asian Development Bank (ADB) initiative to strengthen the Bangladesh railway system is a step toward strengthening the South Asian railway network. The program will help reduce costs for users and increase Bangladesh’s competitiveness for investment.

(iii) Liberalizing Aviation Services

Liberalizing international transport services (such as air transport services) fosters international trade in much the same way tariff liberalization does. The civil aviation sector in South Asia has made significant strides in coping with the growth of international and domestic traffic. The aviation sector significantly contributes to the economic development of this region and is crucial for sustainable development of trade and tourism.

The domestic liberalization of the civil aviation sector has allowed the private sector to run more airlines in South Asia, thus attracting more passengers to fly within the national territory and beyond. Even private airlines from India, Nepal, and Bangladesh are now allowed to operate in South Asia and abroad. Airlines in South Asia carried more passengers than freights in 2001 compared to 1991 (De, 2005; RIS, 2004). The rise in passenger traffic is phenomenal in small countries like Bhutan and the Maldives. However, there are still bottlenecks in aviation infrastructure, particularly in busy airports in the region (e.g., Delhi, Mumbai, Dhaka), which have to be fully revamped. Moreover, there could be direct flights connecting India’s NER with its neighbor countries such as Bangladesh, Bhutan, Myanmar, and Nepal. National air carriers may also be given additional access rights to fly to major cities in South Asia and abroad. Adequate capacity will ensure development of trade and tourism among South Asian countries. Liberal regional rights should also be given to improve international operations at the NER to promote trade and tourism.

To encourage South Asian tourists to travel freely within South Asia, private airlines may be encouraged to fly to major tourist destinations in the region. Private airlines operating in South Asia, such as India’s Jet Airways in Sri Lanka and Nepal, Nepal’s Cosmic Air in India, and Bangladesh’s GMG Airlines in India, could be an example of such successful initiative, but the frequencies of their flights have to be escalated. Similarly, private airlines of Nepal and Bangladesh should be encouraged to fly into NER’s popular tourist destinations, which will promote tourism, thereby generating employment. Such a network will enhance tourism activities in the region. For example, people in the NER may want to enjoy the beaches of the Cox Bazar in Bangladesh and people in Bangladesh may be interested in visiting Darjeeling in India. Therefore, a much more vigorous open skies policy will foster "people-topeople" contact and enhance service trade in the region. Mutual cooperation should also be initiated for upgrading airports, without which the open skies policy will not generate the desired results.

The tourism and trade sectors should also be acknowledged to be closely linked to the civil aviation sector. Therefore, it is important that plans for airport infrastructure and air services take into account the requirements of these sectors. A multimodal approach should be used for planning to ensure better connectivity. Efforts should also be made to make it possible to issue visas to passengers from South Asia on their arrival at the airport. Airlines in South Asia should introduce electronic data interchange, interlinking trade agencies, customs, and immigration for faster, efficient trade transactions. Private sector participation in cargo handling for increasing competition and improved services should be welcomed.

(iv) Linking Inland Waterways

Waterways have been found to be the cheapest means of moving passengers and goods in the remotest parts of South Asia. Today, though Bangladesh, India, Nepal, Pakistan, and Sri Lanka together have about 25,000 km of navigable waterways consisting of a variety of rivers, canals, backwaters, etc., only 10,740 km in the major rivers and 700 km of canals are suitable for operating mechanized crafts. Because of lack of proper water transport infrastructure, organized IWT services in South Asia constitute a very small part of the total transport network of the region. IWT is still not the preferred mode of transport in South Asia. Out of total freight traffic of about 900 million tons by all modes of surface transport in 2001– 2002, IWT accounts for only 25 million tons and thereby accounts for only 3% of total South Asian freight traffic. If the absence of all-weather navigability is a cause of low freight traffic in IWT, then lack of awareness of its energy conservation potential is also a reason to blame.

There is movement of goods from India to Bangladesh by the Central Inland Water Transport Corporation (CIWTC) and Bangladesh Inland Waterways Authority (BIWA). The movement of goods between India and Bangladesh through IWT from 1998 to 2003 is given in Table 17 [ PDF 14.4KB | 1 page ]. In 2002–2003, about 16,230 tons of goods were exported to Bangladesh from India through IWT. Indian exports to Bangladesh through IWT are comprised of coal, rice, white cement, tires, steel coil, and project goods. Figure 2 [ PDF 14.4KB | 1 page ] shows the logistics network of IWT. Although the movement of IWT traffic in bulk and break-bulk categories increased, the movement of containers, apart from some periodic trail runs, has not made any foray in the IWT in South Asia (De, 2003).

