Nature of Informal Trade Relations between India and

Bangladesh

Abstract

India and Bangladesh not only play the role of an indispensable neighbour to each
other but are also important regional trading partners, and their trade relations
include trade in different commodities through different channels. The need for
India to maintain stable trade relations with Bangladesh stems from the fact that
Bangladesh is an important market for India’s exports, and also because the trade
between the two nations tends to influence their relations in other areas including
the political and cultural spheres. However, there exist peculiar problems that need
to be addressed in order to strengthen the mutual ties between the two countries.
This study highlights two of the prominent problems that affect the nature of
bilateral trade between India and Bangladesh, viz the imbalance of trade and the
prevalence of informal trade between the two countries. Based on analysis of
existing studies and articles this article attempts to bring out the effects of these
problems on the nature of trade relations between the countries. This article also
highlights the potential solutions that need to be given attention so as to boost
economic exchanges between the countries.

Keywords: Bilateral trade, Informal trade, Trade imbalance, Tariffs.

1) Introduction
The relation between India and Bangladesh has a rich historical background to it,
dating back to the days of India’s struggle for Independence from British rule. The
two nations have since the infant years of Bangladesh tried to resolve their
differences in different areas in an amicable manner. From India’s point of view,
Bangladesh is an important ally, with which it needs to maintain the amity of its
relations. While the two countries cooperate with one another to achieve the goal
of sustained amicable relations, as well as to ensure mutual assistance in fulfillment
of common aspirations, there are some typical obstacles they both face when it
comes to cooperation in the economic and commercial sphere, which directly affect
the trade relations between them. Thus exploring the scope available to these
countries to overcome the hurdles they face in enhancing their trading ties is the
main concern of this study.

1.1) Current Status:

India has emerged as a maturing country in its international status post-

independence from the British colonial rule. The strategic location of India, and its
large territorial as well as demographic size makes it an important player in the
International arena. India enjoys its privileged position in the Indian Ocean within
Southeast Asia. While it neighbours countries that are home to nationalities having
distinct cultures and ideologies from that of its own, it has made a constant effort
to keep all its neighbours afloat with it in its efforts to prevent violence in the sub-
continent. The ability of India to assume a position of importance, if not dominance,
also originates from the locational advantage it has, being situated between West
Asia and East Asia. This advantage was what made India a coveted colony for the
colonisers. India with its large population with about 74% of the population being
literate1 (those above 15 who can read and write), and with the increasing pace of
urbanization India provides a promising market for the commodities of other
countries, and simultaneously serves as a link between markets at the international
level with its geographic location.

Bangladesh is one of the trusted neighbours Indian has. The existence of

Bangladesh can be traced to its geo-religious identity, whereby its religious identity
caused it to separate from India at the time of partition of India and Pakistan, and
its geographical identity mingled with other cultural factors caused its split from
Pakistan in 1971. The political instability experienced by Bangladesh post its
formation has been steadily declining, and its political affairs are improving in
terms of becoming more regulated. Similar is the case with the image of Bangladesh
as a poverty-stricken nation, which is improving, and this is seen in the reduction
in poverty “from 48.9% in 2000 to 31.5% by 2010”2 The distinct feature of the geo-
political location of Bangladesh is that it occupies an important position as the
neighbour of powerful countries including China and India. Moreover, the
pervasiveness of Bangladesh over the Bay of Bengal needs to be considered as the
Bay of Bengal has become an important channel for naval activities along with the
trading activities it caters to.

