Beyond rhetoric: Why trade realities define the future of Bangladesh-India ties

THE EVOLUTION OF Bangladesh-India trade ties is rooted in structural economic shifts rather than just diplomacy. In the early 1990s, Bangladesh liberalised imports to support domestic production and export-oriented industries. Around the same time, India’s post-reform economy began producing competitively priced, quality goods at scale. The convergence was inevitable: Bangladesh’s expanding industrial base required inputs and India became a natural supplier.

Imports from India, particularly cotton yarn, fabrics, machinery, agricultural commodities and intermediate goods, became integral to Bangladesh’s manufacturing ecosystem. These imports strengthened export competitiveness, especially in ready-made garments, which now account for 84 per cent of Bangladesh’s exports. Over time, India provided Bangladesh duty-free, quota-free access under its 2011 LDC (least developed country) scheme, covering all but 25 tariff lines out of more than 8,000. For Bangladesh, which did not have a bilateral free trade agreement like Nepal or Bhutan, this was a significant opening.

Despite this access, Bangladesh’s export performance in the Indian market remained modest. It took nearly four decades to cross $1 billion in exports to India and five years thereafter to reach $2 billion. Meanwhile, imports from India rose sharply, widening the bilateral trade deficit.

However, bilateral deficits can be misleading when viewed in isolation. A substantial share of imports from India, particularly cotton yarn and fabric, feeds directly into Bangladesh’s garment exports to western markets. In that sense, the deficit with India contributes indirectly to Bangladesh’s surplus with countries such as the United States. Trade flows are embedded within global value chains, not confined to bilateral balances.

The core limitation lies not in market access but in export concentration. Bangladesh’s heavy dependence on garments restricts diversification and India is itself a major textile and apparel producer and exporter. This structural overlap naturally caps expansion in that segment.

A more sustainable strategy would have been to attract Indian investment into Bangladesh to produce for the Indian market under duty-free access. While two special economic zones were dedicated to Indian investors and India extended lines of credit totalling $8 billion between 2010 and 2017 for infrastructure and development, investment inflows have remained modest. Bangladesh attracted less than $2 billion in FDI last year, compared with tens of billions flowing into India.

A more consequential shift is approaching: Bangladesh will graduate from LDC status in November 2026. With graduation, India’s 2011 duty-free scheme will lapse unless extended. Several developed economies, including the European Union, the United Kingdom, Canada and Australia, have announced transitional support beyond graduation. China has also signalled a temporary extension of its preferential scheme. Securing a similar arrangement with India would ease the transition and protect competitiveness during adjustment.

At the same time, Bangladesh must reposition itself within the global trade architecture. Its recent Economic Partnership Agreement with Japan marks a milestone, but competitors are moving aggressively. Vietnam maintains around 17 free trade agreements, including one with the European Union. India recently concluded a trade agreement with the EU. Once Bangladesh’s extended LDC benefits expire, its apparel exports to Europe could face tariffs while Indian and Vietnamese products enter duty-free. This potential tariff differential represents a structural risk to Bangladesh’s primary export sector.

Trade relations cannot be detached from broader geopolitical realities. Energy cooperation, water-sharing over 54 common rivers, renewal of the 1996 Ganges Treaty this year, hydropower imports from Nepal via the Indian grid and scrutiny over large-scale power agreements such as the 1,500 MW deal with the Adani Group all shape the economic environment. For Bangladesh, energy security and transition towards cleaner power are directly tied to export sustainability, especially as carbon-related trade measures emerge in Europe. Transparency and equitable terms in major bilateral agreements are essential to prevent future political contestation.

Infrastructure projects such as the Matarbari deep-sea port and the Padma rail link were conceived within a framework of subregional connectivity. Their full economic viability depends on broader regional integration, including access for India’s northeast and landlocked neighbours. Connectivity, when operationalised on commercial terms, can generate shared gains rather than asymmetrical dependence.

Concerns in India regarding Bangladesh’s expanding trade ties with Pakistan or deepening economic engagement with China must be assessed within the logic of sovereign economic policy. Bangladesh’s largest import partner is China and diversification across partners is a rational strategy. Engagement with one partner need not come at the expense of another, provided security sensitivities are respected.

The political transition following the removal of the previous government has introduced a recalibration in perceptions. A democratically legitimised government in Bangladesh would be better positioned to engage India on the basis of public mandate and institutional confidence.

Rahman is distinguished fellow, Centre for Policy Dialogue, Dhaka.