Behind the Numbers: What is Helping Bangladesh get ahead of India in the wake of COVID-19?

By Kartikeya Bhatotia

Bangladesh‚Äôs economic turnaround story has been venerated by economists since the turn of the 21st century. The country that fought a deadly liberation war resulting in decades of famine and political strife, started showing signs of jumping back in the early 2000s. Bangladesh famously changed its economic status by graduating from the UN ‚Äėleast developed countries list to a ‚Äėdeveloping country‚Äô status in 2015 after years of consistent growth. In the wake of the Covid-19 pandemic, while India‚Äôs economy contracted by 10.3% and per capita income decreased by 11.2%, Bangladesh showed greater economic resilience with a growth of 3.8% and a slight decrease of 2.9% in per capita income. As of 2020-21, Bangladesh has a GDP per capita of $1,888 (nominal USD) as compared to India‚Äôs GDP per capita of $1,877. 

The country has not alone achieved strong economic growth,  but made notable strides in human capital development, reducing vulnerability and increasing per capita income. Economic empowerment and gender mainstreaming have been key drivers of the country‚Äôs economic success in recent decades. Bangladesh has been doing well in macroeconomic indicators too, with prudent fiscal management underpinned by strong exports with consistent double-digit growth. 

So what distinguishes Bangladesh from India and what are some of the key lessons that we can draw from its growth story?

1. Export performance and economic policies ‚Äď case of the garment industry

Bangladesh‚Äôs export industry was hit by the immediate fallout of the pandemic much like the rest of the world. However, by July-August 2020, the industry was already showing signs of recovery. Despite a slowdown in demand worldwide, preferential access to the European markets has helped Bangladesh maintain its exports. This preferential access allows Bangladesh, much like other countries currently categorised as ‚ÄėLeast Developed Countries‚Äô (LDC) by the United Nations Committee for Development Policy (CDP), to have duty-free quota-free (DFQF) arrangements with the European Union. Garment exports, the single-largest component of Bangladesh‚Äôs exports (80%), account for 15% of the country‚Äôs GDP.  Indian exporters pay an export duty of 4.5%, 5%, and 9.6% for yarn, fabrics, and garments, respectively. In contrast, both Bangladesh and Pakistan levy zero export duties for these goods owing to their LDC categorisation. 

Source: Ministry of Commerce (India) and Bangladesh Bank (Bangladesh)

Indian textile exports had meanwhile plateaued as much as three years before the pandemic, despite the rising global demand. Economists believe that the Indian market may also not have adjusted well to the world demand for readymade clothing pointing that the Bangladeshi industry produces ‚Äėsimple apparel‚Äô while India ‚Äúmanufactures superior quality woven and knitted products‚ÄĚ. Indian firms are not well-integrated into the global market. This is attributed to the massive domestic demand and the relative ease of supplying to the domestic market. Meanwhile, large-scale garment producers in Bangladesh account for 80% of the value of exports. This has helped Bangladesh achieve economies of scale, reducing the cost of the products. 

Bangladesh, although a ‚Äėdeveloping‚Äô country according to the UN DESA, has still not graduated from the Least Developed Country‚Äô (LDC) country status decided by the United Nations Committee for Development Policy (CDP). If Bangladesh continues to meet the criteria, with the endorsement of the UN Economic and Social Council (ECOSOC) and the General Assembly, it is expected to graduate in 2024. Even so, with the Everything but Arms (EBA) scheme of the EU, Bangladesh will continue to enjoy a duty-free quota even three years after graduating from the LDC category. This policy will ensure that the country‚Äôs garment industry remains protected till 2027.

On the other hand, Indian firms are still reeling from the export logistics being broken due to Covid-19, with container shortages as well as increased freight costs in important markets making them vulnerable. Efforts should be made to make Indian firms more competitive. The government has already made efforts since 2007 for an FTA with the EU, but exporters demand that India should strive for more FTAs with the global market. 

2. Civil society and government partnership

It is well-known that Bangladesh is ahead of India on many critical developmental indicators. The average Bangladeshi lives three years more than an Indian. Bangladesh also fares better on infant mortality and hunger. Moreover, the female labour force participation rate is over 36% in Bangladesh, compared to 20.3% in India.