1.2) Background of Study:

The improving relation between these nations is closely linked to the economic
relations they share. India and Bangladesh are important regional trading partners
of each other, and their trade relations include trade in different commodities

1
Office of the Registrar General & Census Commissioner, India, Census Report 2011, ,
http://censusindia.gov.in/2011-prov-results/data_files/mp/07Literacy.pdf.
2
World Bank, Agriculture Growth Reduces Poverty in Bangladesh, The World
Bank,.http://www.worldbank.org/en/news/feature/2016/05/17/bangladeshs-agriculture-a-poverty-
reducer-in-need-of-modernization (last visited 17 May 2017).
through different channels. The need for India to maintain stable trade relations
with Bangladesh stems from the fact that Bangladesh is an important market for
India’s exports, and also because the trade between the two nations tends to
influence their relations in other areas where there is a greater scope for
disagreement between the two nations. The bilateral-trade relations shared by the
country is an important aspect of the relations the two countries share. The trade
between the two nations is not even on both sides and the balance is tilted in favour
of India. This is one of the concerns that India needs to address in order to ensure
that the positive relations it shares with Bangladesh.

While the imbalance in trade is the highlighting feature of the trade relations
between the two counties, it is not sufficient to derive a conclusion on the nature of
trade-relations that these countries share because these pertain only to the formal
areas of trade. The India-Bangladesh trade relations also include unofficial trading
activities that takes place in an informal manner across the border. The impact of
such trade on the existing formal trade relations as well as on the political ties of
the two countries needs to be understood in order to ensure that this aspect is not
neglected in important policy decisions taken by the government towards
improving trade relations.

Considering the period of Globalisation, where the major global powers seek to
expand their reach in the developing countries through diplomatic and economic
channels, it is important to ensure that the two neighbouring countries share a
unified desire to boost and secure their relations, as this will help them retain mutual
support even when the dominance of the powerful States seeks to exploit the
economic conditions in these countries. Moreover, the bilateral agreements that
countries enter into and the forums through which they try to negotiate in order to
build their trade relations also define the nature of choices available to these
countries to increase their trade-related interactions. These negotiations also tend
to affect the informal trade relations as they result in the creation of new regulations
which may create conflict with the prevailing mechanisms of informal trading
activity.

It is thus important to understand how these prevailing conditions together shape

the differences between formal and informal trade channels that exist between India
and Bangladesh.The following section establishes the background of the relations
between India and Bangladesh.

2) Historical Ties between India and Bangladesh

2.1) The Foundation Of Amity:

India and Bangladesh share common historical facts from the era of royal kingdoms
to their conditions under the British rule. The cultural and linguistic bonds that
prevailed between these geographic territories can be seen even in the present times.
The divergence, of their course of history, began with the partition of India in 1947
on religious grounds. This divergence however, cannot be taken as demolition of
all commonalities between India and erstwhile East Pakistan as the split of India
and Pakistan was more politically motivated rather than being rooted in cultural,
economic, historic dissimilarities.

The difference that existed between the two wings of Pakistan before 1971, gained
subtle prominence at the very initial stage, right from when the State of Pakistan
was being ideologically shaped with the spread the “Two Nation Theory”. Just as
Pakistan asserted that its emergence was based not on mere religious grounds but
was also on the basis of a “distinct social order”, a similar description could also be
used to describe the division between East and West Pakistan (as referred to prior
to 1971).
The Lahore resolution of 1940 which was passed by the Muslim League to demand
independent State(s) contains an explicit mention of the geographical division
between the then north-western and eastern zone of India. The recognition of these
separate regions in a resolution which sought for independence contributed to the
development of the existing sentiment of a distinction between the two regions.
Bengali-Muslim leaders like Fazalul Huq advocated their demand for an
independent state of Bengal while the Muslim league insisted on the Partition of
India and Pakistan. As the Bengali-Muslims supported the cause of Pakistan, they
simultaneously expected to enjoy autonomy in the Bengal region and held hopes
for its emergence as an independent country. However, this idea was later
subsumed into the thought that East Bengal would be recognised as an autonomous
unit of Pakistan post partition and thus East Bengal was integrated into Pakistan.

The survival of East Bengal as a part of Pakistan however, became uncertain as the
Muslims in Bengal realised that their enchantment with the Muslim nationality was
not sufficient to meet their economic aspirations and strengthen their cultural
Identity. The difference between these two territories due to cultural, racial,
economic and political causes ultimately led to the split of Bengal from Pakistan3,
and it was at this point that India and Bangladesh came together as Independent
powers to enter into an alliance.

