BILATERAL TRADE BETWEEN INDIA & BANGLADESH 27

27

Prospects of Bilateral Trade between

India and Bangladesh
Chandrima Sikdar

India and Bangladesh offer natural markets for each other’s export
products. In their mutual trade, they enjoy the advantages of reduced
transaction costs and quicker delivery due to geographical proximity,
common language and a heritage of common physical infrastructure.
That is why soon after the launching of liberalization in Bangladesh
in 1982 India’s exports to Bangladesh registered unprecedented
growth. On the other hand, Bangladesh’s exports to India also
increased, but not at a commensurate rate. This inevitably led to the
increase of the official trade deficit of Bangladesh with India over the
past decades.
It has been held that this trade imbalance was not just an economic
issue but generated strong enough political resonance that was
inimical to the cordial relations between the two economies. Thus,
in recent years, India-Bangladesh bilateral trade has been an issue
that has called for much concern. It has been held at various levels of
policy-making that a bilateral free trade area between the two
economies will go a long way in dealing with this ever increasing
trade gap. But the ultimate success of any bilateral trading
arrangement between economies hinges on a number of factors like
trade intensity index of an economy; its pattern of revealed
comparative advantage and the extent of trade complementarities
between the economies. The present paper seeks to discuss these
concepts and to evaluate the prospects of bilateral trade between
India and Bangladesh in the light of these indices.

1. Introduction

I NDIA-Bangladesh bilateral relations, being influenced by their

geographic proximity and extensive historical legacy, are wide-
ranging as well as complex. India shares a border of 4,096 km with
Bangladesh. This land boundary is the longest that India shares with
any of its neighbours. Bangladesh’s cultural affinities with India in

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28 FOREIGN TRADE REVIEW

general and West Bengal in particular as also the ethnic linkages with
India’s North-Eastern states greatly enhance the level of people-to-people
contacts between the two nations. Thus the two countries share a friendly
as also a cooperative relation. However, in spite of this apparent friendly
and close relation between the two nations, there exist some outstanding
problems, which influence their relations. One such problem is the ever
increasing trade imbalance that Bangladesh has been facing in its bilateral
trade account with India since the last two decades.
India and Bangladesh offer natural markets for each other’s export
products. Major items of export from India comprise foodgrains, cotton
yarn, and fabrics, made ups, machinery, instruments, glass/glassware,
ceramics and coal. On the other side, imports from Bangladesh are
principally made up of raw jute, jamdani sarees, inorganic chemicals,
leather, etc. In their mutual trade, they enjoy the advantages of reduced
transaction costs and quicker delivery due to geographical proximity,
common language and a heritage of common physical infrastructures.
That is why soon after the launching of liberalization in Bangladesh in
1982, India’s comparative advantage in the Bangladesh market started
asserting itself and Indian exports to Bangladesh registered
unprecedented growth.
The rate of growth of these bilateral exports of India to
Bangladesh reached new dimensions, particularly since 1992-93. The
total export of India to Bangladesh during 1980 was US$94.58 million.
By 1990 it was US$305.07 million and in 2004 this figure stood at
US$1,593.54 million. India tops the list of exporters to Bangladesh.
India’s share in the total import of Bangladesh increased from 3.6
per cent in 1980 to 18.5 per cent in 2004. On the other hand,
Bangladesh’s exports to India have also increased, but not at a
commensurate rate. The total import of India from Bangladesh in
1985 was US$12.91 million. After a crest and fall, the import in 1995
was US$85.86 million and by 2004 this rose to US$58.76 million. For
the entire last decade, India’s share of import from Bangladesh in its
total import remained less than 1 per cent. Consequently, the trade
gap between Bangladesh and India was staggering. In 1980, the gap
was US$88 million, which stood at US$1,534.78 million in 2004. In
this span of 24 years, the rate of increase of Bangladesh’s trade gap
with India was enormous. India’s share in the total trade gap of
Bangladesh increased to as much as 55.7 per cent in the year 2004
starting from a very small share of 4.84 per cent in 1980.

