India-Bangladesh Bilateral Trade and Potential …

1 India-Bangladesh Bilateral Trade and Potential Free Trade Agreement bangladesh Development Series Paper No: 13 The World Bank Office, Dhaka December, 2006 Document of the World Bank The World Bank World Bank Office Dhaka Plot- E-32, Agargaon, Sher-e-Bangla Nagar, Dhaka-1207, bangladesh Tel: 880-2-8159001-28 Fax: 880-2-8159029-30 The World Bank 1818 H Street, Washington DC 20433, USA Tel: 1-202-473-1000 Fax: 1-207-477-6391 All bangladesh Development Series (BDS) publications are downloadable at: Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

2 Copyright Statement: The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission to reproduce portion of the work promptly. Design: Cover designed and published by Progressive Printers. Illustration Credits: Front cover (from left): Courtesy of the Chittagong Port Authority, Abdul Hye Swapan, Andrew Biraj Back cover (from left): Abdul Hye Swapan, Andrew Biraj, Mufty Munir, Courtesy of the Chittagong Port Authority CURRENCY EQUIVALENTS US $ = Tk ( bangladesh Taka, August 2006) GOVERNMENT'S FISCAL YEAR July 1 June 30 Acronyms and Abbreviations AD Anti-Dumping MFN Most Favored Nation AIT Advanced Income Tax NBR National Board of Revenue AV Assessable Value NCAER National Council of Applied Economic Research BEI bangladesh Enterprise Institute NTB Non Tariff Barrier BIDS bangladesh Institute of Development Studies POL Petroleum, Oil and Lubricants BIS Bureau of Indian Standards PSI Pre-shipment Inspection CD Customs Duty QR Quantitative Restriction CIF Cost.

3 Insurance and Freight RD Regulatory Duty DEPB Duty Exemption Pass Book REER Real Effective Exchange Rate DGFT Director General of Foreign Trade RMG Ready Made Garments EPB Export Promotion Bureau ROW Rest of the World EU European Union SAARC South Asian Association for Regional Cooperation FCI Food Corporation of india Saad Special Additional Duty FDI Foreign Direct Investment SAFTA South Asia Free Trade Agreement FOB Free on Board SAPTA SAARC Preferential Trading Agreement FTA Free Trade Agreement SD Supplementary Duty GDP Gross Domestic Product SEDF South Asia Enterprise Development Facilities HS Harmonized Code SPS Sanitary and Phyto-sanitary IDSC Infrastructure Development Surcharge STE State Trading Enterprise LC Letter of Credit T&C Textile and Clothing iii LDC Least Developed Country TRQ Tariff Rate Quota LF License Fee VAT Value Added Tax M&B Men and Boys WTO World Trade Organization Vice President : Praful C.

4 Patel, SARVP Director for Regional Program : Alastair J. McKechnie, SAC01 Sector Director : Sadiq Ahmed, SASPR Sector Manager : Ijaz Nabi, SASPR Task Manager : Zaidi Sattar, SASPR iv Table of Contents Acronyms and Table of Executive 1 Chapter 2. Background: Bilateral Trade and exchange rates .. 3 Chapter 3. india s Trade 9 Chapter 4. bangladesh s Trade policies .. 19 Chapter 5. Reconciling the Trade statistics .. 33 Chapter 6. bangladesh imports from india : composition, trends and Potential under an FTA .. 39 Chapter 7. bangladesh exports to india : composition, trends and prospects under an FTA .. 47 Chapter 8. Informal and Illegal Trade : Dimensions, Trends, Composition, and the Role of Domestic Indirect Taxes .. 57 Chapter 9. Trade Financing, Logistics and Transaction Costs .. 67 Chapter 10. Quantifying the economic costs and benefits of an FTA: some industry case studies .. 73 Chapter 11. Implications for bangladesh and Indian Trade policies.

5 81 Chapter 12. Summary of Key Findings .. 85 Background 89 List of Figures Figure 1: india 1996/97-2005/06 Example of a typical industrial tariff. MFN rate and preferential SAPTA rate for xv Figure 2: bangladesh FY 1996 - FY 2005: Average protective tariffs by type of xix Figure : Recorded India-Bangladesh Trade 1990/01-2003/04 .. 3 Figure : Shares of recorded Trade with bangladesh in india 's total 4 Figure : Shares of Trade with india in bangladesh 's total Trade .. 4 Figure : bangladesh imports from india FY 1992-2004: distinguishing land border from sea and air routes .. 5 Figure : india Real Effective Exchange Rate Index 1980-2004 (Annual averages 1990=100: Increase=devalutaion) .. 5 Figure : bangladesh Real Exchange Rate Indices 1980-2004 (Annual averages 1990=1000: increase=devaluation) .. 6 v Figure : india 1990/91-2005/06: Unweighted Average Tariffs .. 10 Figure : india : trends in average tariffs 2002/03 -2005/06 .. 10 Figure : india 2005/06 Distribution of tariff lines.