The involvement of India in the liberation war of Bengal was primarily to secure
its interest against the threats from its neighbours, following the Indo-Pakistan war
of 1965. The outbreak of civil war in East Bengal following the declaration of
independence by the Awami League, which led the freedom struggle movement in
East Bengal, in March 1971, there was widespread violence and thousands of
refugees fled from East-Bengal to India. India made an effort at the international

3
C.A.F Dowlah., Liberation War, The Sheikh Mujaib Regime, And Contemporary Controversies
296 (2016) (ebook)
level to draw world attention to the atrocities carried out by the Pakistani
government in East Bengal. Indian leaders also made effort to ensure arms supply
to those fighting for the independence of Bengal.4 India also became the first
country to grant recognition to Bangladesh on 6th December, 1971.

2.2) Recent Developments:

Since the independence of Bangladesh, India continues to be its all-weather friend.

The two countries have agreed to jointly fight pressing current day problems
including terrorism and poverty. They have also set up programs for collective
efforts in education, infrastructure and improving cultural ties. Along with these
positive aspects, the two countries also have hurdles to overcome, including trade
related disputes, river water-disputes, and improvement in transportation channels
between the two countries.5 The adoption of the Act- East policy by India also
suggests that there exist ample scope for further developments in India-Bangladesh
relations.

3) Formal Trade Relation between India and Bangladesh

3.1) Nature of Trade Relations:

India and Bangladesh share trade relations which are of utmost importance to each
other. India is the second largest importer to Bangladesh after China, and it is the

4
Gary Jonathan., The Blood Telegram. (2013) (ebook).
5
Aspen Institute, India-Bangldesh Relations: Towards Increased Partnership,
http://www.anantaaspencentre.in/pdf/India_Bangladesh_Report.pdf
only Asian country out of the top ten countries to receive Bangladesh’s exports6.
Bangladesh also comes ninth on the list of India’s top export destinations7.

As trade partners India and Bangladesh trade in goods ranging from agricultural
produce to minerals. The analysis by Basu and Datta (2007) show that the major
part of exports from Bangladesh to India consists of agricultural products, animal
products, and chemicals which together make up 90% of the exports of Bangladesh
to India. India on the other hand exports products including vegetable, textile,
minerals, base metals and machinery (1990-2001). This shows that the nature of
trade between the two countries is majorly composite of basic goods. The economic
development of both countries and the resources available to each also play a major
role in determining the nature of trade. As developing countries, India and
Bangladesh are involved in the trade of manufacturing products and at the same
time, there also prevails intra-industry trade between the countries8.

The exports of India includes machinery and metals, which is likely to give India
an advantage in terms of its earnings from its exports to Bangladesh and also in
terms of dependency of Bangladesh on India. Moreover, it is also seen that India’s
exports make up a significant portion of Bangladesh’s imports9. Considering this

6
Abdul Basher., Indo-Bangla Trade: Composition, Trends and Way Forward, RIS,
http://ris.org.in/images/RIS_images/pdf/South%20Asia%20meeting%202-
3%20may%2020013%20PPT/Abdul%20Basher_paper.pdf
7
Daniel,Workman, India’s Top Trading Partners, World’s Top
Exports,.http://www.worldstopexports.com/indias-top-import-partners/ (last visited 12 August
2017).
8
Suparna Basu & Debabrata Datta, . India-Bangladesh Trade Relations: Problem of Bilateral
Deficit, 42 Indian Economic Review 111–129 (2007), www.jstor.org/stable/29793878
9
India-Bangladesh Bilateral Trade and Potential Free Trade Agreement. Bangladesh
Development Series Paper No,13 (2006),
siteresources.worldbank.org/INTBANGLADESH/Resources/Trade.pdf (last visited 2 September,
2017). Refer Table 6.2, Chapter 6.
nature of exchange between the two countries, the claims of Bangladesh of lopsided
trade relations with India can be confirmed.

