The evolution of Bangladesh-India trade ties is rooted in structural economic shifts rather than diplomacy alone. In the early 1990s, Bangladesh liberalised imports to support domestic production and export-oriented industries. At 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 had become 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 also provided Bangladesh duty-free, quota-free access under its 2011 LDC scheme, covering all but 25 tariff lines out of more than 8,000. For Bangladesh, which lacked a bilateral FTA like Nepal or Bhutan, this was a significant opening.
Despite this access, Bangladesh’s export performance in the Indian market remained limited. It took nearly four decades to cross $1 billion in exports to India, and only five years thereafter to reach $2 billion. Meanwhile, imports from India rose sharply, widening the bilateral trade deficit. At one stage, Bangladesh imported roughly $14 billion from India while exporting around $2 billion.
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 integrated 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. The 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. Domestic constraints like cost of doing business, regulatory inefficiencies and governance challenges-remain critical obstacles.
Recent trade frictions, including restrictions on land-port movements and bans on yarn imports, illustrate internal sectoral tensions in Bangladesh.
Domestic spinners seek protection from competitively priced Indian yarn, while garment exporters prefer unrestricted sourcing to maintain price competitiveness. Long-term resolution lies not in import bans but in improving industrial competitiveness through better financing conditions, infrastructure, reduced cost of doing business, efficient institutions, putting in place single window in service delivery, availability of energy, implementation of the 2018 logistics policy and predictability among others.
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 has also 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. Strategic pursuit of comprehensive trade agreements—with the EU, ASEAN and other major markets—is therefore imperative.
Trade relations cannot be detached from broader geopolitical realities. Energy cooperation, water-sharing over 54 common rivers, renewal of the 1996 Ganges Treaty in 2026, 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 deals 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 sub-regional 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 economic diversification across partners is a rational strategy. Engagement with one partner need not come at the expense of another, provided security sensitivities are respected. For example, India also negotiates trade arrangements—such as its recalibrated tariff framework with the United States—in pursuit of its own national interest. Bangladesh must do the same.
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 from a basis of public mandate and institutional confidence. Durable economic cooperation requires mutual respect, transparency, sensitivity to concerns of the partner countries and recognition of asymmetries.
Ultimately, Bangladesh–India relations must move beyond the narrow lens of trade deficits. The real agenda lies in competitiveness, diversification, connectivity and strategic trade diplomacy. For Bangladesh, the priority is strengthening domestic capacity while negotiating extended market access during the LDC transition. For India, sustaining goodwill requires sensitivity to partnership balance and ensuring that major agreements are transparent and commercially defensible.
A stable ecosystem-where trade, water, energy and security concerns are managed cooperatively-will naturally reinforce bilateral economic ties. Without that stability, even well-designed trade frameworks will struggle.
The future of the Bangladesh-India relationship should rest not on perceptions of dominance, but on calibrated mutual interest. That is the only durable foundation for shared prosperity in South Asia.
The author is a distinguished fellow at the Centre for Policy Dialogue, Dhaka.