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 29

Thus, Bangladesh had a trade deficit on its bilateral trade account

with India throughout the twenty-four years period from 1980-2004.
This deficit not only kept mounting over the years but its share in
Bangladesh’s total trade gap also went up steadily during the same time.
This problem has cropped up due to the fact that though in the last
decade both the countries have liberalized and opened up to global
competition, yet both did so with differential speeds. Bangladesh in its
own wisdom and under the terms of the structural adjustment
programmes (launched with the assistance of the International Monetary
Fund and the World Bank and supported by other donors of the bilateral
aid) has very promptly and rapidly lowered its tariff and non-tariff
barriers and moved much faster towards private sector led and market
driven economic policy reforms as compared to India. This difference
in economic policy regime of the two countries enabled India to gain
greater access to the markets of Bangladesh for its exports since the past
few years. This explains why Indian exports to Bangladesh for these
years have grown at a rate of over 30 per cent per annum while the
exporters from Bangladesh, who sent their products to the Indian markets
had to remain content with comparatively modest gains. As a consequence
Bangladesh’s bilateral trade deficit with India widened substantially,
particularly during the nineties.
Moreover, the existing bilateral trade pattern was such that it kept
exports from Bangladesh at a much lower level, especially in case of
few consumer goods like shoes, leather products, readymade garments,
textiles, etc. This is explained by the prevalence of the relatively higher
tariff and non-tariff barriers applicable to the import of consumer goods
into India under its global trade policy. This has inevitably led to the
mounting of the official trade deficit of Bangladesh with India over the
past decades.
It has been held that this trade imbalance that Bangladesh faces in
its bilateral trade account with India which originated in the
liberalization of Bangladesh’s trading regime was not just an economic
issue but generated strong enough political resonance that was inimical
to the cordial relations between the two economies. Thus, it has been
agreed by all that whilst bilateral trade imbalances are in themselves
not issues calling for special concern, but as far as India-Bangladesh
trade relations are concerned, imbalances require special treatment.
Thus, in recent years, issues concerning India-Bangladesh bilateral trade
have come to occupy an increasingly important place in the discourse

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30 FOREIGN TRADE REVIEW

on the evolving nature of economic relationship between these two

neighbouring countries.
Moreover, the agreement on SAFTA that came into force from 1st
January 2006, which India has to implement by 2012 and Bangladesh
by 2015 is expected to bring forth enormous benefits for the member
states of the SAARC region. It is also likely to help bring down customs
duty, promote cross-border investment, and more crucially, formalize
the unofficial trade that is taking place through third countries and other
unofficial channels in this region. Given this optimism vis-a-vis the
process of SAFTA formation of bilateral free trade area between these
two member states of SAARC seems to be quite likely. Particularly, in
the case of India, Free Trade Areas (FTAs) with Nepal and Sri Lanka
have been declared a success, despite some initial reservations. This, in
turn, could smoothen the way for a similar agreement with Dhaka.
Such a free trade arrangement may go a long way in pushing the
trade exchanges between the countries to a much higher level and
thereby substantially reduce the trade gap between the nations and
integrate the two economies in several ways (Dubey, 2003). But the
ultimate success of any bilateral trading arrangement within trading
blocs hinges on a number of factors. Three such important factors, which
are worth mentioning, are:
• The trade intensity index of an economy which shows the structure
of an economy’s exports or its market positioning.
• The pattern of comparative advantage of an economy which helps to
classify the major exports of the economies in terms of its respective
revealed comparative advantages.
• The extent of trade complementarities between the two economies
which focus on the overall exports of the economies.
The present paper seeks to discuss these concepts and to evaluate
the prospects of bilateral trade between India and Bangladesh in the
light of these indices. This discussion will serve to provide a useful
insight into the structure and pattern of bilateral trade between India
and Bangladesh, which in turn will go a long way in identifying the
potential efficiencies or inefficiencies of the growing trade between the
two countries.
In recent times contemporary researchers have shown considerable
interest in promoting free bilateral trade among the members of regional

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 31

groupings throughout the world. This concern has seen the development
of a substantial volume of literature on this topic in recent years.
However, very little work has been done regarding the bilateral trade
relations between the two neighbouring countries of India and
Bangladesh. The present paper aims to contribute to fulfilling this gap.
However, few researchers, who have made some significant
contributions in this area are – Sen (1972); Rahman (1997); Rahman (2000);
Pramanik (2000); Mukherjee (2000); Eusufzai (2001); Taneja and Pohit
(2000); Waheeduzzaman (2002); Sobhan (2002).
Though these works relate to the promotion of bilateral trade
between India and Bangladesh, yet none of these provide a
comprehensive discussion of the prospects or possibilities of free trade
between the two countries. Though such theoretical exercises have been
attempted for few countries of the world, there does not seem to be any
concrete work on such theoretical framework. In this context a mention
may be made of a preliminary work by Roy and Chakraborty (2000)
which provide a theoretical framework that helps to locate the
comparative advantages of India vis-a-vis Bangladesh in a perfectly
competitive world. But though Roy et al. have made some humble
attempts, yet a simpler but a comprehensive analysis of the prospects
of bilateral trade between India and Bangladesh is still lacking. The
present work aims at filling this gap by contributing to this area.
This paper is organized as follows. Section 2 discusses the trade
intensity and product composition of the exports of India and
Bangladesh. Section 3 throws light on the pattern of revealed
comparative advantages of the two economies. Trade complementarities
of the two countries are discussed in the next section. The data required
for calculating the indices in these three sections are stated in Section 5.
The paper finally concludes with a summary of the findings along with
the policy implications.

