Bangladesh-India Economic Relations: The Need for Financial Integration through Digital Connectivity

177

Over the past decade, the economic relationship between Bangladesh and India has significantly strengthened, underpinned by historical, cultural, and linguistic ties that go beyond a mere strategic partnership. India’s prompt recognition of Bangladesh’s independence in 1971 established the foundations of a robust bilateral relationship based on equality, trust, sovereignty, and mutual understanding. Bangladesh stands as India’s largest trading partner in the subcontinent, while India ranks as the second-largest export partner for Bangladesh. In the fiscal year 2023, the total trade turnover reached a substantial $14.22 billion, reflecting the depth of their economic engagement. This article explores the recent developments in their economic ties, the introduction of trade in local currencies, and the need for financial integration through digital connectivity.

Bangladesh-India Economic Relations

In recent years, Bangladesh and India have achieved noteworthy progress in their economic relations, marking the emergence of a new phase of collaboration. India’s exports to Bangladesh have displayed diversity, encompassing a range of commodities, including cotton yarn, petroleum products, cereals, and cotton fabrics. Notably, in the fiscal year 2023, India’s exports to Bangladesh reached a substantial $12.20 billion, with exports during April-May 2023 alone totaling $1.67 billion, underscoring the sustained growth in trade. Conversely, India’s imports from Bangladesh have primarily consisted of items such as RMG cotton, cotton fabrics, man-made fibers, spices, and jute. In FY23, India’s imports from Bangladesh amounted to $2.02 billion, with imports in April-May 2023 standing at $278 million, demonstrating a consistent flow of goods between the two nations.

Both countries are eagerly looking to initiate the Comprehensive Economic Partnership Agreement (CEPA), aimed at further enhancing trade and commercial cooperation. CEPA is anticipated to bring about new employment opportunities, elevate living standards, and broaden economic horizons for both India and Bangladesh.

Initiatives such as the Swadhinata Sarak (Independence Road) and the Maitree Thermal Power project have been inaugurated, playing a pivotal role in strengthening connectivity and bolstering energy security. These projects symbolize the deepening fraternal ties between the two nations, fostering cooperation in critical infrastructure and energy sectors.

A groundbreaking development in their economic relationship is the introduction of trade transactions in local currencies, specifically the Indian rupee and the Bangladeshi Taka. This strategic move is designed to reduce dependency on the US dollar and promote regional currency and trade integration, enhancing the financial landscape and trade relations between the two countries.

Financial Integration through Digital Connectivity between Bangladesh and India

The need for financial integration through digital connectivity between Bangladesh and India is highlighted by the importance of developing cross-border digital payment mechanisms, which can facilitate smoother financial transactions, making it more convenient for both individuals and businesses to engage in cross-border trade. Notably, both countries have already taken steps in this direction by signing a Memorandum of Understanding (MoU) on cooperation in digital payment mechanisms between the National Payments Corporation of India (NPCI) and Bangladesh Bank. This agreement underscores their commitment to enhancing the efficiency of financial transactions between the two nations.

Secondly, there is a significant opportunity to foster collaborative efforts between e-commerce platforms in both countries, which can serve as a catalyst for promoting cross-border trade and expanding businesses’ access to a broader customer base. India’s e-commerce market is on a growth trajectory, with projections indicating an increase from $83 billion in 2022 to an estimated $150 billion by 2026. Conversely, Bangladesh’s revenue in the eCommerce market is expected to reach approximately $7.63 billion in 2023, with a projected annual growth rate (CAGR 2023-2027) of 15.78%. This growth trend suggests a potential market volume of around $13.71 billion by 2027. These robust e-commerce figures underscore the substantial potential for both countries to establish a strong economic connectivity through the digital marketplace.

Furthermore, the enhancement of banking infrastructure and the establishment of strategic agreements play a pivotal role in expediting fund transfers and facilitating investments. This becomes particularly significant in the development of a seamlessly integrated financial ecosystem. Notably, two prominent Bangladeshi banks, namely State-owned Sonali Bank and Eastern Bank, have taken a proactive step by opening ‘nostro’ accounts denominated in Indian rupees with State Bank of India and ICICI Bank. A ‘nostro’ account represents a financial instrument held by a bank abroad at another financial institution in the currency of that respective jurisdiction. Such accounts serve as a fundamental component in international trade and the settlement of various foreign exchange transactions. By simplifying the currency exchange process and minimizing associated complexities, these initiatives effectively eliminate barriers for businesses and individuals seeking to engage in cross-border trade. The resultant streamlining of this process is poised to incentivize and facilitate a higher volume of cross-border transactions, ultimately bolstering economic ties between the two nations.

