Bangladesh-India CEPA: Something to look forward to

If implemented properly, Bangladesh stands to gain more from the proposed trade pact with India by way of higher exports and investment despite the loss in tariff revenue, found a Dhaka-Delhi joint feasibility study.

Called the Bangladesh-India Comprehensive Economic Partnership Agreement (CEPA), the proposed deal goes beyond the traditional free trade agreements and also addresses trade in services, investment, intellectual property rights and e-commerce.

Talks for the pact were initiated by India in 2018 against the backdrop of increasing Chinese investments in Bangladesh.

But formal negotiations are expected to begin soon as the CEPA will figure high on the agenda during Prime Minister Sheikh Hasina's scheduled visit to India from September 5 to 8.

The proposed deal, which calls for a withdrawal of duties, is expected to boost Bangladesh's exports by 190.15 percent and more if transaction costs were also reduced through improved connectivity, according to the study by the Bangladesh Foreign Trade Institute and the Indian Centre for Regional Trade based on the two countries' trade data between 2015 and 2020.

India's exports to Bangladesh are expected to increase by 188 percent.

The CEPA will increase Bangladesh's GDP by 1.72 percent and India's by 0.03 percent, the study found.

Currently, India is Bangladesh's second biggest trading partner after China. In fiscal 2021-22, Bangladesh's exports to India hit $2 billion for the first time, while imports through the official channel stood at about $10 billion.

However, if import through unofficial channels is factored in, the figure would stand at about $14 billion.

On average, imports from India are subjected to tariffs of about 20 percent, fetching the state coffer about $2 billion.

That revenue would be lost once the CEPA is inked, said MA Razzaque, research director of the Policy Research Institute of Bangladesh.

If Bangladesh signs a free trade agreement with India leaving the current high tariff rates unchanged, the trade diversion effects will be substantial.

"Even if the gains appear to be lop-sided now, negotiations for CEPA should start without further delay."

— An author of joint feasibility study Selim Raihan

It has been estimated that an FTA or agreements like the CEPA with India alone could result in trade diversion worth $700 million.

"This is the amount of trade that is now taking place with other countries but would be lost due to preferential tariffs granted to one country," Razzaque added.

Once the trade deal is signed, Bangladesh's export earnings will go up by $3-5 billion and India's by $4-10 billion in the next 7-10 years, the study found.

Since Bangladesh already gets duty-free quota-free market access to the Indian market, the quantitative analysis shows that there will not be large gains for Bangladesh's exports to the Indian market from CEPA negotiation, it said.

Comparatively, India will receive a larger trade gain primarily because of the high tariff rates it is currently facing in Bangladesh.

"Even if the gains appear to be lop-sided now, negotiations for CEPA should start without further delay," said Selim Raihan, one of the authors of the joint feasibility study.

The reason being the CEPA would at least ensure the continuation of duty-free access to India after graduation from the least-developed country bracket in 2026.

Due to being an LDC, save for about 25 items (mostly tobacco and liquor) all goods from Bangladesh enjoy duty-free access to India.

"It must be kept in mind that, upon graduation from the LDC category, Bangladesh will no longer be eligible to continue the high tariff line as it is now," the study said.

Therefore, in a way or another, Bangladesh will have to provide duty-free quota-free market access to India once it graduates out of LDC under the existing South Asian Free Trade Area negotiation.

"It is in this context, the role of CEPA becomes crucial, at least from the Bangladesh perspective," the study added.

Besides, India is a major source of industrial raw materials and capital machinery, according to Raihan, the executive director of the South Asian Network on Economic Modelling.

For instance, Vietnam, a peer country of Bangladesh, currently has FTAs with some of its major trade partners.

"Despite the fact that the bilateral trade balance for Bangladesh might worsen after the CEPA negotiation, a majority of the increase in imports for Bangladesh would come from the increase in the raw material imports -- which might exert a positive benefit for the country," the study said.

However, Bangladesh should identify some sectors and negotiate for including them in the sensitive list for a specific period of time.

"This is widely practised while signing such deals," said Raihan, also a professor at the University of Dhaka's economics department.

Some sectors in both countries, however, are bound to lose out due to increased import competition, the study said.

In Bangladesh, these could include coal, dairy products, metal products, transport equipment, petroleum and coal products, paper products, publishing, electronics equipment and mineral products.

In India, the sectors could include leather products, apparel, meat products, and vegetable oils and fats.

"One critical area that would be essential in the success of the CEPA would be the removal of non-tariff barriers and other structural challenges existing between the two countries," the study said, adding that there will be more extended opportunities for increasing trade in the Northeast Indian territory.

The CEPA has the potential to go beyond enhanced goods trade and can carve open economic opportunities including connectivity, new markets, investment, finance, technology transfer, and cooperation and partnership.

Both countries would gain from continued trade liberalisation and streamlining of border transactions through trade facilitation and improved physical connectivity.

Closer economic cooperation between the two countries would also promote Bangladesh's prospects for attracting larger investment from India.

Such investments, whether 100 percent Indian or joint ventures, would help to improve the country's export supply capability and boost exports to both the region and the outside world.

"India-Bangladesh cooperation offers a win-win prospect for both countries and the South Asia region as a whole," the study added.

According to an official statement released by India's ministry of commerce and industry, the CEPA will incorporate a variety of issues of mutual interest, including the development of railway infrastructure, port infrastructure, border haats, regional connectivity through multimodal transportation, harmonisation of standards and a mutual recognition agreement.

Further, the agreement looks to step up cooperation in new areas such as green technologies, renewables, and IT and digital platforms.

The CEPA will also strengthen the scope of investment as it includes new areas and ways of cooperation. In addition, the agreement focuses on four areas for strengthening the India-Bangladesh partnership including connectivity and maintaining an uninterrupted supply chain, a joint production of defence equipment, the exploration of potential areas of investments and joint manufacturing of vaccines and other medicines.