2. Trade Intensity and Product Composition

of Exports of India and Bangladesh
This section presents the trade intensity indices (Volrath and
Johnston, 2001) to provide insights into the secular change in the bilateral
trade flows between India and Bangladesh. This index has been
successfully used since the 1960s to analyze the direction as well as the
magnitude of international trade. The intensity of trade measure

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32 FOREIGN TRADE REVIEW

uncovers any tendency for the two countries to trade more or less heavily
with each other. The importance of this index lies in the fact that it can
capture seemingly minor changes in trade between the two countries
and also highlights the importance of relatively small changes in trade
of countries even when their reciprocal trade happens to be small.
Bilateral trade intensity statistic (IT) measures are an exporter’s
penetration of an importer’s market within the context of overall world
trade. A simplified formula of this indicator is
=
ITij = (Xij / Xiw ) / (Mjw / Mww )
Share of i’s export going to j
Share of world import going to j
Alternatively, if one abstracts from transportation margins, then this
index can also be configured to focus on the exporting country and its
competing suppliers in market ‘j’. In that case the IT index becomes
simply
= a ratio of destination shares (ds) as is stated below
ITij = dsij / dswj = (Xij / Xiw ) / (Xwj / Xww )
Share of i’s export going to j
Share of world export going to j
Where, Xij is exports from country i to country j; Xiw is total exports
to the world by country i; Xwj is total world exports to country j; Xww
is total world exports; Mji is imports of country j from country i; Mjw
= total imports from the world by country j; Mww is total world
imports; ds is destination share
A unitary ITij shows that there is no difference in importance to a
nation ‘i’ in supplying imports to nation ‘j’ or in supplying the same
elsewhere in its foreign market. Viewed from the perspective of the
exporter (using relative destination shares i.e. the second IT index), an
ITij >1 implies that nation ‘j’ is a more important market for exporter ‘i’
than for any other country exporting to ‘j’. Likewise, if 0< ITij <1, then
nation ‘j’ will turn out to be a less important market for exporter ‘i’ than
for any other country exporting to ‘j’.
Tables 1 and 2 report the trade intensity ratios with respect to the
bilateral trade between India and Bangladesh in 15 commodities which
have been computed using the destination share measure of trade
intensity, mentioned above. The intensity ratios are computed for the

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 33

years 1980, 1985, 1990, 1995, 2000 and 2004 so that from the changes in
the index over time we can point out whether the two countries are
experiencing an increased or decreased tendency to trade with each
other.
As revealed by Table 1 the bilateral intensity index ratios reinforce
the impression that Bangladesh has not only offered a steady but a very
large export market for almost all of the products (mentioned in the
Table) of Indian origin over the last two and a half decades. Goods like
food items, medicines and metals have been increasingly reoriented to
Bangladesh. Products like crude material, chemicals (other than
medicine), basic manufactures, iron & steel, machines (of all kinds) and
miscellaneous manufacturing from India also found Bangladesh to be a
very important export destination throughout this period. However,
the trade intensity indices for all these goods came down over the years.
The rest of the goods (as mentioned in the Table) have shown more or
less stable trade intensity indices with the value always being much
greater than one.
TABLE 1

TRADE INTENSITY INDEX FOR INDIA (1980-2004)

