Prospects of Bilateral Trade between India and Bangladesh

Abstract

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.