6 11 Figure : india 2004/05: Ad valorem equivalents of specific tariffs on cotton shirts according to cif import price of the 12 Figure : india : ad valorem equivalent of specific MFN tariff, and SAPTA preferential tariff for bangladesh , on a $4 cotton 13 Figure : india 1996/97-2005/06 Example of a typical industrial tariff. MFN rate and preferential SAPTA rate for bangladesh .. 13 Figure : bangladesh 1991/92-2004/05: All Tariff Lines. Unweighted Average Protective Import Duties ..19 Figure : bangladesh 1991/92-2004/05: Industrial Tariff Lines. Unweighted Average Protective Import Duties ..20 Figure : bangladesh 1991/92-2004/05: Agriculture Tariff LInes. Unweighted Average Protective Import Taxes ..20 Figure : bangladesh FY 1996-FY 2005 Average protective tariffs for final consumer 21 Figure : bangladesh FY 1996 - FY 2005: Average protective tariffs by type of good .. 22 Figure : India-Bangladesh Trade 1998/99-2003/04 Comparison of Indian export.

7 34 Figure : Comparison of bangladesh export statistics and Indian Figure : Major components of Indian exports to bangladesh 1996/97-2003 List of Tables Table : bangladesh 1991/92-2004/05: Unweighted Average Protective Import Duty 29 Table : bangladesh 2003/04 and 2004/05: Distribution of tariff lines with extra protection above Customs duties plus IDSC tax, provided by VAT exemptions, supplementary duties and regulatory duties .. 29 Table : Number of tariff lines subject to selective paratariffs FY 03-FY 30 Table : Unweighted average total protection rates by type of product (% of assessable values) .. 30 Table : bangladesh FY 1998, FY 2004 and FY 2005: some examples of total protection rates resulting from selective paratariffs on top of Customs duties, the license fee and the IDSC .. 31 Table : bangladesh tariff schedule 2004/05: Tariff lines with "end user" tariff concessions .. 32 Table : Comparison of Indian export statistics with bangladesh import statistics 1998/99-2003/04.

8 37 Table : Comparison of bangladesh export statistics and Indian import statistics 1991/92-2003/04 .. 38 Table : Indian exports to bangladesh 2003/04 .. 40 Table : bangladesh Imports FY 1996 & FY 2001-FY 2004: Composition and Indian shares .. 44 Table : Indian exports to bangladesh 2003/04 : 25 principal products exported .. 45 Table : Indian imports from bangladesh during Indian FY 04: comparison of MFN and preferential SAPTA tariffs .. 48 Table : Indian protection policies for some major exported commodities .. 52 Table : Some agricultural products and processed foods: comparisons of prices and tariffs in india and bangladesh .. 53 Table : bangladesh 's principal exports other than garments: Indian exports, imports and 56 Table : bangladesh imports from india 2002/03: recorded plus survey-based estimates of smuggled imports .. 64 Table : bangladesh land border imports from india 2002/03: recorded plus survey-based estimates of smuggled 64 Table : Trends in estimated "bootleg" smuggled exports from india to bangladesh .

9 64 vi Table : Some examples of "technical smuggling": sample of consignments inspected at 65 Table : bangladesh sanitary ware tariffs FY 98 and FY 2003-2005 .. 65 Table : Estimated actual and excess costs of transport and Customs clearance in india at Petrapole .. 69 Table : Estimated total extra cost for Indian exporters of delays and "speed money" at Petrapole land border crossing. Cost per 10 ton truckload by various products .. 72 References Volume II - Technical Annex: Methodology and selected case studies: This Technical Annex is made available on a CD-Rom attached to this report. vii Acknowledgements This report was prepared by Garry Pursell (consultant, SASPR) and Zaidi Sattar (SASPR). Component studies on various aspects of India-Bangladesh Trade were made by Abdul Bayes, Sanjib Pohit and Samanthak Das, Rajesh Mehta, Arun Goyal and Ashu Garg (consultants). Data International conducted field survey on informal Trade while Ziaul Ahsan compiled and analyzed essential data and provided superb general research support.

10 Subject to time and other constraints, the authors did their best to take account of suggestions made by Aaditya Mattoo, Will Martin, Paul Brenton, David Tarr, Phillip Schuler (all at Bank headquarters in Washington), and many insightful and thoughtful detailed comments received from peer reviewers Marcelo Olareaga, Mukherjee ( india ), Zaid Bakht and Ismail Hossain ( bangladesh ). The report was prepared under the overall guidance of Sadiq Ahmed, Shanta Devarajan, and Alastair J. McKechnie. Ijaz Nabi and Ejaz Syed Ghani provided useful oversight and direction when they were needed. In the World Bank Dhaka office Aneeka Rahman and Nermeen Shams Rouf provided research support while Mehar Akhter Khan and Mildred Gonsalves put the report together and skillfully formatted the voluminous text in record time. The study also relied on secretarial support at various stages from Oxana Bricha (Washington), Jyoti Sriram (Delhi) and Joyce Mormita Das (Dhaka).