Commodities 1980 1985 1990 1995 2000 2004
1. Food, beverages, tobacco & live animals 2.368 1.465 6.3 39.422 20.406 45.404
2. Crude materials including fuel 9.353 5.51 3.975 13.759 10.037 1.184
3. Chemicals, dyes & coloring products 50.145 20.931 13.016 19.995 20.486 17.107
4. Medical, pharmaceutical, perfumes, 2.164 3.232 27.763 18.148 8.966 14.803
cleaning products and chemical
materials n.e.s.
5. Basic manufactures 7.126 13.643 38.542 72.254 24.386 23.159
6. Textile yarn & fabrics 2.357 14.94 12.551 7.309 7.306 6.09
7. Textile articles n.e.s. - - 6.321 0.718 0.624 2.228
8. Non-metal mineral manufactures 2.951 1.442 1.251 1.414 2.906 2.908
9. Iron & steel and non-ferrous metals 69.805 19.993 53.457 26.078 9.921 15.353
10. Metal manufacturing 8.633 8.217 20.088 3.043 19.176 151.185
11. Machines 85.608 69.661 149.13 94.854 67.034 31.374
12. Electric machines 66.42 30.87 - 197.332 89.7 88.899
13. Transport equipment 73.774 115.48 175.094 184.129 98.25 40.359
14. Clothing accessories and footwear - - 4.512 0.531 0.462 5.014
15. Miscellaneous manufacturing goods & 74.413 34.141 34.914 6.969 9.593 14.337
goods not classified by kind

Note: (-) indicates that the country has not traded the particular commodity with its partner during
the mentioned year.

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34 FOREIGN TRADE REVIEW

Unlike the case of India, the trade intensity ratios for Bangladesh
reveal a very depressing picture. The trade intensity indices are mostly
very small compared to the figures for India. Some goods of Bangladesh
origin which consistently show high trade intensity indices over the
last two and a half decades are chemicals and basic manufactures that
include leather, rubber and paper. However, of late the situation has
improved and the intensity figures have started to pick up as is evident
from the figures for 2004. Thus, throughout the eighties as well as the
nineties India far from being an important market for the products of
Bangladesh has hardly offered an export market to Bangladesh for
majority of its goods. However, encouragingly enough this trend has
gone in for a reversal since the mid nineties and for several commodities
like medicines, textile articles, iron & steel, metals, machines and clothing
accessories India as an export destination for Bangladesh has gradually
assumed importance.
Thus, from being an insignificant export destination for the majority
of products originating in Bangladesh, India has gradually started
TABLE 2

TRADE INTENSITY INDEX FOR BANGLADESH (1980-2004)

Commodities 1980 1985 1990 1995 2000 2004
1. Food, beverages, tobacco & live animals 0 0 0.062 0.331 0.172 5.196
2. Crude materials including fuel 0 0.947 0.853 0 0.639 4.697
3. Chemicals, dyes & coloring products 0 - 19.953 35.929 214.671 6.041
4. Medical, pharmaceutical, perfumes, 0 - 0.007 23.598 70.914 20.668
cleaning products and chemical
materials n.e.s.
5. Basic manufactures (rubber & paper) 188.82 1.081 18.725 5.21 0 1.998
6. Textile yarn & fabrics 0.226 2.127 0.607 0.021 0.202 1.954
7. Textile articles n.e.s. - - - - 0.009 9.086
8. Non-metal mineral manufactures - - - 0.003 0 0.202
9. Iron & steel and non-ferrous metals - - - - 0 3.605
10. Metal manufacturing - 0 - 0 13.957 43.684
11. Machines 0 0 - 0 5.439 37.443
12. Electric machines 0 - - - 0 36.26
13. Transport equipment 23.823 0 - - 3.619 0.048
14. Clothing accessories and footwear - - - - 1.911 2.601
15. Miscellaneous manufacturing goods & 1.863 0.043 1.147 0.575 1.334 0.968
goods not classified by kind

Note: (-) indicates that the country has not traded the particular commodity with its partner during
the mentioned year.

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 35

offering important market for the same since the late nineties. However,
throughout the same period (1980-2004) Bangladesh has always offered
a steady market for many if not all of India’s major exports. This leads
us to a vital question – is this trend consistent with the two countries’
current comparative advantages?

