Businesses have already experienced disruptions to their supply chains due to the ongoing diplomatic breakdown between India and Bangladesh. Increasingly delayed or complex regulatory issues in both countries have also increased the costs to do business between them. A long history of economic interdependence between India and Bangladesh – in sectors such as textiles, agriculture, logistics and energy – has now begun to erode as barriers to trade and regulatory impediments are added to every transaction; making it difficult to sustain a level of economic trade approximating $14 billion annually.
Over the past several years, trade between India and Bangladesh has been facilitated by a web of interdependence created by their respective economies that has survived through some of the most politically tense moments. Businesses operating in the India/Bangladesh corridor are now looking at the diplomatic relations between their two countries primarily with an eye towards logistics and predictability, rather than geopolitics.
According to World Bank data, India is still the largest trading partner of Bangladesh in South Asia and is an important source of intermediate goods. Bangladesh has gained lots of benefits from India being their main trading partner for many years such as being close to them which means quicker delivery times; having a good financial relationship with them; and having the same time zone, which are all advantages that will be difficult to change very quickly. The current government of Bangladesh has started to try to bring in more products from other countries (diversification) and to do this has raised taxes and made it harder to bring in products from India. Even though long-term diversification is good, there will be a lot of costs associated with these changes because they are happening too fast.
While there has been less public expression from the New Delhi Government of India, the consequences have been felt commercially. Bangladeshi exporters have reported longer wait times for clearance as well as more detailed inspections at Indian ports than previously experienced. These steps accompany official representations of quality and security inspections, but are more akin to non-tariff barriers in an operational fashion. This is significant because Bangladesh had consistently expanded its position within India’s apparel market, with exports regularly nearing $1 billion per year. The Indian apparel market has many advantages, including close proximity and a large marketplace, which allow for greater efficiencies in logistics since they do not involve the additional costs associated with transporting goods over long distance.
As a result of the above mentioned developments, regional connectivity has also decreased. BIMSTEC linked infrastructure development activities aimed at connecting Bangladesh’s ports to the north-eastern region of India have all ceased, negating prior years of extensive planning efforts aimed at allowing eastern South Asia to develop as a logistics corridor as opposed to remaining a single point bottleneck.
The foreign investor has practical concerns regarding this dispute. Bangladesh is able to export competitively because of low logistics costs and a reliable supply of cross-border inputs. Factors such as regulatory unpredictability, delays at ports, and longer shipping routes add to unit costs and complicate delivery timelines in these instances. As multinationals evaluate their decisions about investigating apparel, agribusiness, or light manufacturing in different nations, they will take into account political risk in the region along with labour costs. If these issues persist, it would make Bangladesh less attractive as a manufacturing location than Vietnam or Indonesia, and could cause India to lose some of the firms that look at Bangladesh as a complementary source of goods, rather than a rival.
At the border that stretches 4,096 kilometres long, the speed at which goods cross is noticeably slower than previous years. Land customs offices have less business than they did in better times; workers and agents at the transport terminals in Petrapole and Dawki on the Indian side have been waiting for long periods between customers and on the Bangladeshi side of Benapole and Tamabil the sellers are seeing their incomes reduced significantly due to decreased cross-border activity. Border areas tend to have a high percentage of their workforce in informal trade and logistics, a phenomenon documented in many studies by the World Bank. Prolonged interruption of trade has the potential to create economic friction that results in localised issues.
While India and Bangladesh continue to be unable to work together, China is continuing to grow its regard for being a better partner with Bangladesh regarding providing it with capital goods and building infrastructure. For the Bangladeshis, using Chinese manufacturers on their major projects means they can build their projects bigger and more quickly; however, short term geopolitical consequences come with China’s products. India’s main concern is no longer the amount of trade being lost to China, but the long term impact that China’s presence in Bangladesh will create for how India will be able to exert its influence over Bangladesh. India’s previous eastern policy included economic integration between India and Bangladesh would allow India to maintain the ability to keep a significant amount of influence over Bangladesh and will be able to work with other countries in Asia. New supply chains being established will have a long-term negative geopolitical consequence for all three countries.
The protracted standoff is unhealthy for both economies; that is to say, Bangladesh may lose some of the efficiencies that have underpinned its export-led growth, while India may also lose its leverage over a region that is witnessing a growing competition with China.
The expiring of the 1996 Ganges Water Sharing Treaty in December 2026 adds to the urgency. Water cooperation has traditionally served as an important stabilising factor between the two countries; mishandling of the water-sharing treaty negotiations could result in even deeper uncertainty regarding each economy’s future as potential investors re-evaluate their outlook for the medium-term future of South Asia. Both countries are in search of a viable path to develop their economies in the context of an increasingly fragmented global trading environment, and thus returning to an acceptable level of economic predictability – irrespective of the state of diplomatic relations, may represent the best practical approach for both economies moving forward.
The writer is an Associate Professor of Islamic Economics and Finance, Sultan Sharif Ali Islamic University (UNISSA), Brunei Darussalam. E-mail: [email protected]