3.2) Trade Agreements and Treaties:

As stated in the trade agreement between India and Bangladesh in 2006, the aim of
trade treaties between the two counties is to evolve a mutually beneficial trading
system between the two countries in a manner that allows their Individual financial
development and trade enhancement. The Bilateral Trade Agreement that governs
trade between India and Bangladesh continues to be renewed without any
hindrance.

One of the important trade agreements between India and Bangladesh is “South
Asian Free Trade Area (SAFTA)” which was entered into by the SAARC nations,
and it took effect from 1st January 2006 to facilitate “trade liberalisation” between
the contracting countries. As a result of this agreement, India gives preference to
Bangladesh on approximately 2925 tariff lines.10 India also reduced tariff rates by
20% for the Least Developed Countries (hereafter referred to as LDC) under this
agreement, which was beneficial to Bangladesh (as Bangladesh is included in the
LDC list). India also announced the Duty-free tariffs scheme for the LDC countries
in 200811. In addition to this India also decided to reduce the number of trading
items on its sensitive list (List of items exempted from tariff reduction) for LDCs
to 25 in 201112. These decisions paved way for greater export from Bangladesh to
India. There has been an increase in India’s trade with Bangladesh after this period,

10
Id. at p.xvi
11
India’s Duty Fee Tariff Preference Scheme for LDCs, Ministry of Commerce and Industry,
http://commerce.gov.in/trade/international_tpp_DFTP.pdf (last visited 3 September, 2017).
12
Hafiz Wasim Akram, Md. Daoud Ciddikie & M Altaf Khan, India’s Trade Relationship With
Safta Countries: 2 Journal of Indian Research 46–58 (2014),
http://mujournal.mewaruniversity.in/JIR%202-1/5.pdf.
however, the trade balance continues to be higher in favour of India (Refer table 2
of Annexure).

India has also made effort to enhance its exchange with Bangladesh by promoting
transportation and storage, simplified transit regulations, and telecommunication.
As pointed out in Bangladeh Development Series, World Bank (2006), these
measures are essential for effective realisation of trade agreements between India
and Bangladesh. It states that such coordination will be beneficial for economic
cooperation between the two countries.13

4) Informal Trade Activities between India and Bangladesh

4.1) Nature of informal trade activities:

India and Bangladesh have continually made efforts to strengthen their trade
relations by taking measures to enforce bilateral and multilateral trade related
agreements, as well as by setting up infrastructure and improving administration
related to trade. However, problems continue to persist in the smooth flow of goods.
The process of transacting goods at the border of the two counties is one such
problem of the formal trading system. Apart from official channels of trade, the
people of the two countries are also engaged in informal trade.14 Informal trade here
includes economic trade activities which are not carried out as per the rules and
regulations enforced by the government authorities and are thus illegal. The
earnings from these activities do not reach the government as the aim of these
activities more often is to surpass “tariffs and non-tariff barriers”. This
classification of trading activities also includes trade by unlicensed persons who

13
Bangladesh Development Series Paper No,13, supra. note 9, at 86
14
Prabir De And Buddhadeb Ghosh, Reassessing Transaction Costs Of Trade At The India-
Bangladesh Border, 43 Economic and Political Weekly (2008),
http://www.epw.in/journal/2008/29/special-articles/reassessing-transaction-costs-trade-india-
bangladesh-border.html.
may lack the resources to carry out trade through formal channels. Reasons for the
prevalence of these forms of trade can also include the easier nature of informal
transactions as they are less time consuming and enables savings, especially in the
context of developing nations.15

Some fear that the volume of informal trade is more or less equal to the estimates
of formal trade, particularly in matters of Indian exports to Bangladesh. The goods
informally exported to Bangladesh by India primarily include agricultural products,
livestock and consumer goods (sugar, salt and phensydil are the main goods as
stated by Pohit and Taneja, 2000), and the informal exports of Bangladesh to India
includes textiles, spices and electronic items.16

