India-Bangladesh CEPA deal: A critical analysis

The India-Bangladesh CEPA deal is a proposed bilateral trade agreement that aims to enhance the economic partnership between the two nations. While there are potential gains from the agreement, such as increased trade and investment, there are also concerns, including the potential loss of tariff revenue and the impact on certain industries. This article explores the background, potential gains, and losses from the CEPA between India and Bangladesh.

What is CEPA?

The Comprehensive Economic Partnership Agreement (CEPA) between Bangladesh and India aims to significantly improve trade and commercial partnership between the two countries. It is not a typical free trade agreement, as it covers various aspects such as trade in services, investment, intellectual property rights, and e-commerce.

India’s ministry of commerce and industry has released an official statement stating that the CEPA will also address several issues of mutual interest, such as developing railway and port infrastructure, establishing border haats, enhancing regional connectivity through multimodal transportation, harmonization of standards, and mutual recognition agreements.

Furthermore, CEPA focuses on four key areas to strengthen the India-Bangladesh partnership, including improving connectivity and ensuring an uninterrupted supply chain, jointly producing defense equipment, exploring potential investment areas, and collaborating on the production of vaccines and medicines. Additionally, the agreement seeks to increase cooperation in new sectors such as green technologies, renewables, IT, and digital platforms.

Background

In a meeting between the commerce ministers of India and Bangladesh on September 26, 2018, they both agreed that a Comprehensive Economic Partnership Agreement (CEPA) covering goods, services, and investment would significantly enhance trade and commercial partnership between the two countries, considering Bangladesh’s vision to become a middle-income country by 2021 and a developed country by 2041. They instructed their officials to conduct a joint study to explore the possibility of a bilateral CEPA.

However, some experts believe that India initiated talks for a comprehensive deal due to the increasing Chinese investments in Bangladesh and the dysfunctionality of regional free trade arrangements such as the South Asian Free Trade Area (SAFTA).

To date, India and Bangladesh have finished a joint study and concurred on the terms of reference for the CEPA.

Although there was some anticipation that significant progress would be made in the discussion of CEPA during Bangladesh Prime Minister Sheikh Hasina’s visit to India in September 2022, it did not receive much attention. Indian Prime Minister Modi stated that they would soon start discussions on the bilateral Comprehensive Economic Partnership Agreement. The Indian foreign secretary revealed in a special media briefing that the talks between the two countries on CEPA were proposed to commence in 2022 and conclude before Bangladesh’s graduation from LDC status by 2026.

Currently, India is Bangladesh’s second-largest trading partner after China. In fiscal 2021-22, Bangladesh’s exports to India reached $2 billion for the first time, while official imports stood at approximately $10 billion. However, if imports through unofficial channels are factored in, the figure would be around $14 billion.

Read also: Bangladesh-India trade relations, explained

Gains from CEPA

Study findings

A joint feasibility study conducted by the Bangladesh Foreign Trade Institute and the Indian Centre for Regional Trade has claimed that Bangladesh stands to gain more from the proposed trade pact with India through increased exports and investment, despite a loss in tariff revenue. The study analyzed the two countries’ trade data from 2015 to 2020 and found that the proposed deal, which calls for a withdrawal of duties, could boost Bangladesh’s exports by 190.15 percent, and India’s exports to Bangladesh could increase by 188 percent. The study claims that once the trade deal is signed, Bangladesh’s export earnings could increase by $3-5 billion, and India’s by $4-10 billion in the next 7-10 years.

Although Bangladesh already has duty-free quota-free access to the Indian market, the study shows that there may not be significant gains for Bangladesh’s exports to the Indian market from CEPA negotiation. However, India will receive a larger trade gain due to the high tariff rates it is currently facing in Bangladesh. The study noted that “even if the gains appear to be lop-sided now, negotiations for CEPA should start without further delay” to ensure the continuation of duty-free access to India after Bangladesh graduates from the least-developed country bracket in 2026.

The study claimed that when Bangladesh graduates from the LDC category, it will be required to offer duty-free quota-free market access to India under the current South Asian Free Trade Area negotiation. So, after 2026, the removal of tariffs under the CEPA agreement will not have a significant impact. 

The study also found that the CEPA would increase Bangladesh’s GDP by 1.72 percent and India’s by 0.03 percent, while promoting Bangladesh’s prospects for attracting larger investment from India. The CEPA has the potential to go beyond enhanced goods trade and can carve open economic opportunities including connectivity, new markets, investment, finance, technology transfer, and cooperation and partnership. Both countries would gain from continued trade liberalisation and streamlining of border transactions through trade facilitation and improved physical connectivity. According to Selim Raihan, one of the authors of the joint feasibility study, “negotiations for CEPA should start without further delay” to ensure that both countries can take advantage of the benefits of closer economic cooperation.

Losses from the CEPA deal

Bangladesh will lose tariff revenue

Bangladesh is expected to experience a loss of tariff revenue, as imports from India are typically subjected to an average tariff rate of 20 percent, which generates about $2 billion for the state coffers. Once the CEPA is signed, this revenue will be lost, according to MA Razzaque, the research director of the Policy Research Institute of Bangladesh.

If Bangladesh were to sign a free trade agreement with India without changing the current high tariff rates, it could lead to significant trade diversion effects. This could potentially result in a loss of trade worth $700 million, which is the trade currently taking place with other countries but could be lost due to preferential tariffs given to one country, Razzaque explained.

Which industries will be affected?

The study noted that certain industries in both countries will be impacted by the proposed trade pact. In Bangladesh, these industries may include coal, dairy products, metal products, transport equipment, petroleum and coal products, paper products, publishing, electronics equipment, and mineral products. Meanwhile, in India, the affected sectors could include leather products, apparel, meat products, and vegetable oils and fats.

To mitigate the impact, experts recommend that both countries identify specific sectors and negotiate to include them in the sensitive list for a defined period of time.