3. Pattern of Revealed Comparative Advantage

The trade intensity indices evaluated in the preceding section have
examined the importance of a particular country as an export destination
for the products of the other country. The results obtained from this
calculation will now be compared to a second index, namely Revealed
Comparative Advantage Index (RCA). These estimates will help to
distinguish between exportables showing improved comparative
advantage from those that show declining tendencies or none at all.
Identifying the goods with RCA in each economy will also throw some
light on the prospects of greater trade between them.
Comparative advantage as a concept to evaluate patterns of trade is
widely accepted and the concept often features in theoretical as well as
policy discussions. RCA of a country in a particular good is given as the
ratio of net exports of a country to its total trade in that good, i.e.
RCA = (Xih - Mih)/ (Xih + Mih)
Where, Xih denotes exports by country ‘i’ in commodity ‘h’ and Mih
denotes the imports by country ‘i’ of commodity ‘h’.
The net trade to total trade ratio evaluates a country’s trade
performance and considers the possibility of simultaneous exporting
and importing within a particular product category. The ratio ranges
from –1 when there are no exports (Xih = 0) which reveals comparative
disadvantage, to +1 when there are no imports (Mih = 0) which reveals
comparative advantage. These ratios can be computed at various levels
of commodity aggregation. The finer the disaggregation, the better is
the identification of the products in which potential for exports exist.
As pointed out in Table 3, India’s revealed comparative
advantage in different goods has more or less maintained a steady
pattern over the last two decades. India consistently showed revealed
comparative advantage in goods like food items, basic manufactures,
textile yarn & fabrics, textile articles n.e.s., non-metal mineral
manufactures, metal manufactures, clothing accessories. Among

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36 FOREIGN TRADE REVIEW

TABLE 3

REVEALED COMPARATIVE ADVANTAGE IN INDIA (1980-2004)

Commodities 1980 1985 1990 1995 2000 2004
1. Food, beverages, tobacco & live animals 0.664 0.501 0.646 0.753 0.754 0.605
2. Crude materials including fuel -0.772 -0.615 -0.591 -0.679 -0.703 -0.536
3. Chemicals, dyes & coloring products -0.611 -0.859 -0.514 -0.415 -0.1 -0.17
4. Medical, pharmaceuticals, perfumes, -0.676 -0.735 -0.421 -0.377 0.138 0.114
cleaning products and chemical
materials n.e.s.
5. Basic manufactures (rubber & paper) 0.373 0.455 0.538 0.151 0.203 0.183
6. Textile yarn & fabrics 0.825 0.645 0.805 0.907 0.777 0.535
7. Textile articles n.e.s. 1 1 1 1 0.947 0.961
8. Non-metal mineral manufactures -0.047 0.08 1 0.374 0.162 0.076
9. Iron & steel and non-ferrous metals -0.971 -0.903 -0.745 -0.447 -0.062 0.149
10. Metal manufacturing 0.408 -0.139 0.219 0.048 0.546 0.429
11. Machines -0.623 -0.785 -0.603 -0.718 -0.502 -0.074
12. Electric machines -0.317 -0.649 -0.73 -0.712 -0.324 -0.35
13. Transport equipment -0.399 -0.611 -0.561 -0.354 0.035 -0.241
14. Clothing accessories and footwear 1 1 0.596 0.672 0.985 0.976
15. Miscellaneous manufacturing goods &
goods not classified by kind 0.013 -0.289 -0.397 -0.416 -0.332 -0.357

these, all goods excepting basic manufactures and metal

manufactures showed RCA=1 or close to 1 for most, if not all years.
For basic manufactures, the RCA index has varied from 0.15 to 0.53
during this period, while metal manufactures, which have been a
good of comparative disadvantage initially, gradually assumed
importance and its RCA index stands at 0.43 in the year 2004.
Table 4 shows that in all the six years Bangladesh had a comparative
disadvantage in all most all the commodities mentioned in the table. It
had revealed comparative advantage only in textile articles n.e.s. (RCA2
is equal to or very close to 1 in all the years excepting 1985 when RCA2
= 0.4) and clothing accessories for which RCA2 has either been equal to
or very close to 1 throughout.
The above discussion provides useful insights into the nature and
extent of RCA of India and Bangladesh. It is evident that both countries
have RCA in textile articles and floor coverings and clothing accessories.
However, India is also endowed with comparative advantage in food,
basic manufactures, textile yarn & fabrics, non-metal mineral
manufactures and metal manufactures. But for Bangladesh, the only

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 37

TABLE 4

REVEALED COMPARATIVE ADVANTAGE IN BANGLADESH (1980-2004)

