Bangladesh Crisis Leads To Trouble For Indian Exporters

Kolkata-based exporter Aditya Manaksia, who is also a member of the Entrepreneurs’ Organisation (Kolkata Chapter), began exporting food products to Bangladesh last year with the aim of growing his business. In the financial year ending March 2024, he exported coconuts to Bangladesh, making substantial profits.

However, the political crisis in Bangladesh has been tough on his business. Manaksia now finds himself uncertain about what lies ahead and when things will return to normal.

Manaksia told The Core, “We had planned to supply coconuts for oil and food consumption, building on last year's successful trial. Unfortunately, the current situation has put these plans on hold.”

Massive protests against government job quotas led to Sheikh Hasina resigning from the post of prime minister on August 5. While an interim government is in place, things are far from going back to normal.

The unrest impacted import-export activity at the border, affecting Indian businesses. For the first 48 hours, there was no movement of cargo across the Petrapole-Benapole border that connects India and Bangladesh.

Movement of goods resumed gradually, with priority for perishables. But stakeholders believe that clearing out the blockade will take time, having an obvious impact on business back home.

“Many factories are still shut and logistics issues persist. Trucks from India face heavy scrutiny along their routes, adding to the disruptions,” Ajay Sahai, chairman of the Federation of Indian Export Organisation told The Core.

Hasina’s resignation will have far reaching implications for trade in India, for logistics and cross border agreements too. With the political situation still in turmoil, exporters are facing significant payment problems with their Bangladeshi clients because some banks in Bangladesh are not operational.

Payment Problems

Manaksia has a 100-metric-tonne rice order worth Rs 1 crore destined for export to Italy, but it's currently on hold due to the buyer being based in Bangladesh. The problem is payment issues.

Arun Garodia, chairman of the Engineering Export Promotion Council of India told The Core that there is an ongoing payment issue that hasn't been addressed positively and remains widely unmentioned.

“The main issue people are currently facing is payment problems. This could worsen due to delays or non-payment. Many (Bangladeshi businesses) are approaching banks and the Reserve Bank of India (RBI), as well as the ministry, to extend payment terms and conditions,” Garodia said.

Bangladesh has been struggling with dollar shortages for a while, making payments tricky. As a result, many exporters now insist on using letters of credit (LC) to ensure they get paid upfront before committing to the sellers.

“Some exporters are concerned about payment issues and the accreditation of banks, though that is not new. There is speculation that some Bangladeshi banks might not be processing documents due to unclear directions, especially given Bangladesh’s dwindling foreign exchange reserves,” Sahai said.

The dollar crisis is a big mismatch between dollar supply and demand, dropping reserves, weak remittance flows, and sluggish export earnings.

The long-term economic mismanagement has caused a severe crisis in foreign currency reserves in Bangladesh. Businessmen, bankers, and economists in Bangladesh are urgently calling for strict reforms, including allowing market forces to determine foreign exchange rates.

“This situation could be affecting import regulations and contributing to the decline in India's exports to Bangladesh over the past two years. While there is some uncertainty, it is not a uniform story; challenges exist, but payments and new LCs are still being processed by fewer banks,” Sahai added.

Recent updates from Bangladesh show a positive shift as the army has handed power to the interim government. But what does this mean for the future of import-export trade and foreign investments?

“Foreign investment in Bangladesh has hit a standstill. For the sake of its future, Bangladesh should ensure this situation doesn't worsen. The country’s investment climate has already dried up, and even when things return to normal, investors will wait to see how long that stability lasts. If normalcy persists for a few years, then we might see an investment return. However, it is still too early to consider pulling out existing investments,” Sahai said.

Business To Move From Bangladesh to India?

On the day of Hasina’s resignation, rumours began agitating that fast-fashion companies might shift their factories from Bangladesh to India.

Business Standard reported that the textile sector, a major contributor to Bangladesh's exports, could be severely impacted by the instability, with international buyers potentially looking to alternative markets like India. But is it feasible for a textile company with significant investments in one country to relocate its operations to another country?

“I don't agree with that viewpoint. Investing in a country is not a quick decision. Right now, companies with factories in India and Bangladesh, including textile, leather and footwear businesses, are facing disruptions. Buyers are concerned about supply issues and are temporarily shifting orders to India due to uncertainties in Bangladesh,” Sahai said.

Bangladesh exports textiles about three times more than India. In 2023, Bangladesh secured the second spot in global exports, capturing about 8.5% of the market. Its share steadily increased from 2015 to 2023, primarily at the expense of China, which still holds the top position. Meanwhile, India ranked seventh in the global ready-made garment trade, maintaining a market share of around 3-4% during this time.

The long-term trend will hinge on the situation in Bangladesh. If conditions deteriorate or remain stagnant, more orders might shift to India.

“Hypothetically speaking, fast fashion brands like Zara, which source a lot from Bangladesh, operate on a super-tight schedule—from design to store shelves in less than a month. If they are designing for September, for instance, they might shift some of those orders to India. Orders destined for markets like the US, might come to India for a short term,” Ajay Srivastava, Founder of Global Trade Research Initiative (GTRI) told The Core.

Impact On FTA

Under Sheikh Hasina's leadership, trade between India and Bangladesh saw a major upswing, leading to a notable trade surplus for India. Her exit might jeopardise these achievements, affecting the movement of goods and people and possibly stalling the progress of a planned free trade agreement (FTA).

The trade ties between the two nations encompass diverse areas like trade, medical tourism, and corporate growth.

Bangladesh was initially set to lose its least developed countries (LDC) status in 2026, but the WTO has now extended the Duty Free Tariff Preference (DFTP) status for an additional three years for countries transitioning out of LDC status. This means Bangladesh will retain these benefits until 2029.

“Consequently, there’s no immediate urgency for negotiations, which were previously pressing for 2026. Bangladesh has ample time to discuss potential agreements, possibly signalling a return to stability. Likely, substantial negotiations might not occur for another three to six months, as other priorities, such as an FTA with India, could take up to two years,” Sahai said.