India’s National Waterways 2 (NW 2),²³ cutting across Bangladesh, links the NER with West Bengal. The absence of all-weather navigation facilities, coupled with inadequate water depth, obstructs high-speed vessels from passing through national waterways, so these waterways can make little contribution to merchandise trade between the two countries. Since Bangladesh and India’s West Bengal and NER are well covered by inland waterways, the requirement is interlinking major waterways for navigation, and bringing new waterways within the India–Bangladesh Waterways Treaty to enhance the bulk movement of goods in the most remote corners where even roads and railways cannot penetrate.

(v) Liberalizing Maritime Facilities

Ports are a key infrastructure component in South Asia, where recent policy initiatives have ushered in new institutional arrangements, and have yielded results in terms of measurable outcomes such as delays at the ports. Most busy ports in South Asia—such as Jawaharlal Nehru (in India), Karachi (in Pakistan), and Colombo (in Sri Lanka)—have been partly privatized, resulting in more efficient operation. Some of the world’s leading port companies are also running container terminals in Pakistan, Sri Lanka, and India, but not in Bangladesh (World Bank, 2002).

A good amount of Indian exports to Bangladesh pass through sea ports. Table 18 [ PDF 10.7KB | 1 page ] shows the traffic of India’s exports to Bangladesh for 1998–1999 and 2003–2004 as regards the different ports. Jawaharlal Nehru, Kandla, and Vizag are the top three ports, handling most of India’s merchandise export to Bangladesh through the sea. Exports from Mumbai and Jawaharlal Nehru ports take longer, compared to Chennai and Vizag (Table 19 [ PDF 10.8KB | 1 page ]). India exported $84.06 million worth of iron and steel to Bangladesh in 2004–2005, a major portion of which was exported through the Jawaharlal Nehru port. In addition, shipments of electrical goods, spare parts, machinery, chemical products, denim goods, etc. enter Bangladesh (Chittagong) through Jawaharlal Nehru, Kandla, Chennai, and Haldia ports. There is also a liner service, started from Vizag to Chittagong.²⁴

Because most intra-regional trade among South Asian countries is routed through seaports due to rising handling costs at the ports, coupled with operational inefficiency, intra-regional trade in South Asia is not picking up at the desired level. The year-wise movement of containers between Kolkata, Haldia, and Chittagong ports is low. Because of the absence of direct calls between the ports of India and Bangladesh, containers shipped to Bangladesh from the West Indian ports are normally transshipped at Colombo and/or Singapore thereby imposing additional costs to the users and hampering intra-regional trade growth. Sharing the Jawaharlal Nehru Port could be a way of encouraging private–public partnership for developing an efficient port network in Bangladesh.

The NER is near Bangladesh’s Chittagong Port. No progress has been made to give access to the NER to use the Chittagong Port for international and coastal trade, despite clear indications of transshipment benefits in favor of Bangladesh. The cost of noncooperation in the maritime sector is likely to be destructive. When India saw Bangladesh’s noncommittal attitude toward NER’s transshipment facility, India took new initiatives to link the NER with ports in Myanmar. Therefore, a quick decision to open up the Chittagong Port for NER’s trade will pave the way in strengthening bilateral relations between the two countries, failing which cooperation momentum will slow down.

(vi) Behind the Border Issues

Trade services (or trade facilitation) are at the forefront of the development agenda; they are a critical element of any strategy to fight poverty.²⁵ Today’s trade issues go beyond the traditional mechanisms of tariffs and quotas and include "behind-the-border" issues, such as the role of infrastructure and governance in supporting a well-functioning trading economy. Some studies have indicated that the cost of trade facilitation, specifically trade documentation and procedures, is high, between 4–7% of the value of goods shipped. In 1996, the Asia-Pacific Economic Cooperation (APEC) group conducted a study that highlighted the gain from effective trade facilitation. For example, the gains from streamlining customs procedures exceeded those resulting from trade liberation such as tariff reduction. Gains from effective trade facilitation accounted for about 0.26% of real GDP of APEC members (about $45 billion), while the gains from trade liberalization would be 0.14% of real GDP (about $23 billion) (UNESCAP, 2005). An empirical study by Cudmore and Whalley (2004) finds that reducing border delays is critical for trade liberalization to have a positive impact on welfare.