4.2) Implication of Informal Trade

Rather and Gupta in their study (2014) state that, the informal trade that takes place
between India and Bangladesh is mainly through roadways. They report that, “the
annual value of informal exports to Bangladesh from India in the year 2000 was
estimated at between $1 billion. Consumer goods of international quality are also
informally traded at the border.”17

The volume of informal trade between the two counties indicates towards the
widespread nature of this problem. With Bangladesh having, time and again
expressed its regret over the trade imbalance between the two countries being in
India’s favour, India needs to be watchful on the continuation of such informal
trade, which causes a loss to both countries, but more so to Bangladesh as it adds

15
.Sanjib Pohit And Nisha Taneja, India’s informal Trade with Bangladesh and Nepal; A
Qualitative Assessment, Working Paper No.58 with Indian Council for Research on International
Economic Relations (2000), http://icrier.org/pdf/nishapohit.pdf
16
Id.
17
Ahmad Rather And Dr. Deepika Gupta, India-Bangladesh Bilateral Trade: Problems and
Prospects, 22 International Affairs and Global Strategy (2014),
http://www.iiste.org/Journals/index.php/IAGS/article/viewFile/13827/13924
to the existing imbalance arising out of formal trade. Moreover, considering that
such informal trade cannot be undertaken without some kind of leeway given to it
by security forces, it also creates doubts regarding the functioning of the forces,
which both the countries will have to justify even at the international level in case
of any future contingency arising out of such activities.

Making a possible comparison between the formal systems of border trade, some
of its positive implications may also be found in case of informal trade. These
include income generation opportunities to locals in the border area, increased
interaction between the people of these countries at the grass-root level, and also
better access to markets for perishable goods. However, these positives need to be
ascertained through a ground study.

Conclusion

The relation shared by India and Bangladesh though rooted in a shared history and
culture, continues to improve for the sake of the economic relations and political
cooperation that these countries need to maintain to ensure security, development
and access to resources. Both the countries are developing nations and thus their
mutual dependence and amity cannot be compromised. The historical analysis
attempted in this study brings out the struggle of Bangladesh to establish its identity
as a nation and the supportive role played by India in its endeavour. The tendering
of such support by India continues to be in pursuance of the goal of securing its
interest against other neighbouring nations. The need for Bangladesh to cooperate
in a like manner is also based on the same reason, and in addition, it also includes
the dependence of Bangladesh on India in economic terms due to the trade that
takes place between the two countries.

The formal trade between the two countries helps the countries provide for their
individual need for basic goods including food items, textile, manufacturing
material and raw material. The problem with the formal trade system is the trade
imbalance which is of greater advantage to India. Juxtaposed to this imparity
between the two countries, is the informal system of trade through which goods
including foodstuff, consumer goods and few raw materials are traded. The
informal trade network is fuelled mainly by the problems encountered by traders in
matters of licencing, customs clearance and related delays, and transaction costs.
To overcome these hurdles much of the trade between the two countries is done
through informal channels.

The need to limit informal trade between the countries is important as such trade
prevents the flow of revenue to the governments of the two countries, and leads to
corrupt practices among the security forces as they are suspected to allow such
activities across the border. Moreover, such transactions are often used by
Bangladesh to pressurise India to work towards improving the trade imbalance
between the countries, thus affecting the political ties. Most of the studies referred
to on this topic suggest measures such as improving transportation and storage
facilities to encourage formal trade, improvement in the system of providing check-
post clearances and customs, keeping a check on corruption, and strengthening
border patrol. Any move taken in this direction will be effective only if it assures
traders timely and cost-effective transaction. Thus the formulation of any bilateral
policy by the two countries towards eradication of informal trade, needs to be
accompanied by immediate measures that provide relief to small traders and also
make it less cumbersome for them to exchange goods through official channels.