Commodities 1980 1985 1990 1995 2000 2004
1. Food, beverages, tobacco & live animals -0.944 -0.384 -0.29 -0.287 -0.408 -0.395
2. Crude materials including fuel -0.559 -0.705 -0.487 -0.826 -0.858 -0.965
3. Chemicals, dyes & coloring products -0.829 -1 -0.975 -0.949 -0.91 -0.998
4. Medical, pharmaceuticals, perfumes, -0.961 -1 -0.638 -0.564 -0.854 -0.945
cleaning products and chemical
materials n.e.s.
5. Basic manufactures (rubber & paper) -0.604 0.793 -0.845 -0.797 -0.318 -0.012
6. Textile yarn & fabrics 0.515 0.187 -0.106 -0.662 -0.686 -0.735
7. Textile articles n.e.s. 1 0.427 1 1 0.809 0.938
8. Non-metal mineral manufactures -1 -1 -1 -0.675 -0.92 -0.713
9. Iron & steel and non-ferrous metals -1 -1 -1 -1 -0.999 -0.9
10. Metal manufacturing -1 -0.952 -1 -0.898 -0.928 -0.888
11. Machines -0.952 -0.863 -1 -0.877 -0.867 -0.994
12. Electric machines -0.949 -1 0 -1 -0.942 -0.939
13. Transport equipment -0.999 -1 -1 -1 -0.937 -0.948
14. Clothing accessories and footwear 1 1 0.971 0.903 0.905 0.941
15. Miscellaneous manufacturing goods & -0.596 0.455 -0.881 0.231 -0.705 -0.782
goods not classified by kind

two goods of comparative advantage for all these years have been textile
articles n.e.s. and clothing accessories only.
Thus, both India and Bangladesh show export interests in textile
articles and clothing accessories. In fact, these are the only two goods in
which Bangladesh has throughout exhibited to have comparative
advantage. Hence an obvious question that arises is: does India still
have an incentive to enter into bilateral trade with its neighbour
Bangladesh? To find an answer to this question we refer to Table 5. This
table focuses on the last year of analysis (2004) and pinpoints products
in which the two countries have revealed comparative advantage in that
year. The second and third columns of the table respectively indicate the
potential exporter (country with RCA) and potential importer (country
lacking RCA).
Table 5 shows that in 2004 there were seven out of the fifteen goods
mentioned in the table in which there exists possibility of bilateral trade
between India and Bangladesh. For these goods the comparative
advantage of one country is rightly matched by the comparative

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38 FOREIGN TRADE REVIEW

disadvantage of the other so that there is a possibility of having mutually

beneficial trade between the economies. Of these there are two goods,
namely textile yarn and metal manufacturing in both of which India
shows very high export potential while Bangladesh has a significantly
high negative RCA index, thereby showing the extent of comparative
disadvantage that it has in these goods.
TABLE 5

TRADE POTENTIALS BETWEEN INDIA AND BANGLADESH

AS POINTED OUT BY RCA MEASURE FOR 2004
Commodities India Bangladesh

1 Food, beverages, tobacco & live animals Potential exporter Potential importer
2 Crude materials including fuel Potential importer Potential importer
3 Chemicals, dyes & coloring products Potential importer Potential importer
4 Medical, pharmaceutical, perfumes, cleaning Potential exporter Potential importer
products and chemical materials n.e.s.
5 Basic manufactures (rubber & paper) Potential exporter Potential importer
6 Textile yarn & fabrics Potential exporter Potential importer
7 Textile articles n.e.s. Potential exporter Potential exporter
8 Non-metal mineral manufactures Potential exporter Potential importer
9 Iron & steel and non-ferrous metals Potential exporter Potential importer
10 Metal manufacturing Potential exporter Potential importer
11 Machines Potential importer Potential importer
12 Electric machines Potential importer Potential importer
13 Transport equipment Potential importer Potential importer
14 Clothing accessories and footwear Potential exporter Potential exporter
15 Miscellaneous manufacturing goods & goods Potential importer Potential importer
not classified by kind
The bold fonts show goods with high absolute RCA.

However, it needs to be emphasized that the potential for the bilateral

trade between the two countries in products in which one of the countries
revealed comparative advantage is indicated crucially depends on the
importance of such product in the total imports of the trading partner. For
example, the prospects for bilateral trade is generally believed to be strong
in situations where a country has comparative advantage in products that
figure prominently in the import structure of the other country.
Table 6 sheds light on the share in bilateral imports of products of
India/Bangladesh in which Bangladesh/ India has revealed comparative
advantage.