The customs offices in India and Bangladesh still require excessive documentation, especially for imports, which must be submitted in hard copy. ²⁶ A list of the principal documents that must be submitted at prominent customs points is shown in Table 20 [ PDF 10.9KB | 1 page ]. It shows that an Indian exporter to Bangladesh has to obtain 330 signatures on 17 documents at several stages. While most of these are standard for international trade, the government tends to add requirements that are purely local in nature. The bureaucratic response to problems and anomalies has been to introduce new procedures and documents to protect their recurrence. This introduces a significant increase in the cost of doing business but, in many cases, has little effect on the cause of the problems.²⁷ Because of this complex, lethargic, and primitive procedure, pilferage continues to rise. This often changes the composition and direction of trade. Procedural complexities very often work as deterrents to India–Bangladesh trade.

Inadequate trade facilitation measures are prominent in the India–Bangladesh border trade. In the road sector, a trade consignment takes a minimum of 4–6 days for clearance from the Indian border to the Bangladesh side, and vice versa (Table 21 [ PDF 10.9KB | 1 page ]). The present legal arrangement between India and Bangladesh prohibits Indian or Bangladeshi vehicles to cross each other’s border for delivering the consignment to the ultimate user(s). In summary, the aggregate delay (loss of time) pertaining to all three phases of exports turn out to be over 4 days for a single shipment (Table 21). Box 2 [ PDF 10.4KB | 1 page ] captures field level observations which amply demonstrate why the border crossing of goods between India and Bangladesh take so much time.

At present, an exporter incurs about Rs10,100 ($230) as transaction costs at the border (Table 22 [ PDF 10.1KB | 1 page ]), which in ideal conditions should be around Rs2,900 ($66). If we leave out transportation costs (Rs2,800), the remaining 72% of estimated total transaction costs (Rs7,300) are nonetheless very high compared to any such costs witnessed elsewhere. Therefore, all associated costs (non-transportation-related costs) alone carry more than 72% of estimated total transaction costs, and these associated costs are acting as the major deterrent to India–Bangladesh official overland trade.

(vii) Use of Electronic Data Interchange System at the Border

Customs checks and clearances are an intrinsic element of any cross-border movement of goods. In recent years, significant reforms have been carried out in the related procedures. These include simplified documentation, pre-shipment inspection, and simplified tariff based on the Harmonized Code (at 8 digits). The customs department has also computerized documentation and provided electronic data interchange (EDI) connectivity. Banks, airlines, shipping lines, and customs house agents have also been linked with the network. It is claimed that more than 90% of the transactions have been brought under EDI facilities. Unfortunately, India–Bangladesh overland trade appears to have been bypassed. The facilities have been provided only at one location, Petrapole. But even here, the system has not been operational for the last couple of months. Hence, all transactions are being carried out manually.

The existing EDI system also suffers from certain shortcomings which add to the transaction costs. For example, though the filing of declarations has been made possible online, a hard copy of the declaration is generated by the system, albeit at a later stage, and signed for a variety of legal and other requirements, both for the importer and customs. Other supporting documents are also submitted for verification. Thus, many shortcomings associated with documentation continue to exist under the present EDI system.

(viii) Improving Export Competitiveness in the Textile and Clothing/Garments Industry

Under the World Trade Organization agreement, Europe and America will lift the textile import quotas this year. Thus, South Asia will witness both a prospect to exceed quota levels as well as a risk of loss of market share in the highly competitive market. The greatest competitor in the garments industry will be the PRC. However, the recent initiative taken by the PRC in removing the dollar peg for the yuan will ease the competition in the garment exports of South Asian countries as the production cost of Chinese goods will increase. This will increase export competitiveness as a result of the Chinese currency's revaluation.

As the garments industry is highly labor intensive, further investment, growth, and strengthening of this sector will significantly reduce poverty in South Asia. Garments constitute a major portion of the exports of South Asian countries, such as Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Small and medium-sized firms largely dominate the South Asian textile industry, including those of India and Bangladesh. These firms are not ready to face the post-quota competition in the world market posed by the PRC. The major constraints that the garments industry faces include poor infrastructure and restrictive labor laws.

The Indian textile and garments industry is large, with a labor force of 30 million; the further development of this industry will help reduce poverty in India. It is a big producer of cotton and man-made fibers. Its labor costs are cheaper than the PRC's. If labor productivity can be enhanced, it has the potential of becoming a vertically integrated textiles powerhouse like the PRC. At present, India accounts for only 5% of American textile imports, compared with the PRC’s fast-growing 19%.