Thirdly, the implementation of joint programs for trade finance holds the potential to simplify the process of securing financing for cross-border trade, with a particular emphasis on aiding small and medium-sized enterprises. Notably, substantial efforts have been made in this regard. In 2001, Bangladesh declared 13 customs stations as land ports, yet only two were operational. However, since the government came into power in 2009, there has been a concerted push to develop, expand, and modernize the infrastructure of 24 land ports. This active and ongoing process signifies the commitment of both countries to digitalize land port connectivity, further facilitating cross-border trade. The alignment of customs and trade regulations is imperative to reduce trade barriers and foster efficient cross-border trade, where standardized processes will play a pivotal role in promoting smoother transactions.

Fourthly, the importance of investing in digital trade facilitation infrastructure cannot be overstated, as it is instrumental in expediting the movement of goods and services across borders. Such investments serve to streamline the logistical aspects of cross-border trade. In 2023, India’s score in the United Nation’s Economic and Social Commission for Asia Pacific’s (UNESCAP) has notably risen to 93.55% from 90.32% in 2021, showcasing its substantial progress in this domain. In contrast, Bangladesh ranks 35th out of 50 countries in the digital readiness indicator, scoring 4.63 out of 10 according to the 14th edition of the index unveiled by Agility, while India holds the second position. This divergence underscores a significant opportunity for Bangladesh to enhance its digital connectivity with India, as the latter has already achieved remarkable success in this arena. This presents a valuable opportunity for collaboration and knowledge sharing in the digital trade sphere between the two countries, further strengthening their economic relations.

Fifthly, the formulation and implementation of investor-friendly policies and incentives hold the potential to draw businesses seeking to invest in either of the two countries, thus contributing significantly to the reinforcement of their economic ties. Notably, India’s current share in Bangladesh’s foreign investments stands at $15.7 million, accounting for 1.15% of the total. However, the dynamics of foreign investment can undergo a transformative shift with the aid of digital connectivity and substantial investments in financial integration sectors. An illustrative example of this commitment is the special economic zone dedicated to Indian investors in Bangladesh, which is poised to receive a substantial injection of $115 million under the 34th line of credit from India. This financial support underscores the collective dedication of both nations to foster economic cooperation and enhance investment opportunities, showcasing the potential for growth in this vital domain.

Lastly, the growth in digital transactions underscores the utmost importance of cybersecurity cooperation between both nations. Collaborative efforts should be prioritized to safeguard digital financial transactions and sensitive data effectively. In a notable move, India has allocated over Rs 600 crore in its Budget for 2023 to bolster cybersecurity measures, demonstrating a dedicated commitment to digital security. Conversely, Bangladesh has allocated a significant portion of its technology budget, specifically 11%, to cybersecurity in the year 2022. This reflects a proactive approach to fortify cybersecurity infrastructure within the country.

Furthermore, the promotion of financial literacy and awareness programs emerges as a critical component to empower individuals and businesses, allowing them to harness the full potential of new digital financial integration opportunities. Both countries can explore opportunities to initiate more exchange programs, aiming to bolster connectivity among various stakeholders. This collaborative approach contributes to a more secure and informed financial landscape, thereby strengthening economic ties between the two nations.

Finally, the economic relationship between Bangladesh and India has evolved significantly over the years, with both nations recognizing the potential for further growth and cooperation. Recent initiatives, such as trade in local currencies, demonstrate their commitment to strengthening economic ties and reducing dependence on the US dollar. As the two countries move towards financial integration through digital connectivity, they have the opportunity to create a seamless and efficient cross-border trade ecosystem that benefits businesses and individuals on both sides. This evolution marks a significant milestone in regional economic cooperation and signifies the potential for even closer economic integration in the future.

– S. M. Saifee Islam is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).

[Read Full Briefs as a Pdf]