It is obvious that being next to a huge country such as India has important consequences for Bangladesh. In 2022, these relations will be challenged as never before. Relations with India are at many levels: Economic, military, cultural, religious, and financial. The policy of the government is certainly to maintain good relations with India, but not follow India’s demands.
India, on the other hand, recognizes that a friendly relationship with Bangladesh is very important. However, India wants to closely control every aspect of Bangladesh’s government that touches on India interests, which in India’s eyes, is virtually everything.
India runs a very large trade and current account surplus with Bangladesh: In 2020/21 Bangladesh had a current account deficit with India of $8.8 billion. This was largely made up by the trade deficit of $8.3bn (exports from Bangladesh were $1.3bn and imports to Bangladesh were $9.5bn). The official estimates are wrong in four respects:
(1) There is a large amount of under-invoicing of imports. That is, the stated value of the import is less than the true value; the importer uses the hundi system to pay the foreign exporter the difference. For India, more than 50% of invoices were found to be undervalued. We estimate this under-invoicing as $3bn
(2) The balance of payments does not reflect the remittances of Indian workers in Bangladesh that flow through the hundi system. We estimate these at $1.4bn. This is lower than many reported estimates but is based on information from people in the industry
(3) Bangladeshi visitors to India for all purposes (education, medical treatment, tourism) account for $1.5bn for the 2.6 million Bangladeshi visitors to India in 2020/21
(4) Informal trade which is a net $3bn
A more accurate estimate for the current account deficit for India is about $17.7bn. The inflow of capital to Bangladesh from India in 2020/21 was $1.4bn (Most of these numbers are from the Bangladesh Bank’s report on the balance of payments with India for 2020/21). The Indian economy benefits tremendously from this current account deficit. Equally, this reduces the Bangladesh economy by about $14.1bn. The return capital inflow is only $1.4bn.
India has put many barriers to reduce Bangladesh exports. It is a ruthless exploitation of the Bangladesh economy. One would hope that the Bangladesh government in 2022 would insist on corrective arrangements: Lowering the barriers to exports or put countervailing duties in place to lower Indian imports. Second, to prevent Indian companies from under-invoicing exports to Bangladesh. The impact of this is to reduce border taxes collected by Bangladesh; these uncollected revenues amount to about $1bn.
The Indian workers’ illegal transfers through the hundi system should be stopped, these amounts taxed as income, and then made to pass through the formal banking system. The BGMEA has a key role to play here. Since BGMEA is asking a lot of help from the government, it is fair to insist that the payment of foreign workers gets under control.
The Reserve Bank is aware of these flows but does nothing to stop this illegal activity. The other components cannot be controlled. However, the informal trade in cattle can surely be formalized. The data presented here indicates that the informal markets equals the official current account deficit.
The foreign assistance that is offered by India to Bangladesh is limited. Project implementation is slow. There is one large coal-fired power plant soon to come into operation that will make an important contribution to Bangladesh generating power capacity. There are various contributions to the railway, which ultimately probably benefit largely the Indian exporter to Bangladesh.
None of these is likely to make a positive contribution to the economy (that is, a positive return on capital). The foreign assistance is then a show, not a serious investment.
Here is a test: Would the World Bank be willing to finance any of these projects?
Military relations between the two countries seem good and the Indian armed forces are certainly trying to make positive contributions to the Bangladesh military establishment. 2022 should see a deepening of these relationships. Of course India is anxious to improve its relationship with the Bangladesh military.
Some points are very sore: The Chinese supply of submarines and more seriously, the construction of a naval base to house the submarines.
The most serious issue in 2022 will be the Indian treatment of Muslims in India, and in particular, accusations and listings of large numbers of Muslims who -- it is claimed -- have immigrated from Bangladesh. These issues may become more inflamed in 2022 depending largely on the political developments in India. While the Indian government is certainly supportive of Bangladesh, many Indian politicians have little concern for the impact of their policies.
India’s move to establish a Hindu state while making Muslims second-class citizens is a dangerous development for Bangladesh. Encouraging the Hindu state and casting aside the secular state that the great Jawaharlal Nehru established forces three things on South Asia:
(1) The continuation of the caste system with its cruelty and exploitation of the weak
(2) The inevitable rising tension between the Muslims and the Hindus. There are warnings of genocide as the ultimate intent of the BJP
(3) The real catastrophe in South Asia is the deep anger -- even hatred -- between Pakistan and India and each armed with nuclear weapons. Bangladeshis should live in terror of what these two groups -- Pakistani Muslims and Indian Hindus -- are willing to do to each other. Chances of nuclear war in South Asia are rising day by day
Bangladesh should join with China and the United States to lower this nuclear arms race. There are many actions that Prime Minister Sheikh Hasina can initiate to lower the threat of nuclear war:
(1) More open trade relations between India and Bangladesh would benefit both sides and generate common business interests. India FDI levels are pathetic for a country of such size. Open trade would probably raise FDI. The hidden, informal trade and investment should come out into the open
(2) Bangladesh must take the lead to rid South Asia of nuclear weapons. Consultations with the US and China can open the door to diplomatic efforts
(3) Bangladesh’s government and foreign service are able to take the lead in trust building actions involving Pakistan and India on nuclear weapons
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics. This article, the first of four, is an expansion of an article “Prospects for Bangladesh 2022” published in the AmCham Journal, October – December 2021.
