THE INDIA-BANGLADESH CONUNDRUM

In a prior letter to the Bangladesh Power Development Board (PDB), Adani Power had urged the clearance of outstanding dues by October 30, 2024, which amount to $846 million. The letter, dated October 27, 2024, stated that failure to make payments would compel the company to suspend power supply in accordance with the Power Purchase Agreement (PPA). Adani Power Jharkhand Limited (APJL), a wholly-owned subsidiary of Adani Power, has warned that it would discontinue electricity supply to Bangladesh if outstanding dues totalling nearly $850 million (approximately Rs 7,200 crore) were not settled by November 7, 2024. APJL has already halved its power supply due to unpaid bills.

On the other hand, the recent developments show that Bangladesh has begun shipping garments to the Maldives by sea, from where they are then flown to major global retailers. This route is seen as a strategic move to enhance efficiency and control over the supply chain, enabling Bangladesh to meet the demands of the fast-paced international textile market. However, this could significantly impact the revenue generated by Indian ports and airports, which previously handled a substantial volume of Bangladeshi goods.

Ever since the fall of the Sheikh Hasina regime on August 5, 2024, there is an ongoing fracas between India and Bangladesh. While the political unrest in Bangladesh was intensifying, the signs of collapse started to show in the economy, and the hidden vulnerabilities of the Bangladesh economy such as heightened reliance on LDC-specific international support measures (most notably in terms of preferential market-access), lack of export diversification and over-reliance on low-technology textile and clothing products, dependence on external development finance, predominantly in the form of migrant remittances, to support capital accumulation, etc., started surfacing one after another.

Bangladesh economic crisis

The collapse lies in the backdrop of a crisis involving the textile industry, which holds a very strong position in the country’s path towards economic growth. As per reports online, the ready-made garment industry makes for about 83% of Bangladesh’s total earnings. World Trade Organisation (WTO) data states that Bangladesh exported $38.4bn worth of clothes in 2023. To top it off, Bangladesh also ranks umber 3 when it comes to apparel exports, coming only after China and European Union. As for the fashion giants, H&M sources clothes from over 1,000 factories in Bangladesh, while Zara is known to rely heavily on manufacturing clusters within the country, with 150 suppliers and 273 sewing factories, employing nearly a million workers.

International buyers who had hitherto considered Bangladesh a safe and secure place for sourcing readymade garments at low costs are rethinking their supply chain links with the country. Clothing manufacturer Hula Global, which serves major US store chains, had redirected orders from Bangladesh to India to avoid disruptions. Already, some big brands, that help supply to companies such as Disney, US supermarket chain Walmart and other global apparel companies have looked elsewhere for next season’s clothes.

This has not only proved damaging to export revenues but has also made the country’s foreign investment prospects bleak as international investors are now petrified of the risks attached to putting their money in Bangladesh.
It has ruined the international image of Bangladesh. A country that was supposed to be the next big thing in the world economy has now turned into one that one would be cautious to invest in. The impact of this severe shift in perception could last beyond the current crisis, diverting an opportunity for investment and trading away from Bangladesh.

Can Bangladesh overcome this crisis without support from India?

Well, Bangladesh depends heavily on India for its supply of rice, wheat, onion, ginger, garlic, sugar, cotton, cereals, iron and steel, refined petroleum, electronic equipment, and plastics. Bangladesh’s economic boom before the pandemic hit it hard was based on the export of garments to the West. This key industry depends heavily on the supply of raw materials from India. Deterioration of relations with India will immediately result in a decline in exports, a reduction in GDP, higher inflation, and a loss of jobs. No matter what attractions other nations may hold, for now, Bangladesh cannot afford to damage its ties with India.

Moreover, India is Bangladesh’s second-largest trading partner – after China. According to Business Standard, bilateral trade between the two nations stands at $12.9 billion. According to Global Trade Research Initiative (GTRI), India’s exports to Bangladesh are highly diversified, covering sectors like agriculture, textiles, machinery, electronics, auto parts, iron and steel, electricity and plastics.
The most important thing that ties Bangladesh to India is its immutable geography. Bangladesh is an almost India-locked country. Ninety-four percent of its 4,367 km-long border is shared with India. While this makes Bangladesh dependent on India for both security and trade, it also gives Bangladesh some leverage over India because Bangladesh provides easy and inexpensive connectivity between the eastern parts of India and the rest of the country. The Siliguri corridor acts as a bridge to East Asia. Thus, Bangladesh is critical for India’s internal connectivity.