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 39

TABLE 6

NUMBER OF COMMODITIES WITH RCA & THEIR IMPORT SHARES

Country Number of commodities Share in total imports
with RCA of partners (%)
1980 1985 1990 1995 2000 2004 1980 1985 1990 1995 2000 2004

Bangladesh 3 5 2 3 2 2 0.001 0.067 0.001 0.005 0.003 0.006

India 7 6 7 7 9 9 1.091 1.708 5.1 11.047 9.669 8.395

Throughout the eighties the share of such products of India in total

imports of Bangladesh was less than 2 per cent but was on the rise.
From the nineties the share gradually picked up and in 2004 it stood at
8.4 per cent. Of the six years mentioned in Table 6 the highest share was
recorded in the year 1995, whereas the share of imports from Bangladesh
in the total imports of India has not crossed the 0.07 per cent mark
throughout the last two and a half decades. During the entire period,
more than 99.9 per cent of India’s imports consisted of goods in which
Bangladesh lacked revealed comparative advantage. The figures for
India suggest that the goods in which the country is endowed with RCA
account for on an average for 6 per cent of Bangladesh’s total imports.
Thus, India reveals to have a fair potential to meet the import needs of
Bangladesh. Hence, India’s prospects of benefiting from a bilateral
trading arrangement with Bangladesh seem quite bright while
Bangladesh seems to have a relatively limited scope in this arrangement.

4. Trade Complementarity
The analysis in the preceding section provides one with an
assessment of the extent to which exports of India can match the imports
of Bangladesh and vice versa. But this analysis focuses only on
commodities in which each country’s revealed comparative advantage
is indicated while all other commodities exported by the individual
countries are ignored. An alternative for this is to investigate trade
complementarities at the bilateral level in terms of the total export and
import structures of the two countries. So we now turn to explore the
extent of trade complementarities between India and Bangladesh on
the basis of trade complementarity index. Unlike RCA indices, which
concentrate only on the exports of the goods in which the countries are
endowed with revealed comparative advantage to the neglect of the
other export products, this measure focuses on the overall exports of
the two economies. Trade complementarity index, which measures the

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40 FOREIGN TRADE REVIEW

compatibility of imports of country ‘i’ with exports of country ‘j’, is

defined as below:
Cij = 1 – (Ó | m k i – x kj |) / 2
where Cij is Trade complementarity index for trade between countries
i and j; m k i is share of good k in total imports of country i and
xkj = Share of good k in total exports of country j
The trade complementarity index is zero when no good exported by
one country is imported by the other, and equals one when the shares of
one country’s imports correspond exactly to those of the other’s exports.
A situation of reciprocal trade complementarity obtains when the supply
capability of a particular country matches well with the demand
capability of its trading partner and supply capability of the trading
partner matches well with the demand potential of this particular
country. However, it is also possible that the supply capabilities of a
particular country match well with the demand potential of its trading
partner, but not vice versa. This is referred to as a situation of partial
complementarity. Finally, when both the supply and demand patterns
of the pair of countries do not match with each other, it is a situation of
poor complementarity and the trade complementarity index is close to
zero (Panchmukhi, 1990).
Tables 7 and 8 report trade complementarity indices for India’s trade
with Bangladesh and Bangladesh’s trade with India respectively. The
degree of trade complementarity between Bangladesh’s imports and
Indian exports has been quite high for all the six years that has been
considered. It has been on an average 59 per cent (Table 7). The pattern
of complementarity between India’s imports and Bangladesh’s exports
is shown in Table 8, according to which there is clearly a lack of trade
complementarity in exports of Bangladesh to India during the same time.
The index is around 28 per cent.
TABLE 7
TRADE COMPLEMENTARITY INDICES OF INDIA WITH BANGLADESH
Years Indices
1980 0.568
1985 0.611
1990 0.601
1995 0.593
2000 0.646
2004 0.523
AVERAGE 0.59

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 41

TABLE 8
TRADE COMPLEMENTARITY INDICES OF BANGLADESH WITH INDIA
Years Indices
1980 0.292
1985 0.208
1990 0.214
1995 0.228
2000 0.181
2004 0.571
AVERAGE 0.282

Thus, as noted from the tables, there arises a situation of partial trade
complementarity in case of India-Bangladesh bilateral trade. While
India’s exports match fairly well with Bangladesh’s imports the converse
is not as favourable. Hence, the estimates of trade complementarities as
obtained from the trade figures of India and Bangladesh indicate that
the bilateral matching of exports and imports between India and
Bangladesh have rather limited possibilities.
The foregoing discussion points out that while India has some
potential to meet Bangladesh’s import demand, there is a major lack of
such potential on part of Bangladesh. This applies to goods in which the
individual economy is endowed with revealed comparative advantage.
Similarly for overall trade also, as reflected by trade complementarity
indices, while India’s exports match Bangladesh’s imports fairly well,
there is a clear lack of such complementarity in exports of Bangladesh
to India. Hence, there exists a situation of partial trade complementarity.
Thus, in spite of several attempts to promote Indo-Bangladesh
bilateral trade under the provisions of SAPTA and now SAFTA, the
prospects of expansion of bilateral trade between the two economies of
India and Bangladesh seem to have a rather limited scope.