The civil-society and government partnership over the years has been instrumental in improving these indicators. The healthy relationship between governments and NGOs has played a critical and complementary role in expanding social and economic opportunities for the people. Studies estimated that the percentage of total aid to Bangladesh through NGOs increased from 10% to 49% between 1990 and 2015. This was concomitant with the rise of the microfinance movement in the country. The focus of NGOs over the decades shifted from aid and rehabilitation to poverty alleviation and development services. This expansion was noted by the Government of Bangladesh in its Five-Year Plans for development. The laws in Bangladesh like Societies Registration Act and Social Welfare Registration Act and Control Ordinance 1961 Act helped NGOs stay independent without government interference. The Bangladesh government offers a 10% tax rebate for NGOs and microfinance institutions working in development programs. Despite their crucial participation in developmental efforts, policy-makers in India note that the government is fighting a ‚Äėwar of control‚Äô with NGOs. Legislations that were favourable to NGO independence have eroded in the recent past due to increased bureaucratic hurdles.  Philanthropic contributions to Indian NGOs declined by a whopping 40% between 2015 and 2018. A 2020 amendment, dubbed as a step towards a ‚Äėself-reliant‚Äô India,  has made FCRA even more strict.

3. Government support in response to Covid-19

The proactive role of the Bangladeshi government in the immediate response to Covid-19 has been noteworthy. When the garment workers were out of work in early and mid-2020, the government helped the garment industry pay their workers as a part of a $9.9bn liquidity support plan. They also gave the workers cheap credit, to be paid directly to the bank accounts of the garment workers. By delaying the collapse of one of its largest industries, the Bangladesh government has managed to prevent a recession in the country. Another notable thing that gives Bangladesh an edge in Covid-19 recovery is that 62% of its enterprises are formal whereas about 86% of enterprises in India could be informal with more than 60 million unincorporated enterprises in the non-farm, non-construction sector alone.  India also notably had $13 bn support for its MSME sector as well as the recent doubling of the budget for the MSME sector, most of which will be targeting the recovery of MSMEs after Covid-19. Most standard fiscal and monetary packages will not end up helping MSMEs in the informal sector since direct finance from financial institutions is extremely limited.  Additionally, the government is finding it difficult to give direct grants and wage subsidies to enterprises as no database exists of proprietary enterprises. The liquidity support granted to MSMEs by the RBI amounting to Rs. 50,000 crore has reportedly not gained much traction.  However, microfinance institutions, cooperatives, and other community-based organisations could play a crucial role in lending to individuals, Self-Help Groups (SHGs), and Joint Liability Groups (JLGs). There is a need to augment the lending operations for these small players. As a long-term mitigatory measure, a database of proprietary enterprises would be crucial in delivering grants and wage subsidies similar to what Bangladesh delivered to garment producers.

In conclusion, there are a few lessons and cautionary tales for India. Bangladeshi textile industry has benefited from friendlier trade rules, which allowed them to scale up and reduce their costs to have a significant edge in garment exports. India can learn from this and similarly seek to be more competitive in the international market. US-China trade wars are a big opportunity to attract new buyers as American demand shifts from Chinese suppliers to Indian suppliers. 

While recovery efforts will be a priority for both Bangladesh and India in 2021, balancing domestic and foreign policy and supporting employment-intensive sectors such as MSMEs may hold the key to navigate the current scenario. Bangladesh is expected to secure favourable trade agreements in this decade, while India will need to seek better trade policies with partners. Despite the success of Bangladesh‚Äôs garment industry and its contribution to economic growth, there are some cautionary factors that the country can no longer ignore ‚Äď the garment industry is also characterised by low wages and a lack of safety standards that has prompted global outrage and calls for sanctions.

Photo credit: Better Work Programme/ILO Asia-Pacific

About the Author

Kartikeya Bhatotia is a Research Associate with LEAD, and is currently engaged with the Solutions for Transformative Rural Enterprises and Empowerment (STREE) initiative that provides technical assistance to the National Rural Livelihoods Mission. Kartikeya is interested in livelihoods, human ecology, and the political economy of developing countries.