Capitalising on the need for better connectivity with Bangladesh and to establish an efficient transit route to India’s northeast region, New Delhi and Dhaka have taken big strides in the past few years, having set up six land ports, revived six historical railway lines, and established a Friendship Pipeline for the supply of high-speed diesel. These linkages contributed to Bangladesh becoming India’s largest trade partner in the neighbourhood, and the top five trade partners globally. Between 2014–24, bilateral trade has increased by 95%, and Bangladesh remains the largest source of tourism for India.

India and Bangladesh developed a slew of infrastructure and connectivity projects during the Sheikh Hasina’s regime. Some of the completed ones are-
i) Akhaura-Agartala cross-border rail link and Khulna-Mongla Port rail line in November 2023.
ii) Five operational bus routes between India and Bangladesh, including connections from Kolkata, Agartala and Guwahati to Dhaka.
iii) Agreement for the usage of the Chittagong and Mongla ports to ease the movement of cargo between mainland India and the Northeast.
The growing economic interdependence resulting from connectivity projects means that it has become increasingly costlier for the neighbours to exclude New Delhi and other bilateral partners from their developmental plans.

Regardless of the political landscape at home, regional governments must consider the critical role that India plays in their economic development. This is particularly important for Bangladesh, with the country set to graduate from the UN categorised least developed country status in 2026, and consequently needing more partnerships to address its growing needs. The $7.9 billion line of credit extended by India to Bangladesh, of which so far only approximately 16% has been utilised, remains significant.

Diplomatic relations in a neighbourhood are never set in stone, and the Maldives is a good example of the same. What’s seeming like an end of the road may be just a bad turn, after which the transit will be smoother and much better. Several such examples have proven this in the last decade. At one time, India was written off in Sri Lanka, but we all witnessed what happened in 2022. Sri Lanka was engulfed in a severe economic crisis; the crisis was exacerbated by substantial Chinese debt. The economic downturn was marked by soaring inflation and a significant drop in foreign reserves. It is when India stepped in as the first responder, providing crucial financial aid and securing an IMF package for Sri Lanka. This assistance was pivotal in stabilising the Sri Lankan economy, with inflation dramatically decreasing from 67.4 per cent in September 2022 to below 3 per cent today.

In 2024 we can see the same picture of the India Maldives relations. Over the past decade, the Maldives has borrowed around $1.5 billion from the Chinese, which now makes up 20 per cent of its public debt. Beijing has announced a mere $50 million write-off in loans for Male. On the other hand, India has extended budgetary support of nearly $50 million, while also increasing the export quotas of essential commodities to the Maldives. This is besides the $220 million invested by India for the development of the archipelago. This is how India has so finely handled the Maldivian fiasco.

The experiences of Sri Lanka, the Maldives, and Bangladesh illustrate recurring pattern where initial economic assistance from China leads to substantial debt, which eventually becomes a trap.
What Bangladesh is experiencing now, had already been faced by Sri Lanka and the Maldives. Pakistan has perennially been in a debt trap. Nepal has also started to feel the impact.

India has time and again shown pragmatism in dealing with diplomatic issues. It has given Hasina a safe passage, for a later day when Awami League workers would need a leadership face for revival. At the same time, India is also engaging with the interim government well.
Beyond a point, these may not necessarily be diplomatic measures alone. After all, Bangladesh does find itself surrounded by India from all sides. Unless Bangladesh wishes to become the next big victim of China’s debt-trap policy, it may take sincere measures to maintain a healthy relationship with India. In 1971, India helped Bangladesh to emerge as a new nation and in 2024 India will once again help Bangladesh emerge as a new Bangladesh. After all, if Bangladesh is such a huge economic success story, then India has a bigger role in it.