The manufacture of ready-made garments is Bangladesh's largest export industry and the most demanding in terms of fast, low-cost, and reliable logistics. Manufacturers produce mostly low-value garments similar to those produced in the PRC and Viet Nam. In 2001– 2002, the value of exports was $4.86 billion versus only $0.064 billion a decade earlier. Despite a slight drop in 2002–2003, the industry reported an increase to about $5.25 billion in 2003–2004.

The end of the most-favored nation agreement will introduce instability in the export market for ready-made garments. The market has already factored in the end of the agreement as Bangladesh exporters have been forced to accept price cuts, said to average about 15%, to maintain market share. Having accepted this reduction, they have been able to export a significantly larger volume than last year. But the large garments buyers are expected to continue adjusting their portfolio of buyers over the next two years. They have already developed a strategy of diversifying sources of supply by using multiple contracts within a country and in more than one country. With this strategy, they can adjust the amount produced by individual suppliers on an annual basis depending on operating conditions and costs. During the next two years, as the market seeks a new equilibrium, Bangladesh should solidify its position as a reliable, low-cost supplier of quality goods. To match future price pressures, producers should identify new sources of savings in time and cost. Since recent savings have been achieved in production activities, it will now be necessary to focus on logistics.

Over time, South Asia has improved its position in the world textile and apparel market with a growing market share. For instance, clothing exports from South Asia, as a share of world exports, have increased from 5% in 1990 to 7% in 2003 (Table 23 [ PDF 11.9KB | 1 page ]). India (41%) and Bangladesh (27%) accounted for greater shares of South Asia’s clothing exports, while Pakistan and Sri Lanka accounted for 17% and 15%, respectively, in 2003 (Kelegama and Weeraratne, 2005). Conversely, in the textile trade, India (50%) and Pakistan (45%) accounted for a majority of exports, while Bangladesh and Sri Lanka accounted for negligible shares.

Among other South Asian exporters, only Pakistan has a big raw material base. Pakistan’s industry witnessed a strong investment of $4 billion in the four years up to the lifting of quotas and, therefore, it is well posed for growth. Bangladesh's ready-made garments sector grew rapidly over the years and currently accounts for about 77.55% of the total export of the country. Export volume of the sector is about $6.07 billion in fiscal year 2004–2005. On the other hand, Bangladesh does not have a vertically integrated garments industry and, therefore, does not have any natural comparative advantage. However, its labor costs are cheaper compared to those of India and Pakistan.

There is a need for cross-border investment and integration of the textile and garments industry in Bangladesh and India to build more vertically integrated and competitive garments companies.

(ix) Renovating Land Customs Stations

Land customs stations (LCSs) are the gateways for the transit of human beings, goods, and services between India and Bangladesh. Most India–Bangladesh traders and service providers use LCSs. Unfortunately, not a single LCS between India and Bangladesh offers services that are of international standard. The physical environment at LCSs is anything but conducive for trade and services. Several measures have already been taken for upgrading LCSs in the NER, but effects are still limited.²⁸ At the time of this writing, 11 LCSs, as shown in Table 24 [ PDF 12KB | 1 page ], have been prioritized for development of infrastructure,²⁹ out of which the development of four LCSs—namely, Moreh, Sutarkandi, Dawki, and Zokhawthar—were given the highest priority.³⁰

The bordering states of India and Bangladesh should quickly acquire the needed expertise on the complex issues of trade facilitation so they can negotiate more effectively and ensure that agreements serve their objective of reducing poverty.

(x) Sanitary and Phytosanitary Measures

India and Bangladesh, being WTO members, have to fulfill certain obligations posed by the WTO.³¹ As per the WTO Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures, members are obliged to provide at least 60 days’ notice³² to other members, through the WTO, for comments before adopting SPS measures. SPS measures are a formality in trade among developed and between developed and developing (and LDC) countries. However, such measures are yet to take shape in trade among developing and least developed countries. The case of trade between India and Bangladesh is no exception. Table 25 [ PDF 11.2KB | 1 page ] shows the number of such notifications that India and Bangladesh made. Even though India reported 35 cases to the WTO, no single case has been found where India invoked the WTO route on SPS measures for its exports/imports from Bangladesh; nor has Bangladesh enforced its exporters to get conformity on SPS measures while exporting to India.

While standard and safety-related requirements in agricultural and food-related products are extremely important, there are instances when these standards and related requirements have been put in place by countries with the implicit objective of protecting their respective domestic industry. In view of SAFTA, SPS measures are likely to gain importance in South Asia. SAFTA members have already taken some initiatives. For example, Geneva-based SGS India, a global player in commercial verification and monitoring services in international trade, has taken over pre-shipment inspection jobs for all Indian exports to Bangladesh.³³

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