5. Data
The basis of the data of this study are the export & import figures
(both world as well as bilateral) for 15 commodities at 2 digit level SITC
classification for the two economies of India and Bangladesh for the
period from 1980 to 2004.
The 15 commodities are as follows :
1. Food, beverages, tobacco & live animals; 2. Crude materials
including fuel; 3. Chemicals, dyes & coloring products; 4. Medical,

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42 FOREIGN TRADE REVIEW

pharmaceutical, perfumes & cleaning products; 5. Basic manufactures;

6. Textile yarn & fabrics; 7. Textile articles nes; 8. Non metal mineral
manufactures; 9. Iron & steel and non ferrous metals; 10. Metal
manufacturing; 11. Machines; 12. Electric machines; 13. Transport
equipment; 14. Clothing accessories & footwear; 15. Miscellaneous
manufacturing.

6. Summary and Conclusion

Globalization, defined as economic interaction among individuals
and organizations in different countries, has gathered momentum during
the last two decades. As a result of this, globalization leading to greater
international trade, integration of the world’s capital markets, and
increased foreign direct investment, there has been a notable increase
in the world’s output of goods and services. To take advantage of this
increased integration of the world’s economy, governments of both
developed and developing countries across the world are increasingly
turning their efforts towards measures to upgrade their indigenous
resources and capabilities and to promote the competitiveness of their
own firms in global markets. Therefore, the orientation of governments
across the world has shifted from being focused predominantly on
domestic markets to being focused on global markets.
This has put the countries of the world, in particular the developing
countries, in the face of a fierce competition for resources required for
growth. International competitiveness of nations is a concern of all.
Besides, there is a host of other challenges facing these countries, which
have been prompted by this recent trend. One of the key challenges
facing the developing countries, today, is to combine the ingredients of
growth with their indigenous resources to promote economic welfare.
Moreover, these countries have to find ways to promote the development
of their firms in international markets through exports and foreign direct
investment. Other key challenges include gaining access to channels of
distribution, enhancing networks, and linking their domestic companies
to international networks. All these challenges coupled together appear
to be too big a challenge to be met by the government alone of a particular
developing or less developed country. Hence, regional and sub-regional
economic cooperation and integration are being thought as a policy in
different regions to respond to the challenge of globalization.
Given this present global scenario it is absolutely necessary for the
countries of South Asian region to build up economic cooperation for

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 BILATERAL TRADE BETWEEN INDIA & BANGLADESH 43

the sake of their own economic development and survival. In order to

counter some of the unfavourable terms and conditions imposed by
WTO and World Bank on the developing countries, the South Asian
developing countries must act together on mutually acceptable terms.
This is a historical necessity. However, as regards the two neighbouring
countries of India and Bangladesh the need for fostering bilateral
economic cooperation between the two nations is far greater. Efforts for
sub-regional cooperation and integration seem more pragmatic for fast
track development as this will increase the economic lot of the people in
general. Besides, such cooperation between these two South Asian
countries is likely to go a long way towards dealing with the problem of
ever increasing trade deficit of the relatively less developed economy
Bangladesh on its bilateral trade account with India.
Against this backdrop, this paper has made an attempt to provide
an analysis of the prospects of bilateral trade between the two
neighbouring countries of India and Bangladesh. The scope and viability
of a bilateral trading arrangement between these two countries is
evaluated in the light of three indices, namely Trade Intensity Index,
Revealed Comparative Advantage Index and Trade Complementarity
Index. On the basis of these indices worked out in Sections 2, 3, and 4 of
this paper one can conclude that while India has some potential to meet
Bangladesh’s import demand, there has been a clear lack of such potential
on the part of Bangladesh over the last two decades. This applies not
only to goods in which the individual economy is endowed with revealed
comparative advantage but to overall trade also, as reflected by trade
complementarity indices.
Thus, though there has been a considerable concern at various levels
of policy-making in both the countries of India and Bangladesh over
strengthening the trade ties between these two economies, yet in the
light of all the three indices evaluated in this paper the actual prospects
of such a trading arrangement seem to have a rather limited scope.

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