Eschew politics of revenge to sustain the economic benefits and minimise the emerging polarisation.
India’s eastern neighbour, Bangladesh, is witnessing a regime change driven by nationwide protests against a ruling party that had been in power for too long and had lost touch with the ground realities of the common people. Hopefully, after a fresh national election, a new set of more responsive democratically elected political leaders will take charge of the country’s affairs. While the events leading up to this change are significant, they should not necessarily be labelled as a “revolution” or a “second liberation,” as described by Mohammad Yunus, the head of the interim government formed at the behest of the Army.
Those tasked with steering the nation would do well to avoid drastic changes, focusing instead on maintaining stability and not being drawn into turbulent waters. Bangladesh, as a young nation, remains in a fragile state—its economic and other progress in recent years has not been matched by the development of durable and well-established political and governance institutions. Replacement of a fairly well drafted Constitution and striving for structural reforms in the factors of production can, perhaps, wait since these have the potential of endangering the very social fabric of the nation besides dislocating the economic progress attained hitherto.
Bangladesh’s economy, in recent years, has grown at an impressive 7% per annum, the poverty rate has been halved to 18.9% and exports have risen to $55 billion, driven primarily by the ready-made garments industry. Bangladesh has become the world’s second-largest producer of clothing, creating several thousand formal jobs, particularly benefiting women. Life expectancy is 74 years, while both infant mortality and maternal mortality rates have seen substantial declines to 21 per thousand live births and 156 per one lakh births, respectively. The overall literacy rate is a commendable 75%. Despite a fertility rate of 1.9% and a sizeable, growing population of 173 million (and likely to stabilize at 218 mn in 2050), per capita income has steadily increased to $2,650, making Bangladesh eligible to be classified as a middle-income nation by 2026.
EMERGING CHALLENGES IN BANGLADESH
To sustain economic progress over time in one of the most densely populated nations, and ensure the benefits are more inclusive, particularly covering the large rural sector, several well-conceived and effectively implemented policy measures are required. The growth process must be specifically designed to address the aspirations and needs of the youth aged 18-29, who constitute 45% of the nation. The officially acknowledged unemployment rate among them is 5.8%, though this figure likely understates the reality. The lack of gainful economic opportunities, especially for those among them who are graduates, has been particularly acute.
The plight of the huge farming community has been gradually worsening. Farm output has declined as landholdings have become smaller over time and climate change-induced flooding and cyclones have become more frequent. Comprehensive institutional reforms to address all factors of production—land, labour, and capital—have yet to be put in place. The large surplus of labour in both rural and urban areas has caused real wages to decline rather than grow, even at a modest pace. Although the share of the population living in abject poverty has decreased to 19.8%, it remains palpably large and visible.
Inflation remains in double digits despite high levels of imports from China, its largest trading partner, and India. The ability to maintain balanced foreign trade has shrunk significantly, with imports rising without a corresponding increase in exports. Despite an installed electricity generation capacity of 24,931 MW as of June 2023, Bangladesh had to import more expensive electricity from India, utilizing 2,656 MW of capacity, because fuel was available for only 16,477 MW. This was despite the per capita electricity consumption being a lowly 317 kwh or under one unit per day. Additionally, the country was compelled to seek aid from the IMF to cope with volatile international energy prices and the depleting foreign exchange reserves. The external debt to finance domestic activities has swelled beyond $100 billion. This situation persists despite there being no national social security system, a minimum support price for crops, or significant subsidies on food grains or other essentials.
There is a potential of decline in garment exports to the United States, Bangladesh’s largest buyer. The possibility of American orders being diverted elsewhere cannot be ruled out. Vietnam and Mexico have many of the same advantages as Bangladeshi manufacturers, including large-scale plants, an adequate labour force, locally made fabric, superior transportation infrastructure and the capability to rapidly ramp up production. Following the fall of the Hasina government, many businesses in Bangladesh are facing a liquidity crunch, with the central bank capping bank withdrawals at a mere two hundred thousand takas. Prolonged restrictions could force many, including exporters, to shut down operations.
Another source of restlessness, which led to the student-led countrywide protests that deposed the government a fortnight ago, is the deepening polarization in society along partisan lines. The Awami League government’s strong arm tactics over the past decade, combined with Premier Hasina’s recent remarks calling those who oppose her policies as “Razakaars”—a term historically used to describe those who sided with oppressive Pakistani forces during the 1971 Liberation War—have further alienated individuals with differing political views.
While many of the Hasina government’s actions may have been unjustified, it would be in the nation’s best interest if the BNP, Jamaat-e-Islami, and their political affiliates exercise restraint and avoid pressuring the interim and new governments to publicly settle scores with her. Setting up a criminal tribunal for her trial and getting her back from India would further divide society and have serious deleterious effect. The 79-year-old ailing two-time Premier Khaleda Zia may have genuine grievances against her five-year incarceration and the unfair treatment of the BNP cadre by now-in-exile Sheikh Hasina. However, in the larger interest of the beleaguered nation, she may have to eschew her justifiable urge to settle scores. Similarly, Hasina would need to unequivocally abandon the hope of ever staging a comeback to power or returning to her homeland in the near future.
Undoubtedly, such constraints limit the options available to the new administrations to accelerate the pace of economic evolution and reduce the burden on the common man. However, the unfortunate social and political chasms do not bode well. Looking forward, most citizens, particularly the outspoken youth, are hoping for freer and more transparent governance. For such a milieu to emerge, they might even be willing to accept a slight slowdown in the tempo of economic evolution. That could permit a degree of political corrective action to accompany attending to the emerging economic woes.
LIKELY IMPACT AND DESIRABLE RESPONSE FROM INDIA
A slowdown in the textile and garment industry in Bangladesh is not likely to benefit India. Prima facie, it might appear that prolonged disruptions could lead to Western clothing orders being shifted to its neighbour. However, without the necessary large-scale production facilities and with higher local wage costs, India may not be in a position to become a meaningful replacement. The order diversion by US importers is more likely to favour established garment manufacturers in Vietnam, Mexico, and Canada. Their cost disadvantage would remain marginal as Bangladesh exits the least-developed nation category and loses its preferential tax treatment.
The US, in any case, has not been too pleased with Bangladesh ever since last year when Bangladesh reportedly turned down an American proposal to lease its St. Martin’s Island near Chittagong. Following this, the US was critical of Sheikh Hasina for manipulating the election process in early 2024. Washington had also shown a preference for the BNP and its leader, former Premier Khaleda Zia, who had been under prolonged house arrest. After the election results, there was even talk of Bangladesh being put under economic and other sanctions by the US Administration on grounds of unfair elections.
A slowdown in GDP growth in Bangladesh, driven by a reduction in clothing exports, would lead to a decrease in aggregate consumption within the Bangladeshi economy. This, in turn, would reduce its imports, negatively impacting India’s exports of not just textiles, but also food, fuel, fertilizers, automobiles, and electricity. Lower domestic demand would not only diminish fresh capital investment by Indian firms but also render the capacities already created underutilized. With Bangladesh also experiencing difficulties in debt servicing, India might also have to deal with its requests for debt rescheduling.
India, which has been the largest tourism destination for Bangladeshis—accounting for 22.5% of India’s 9.23 million visitors last year—would also be impacted. As would the private health providers in India since 80% of these tourists were coming on medical grounds.
In any case, a fair amount of uncertainty remains regarding the overall bilateral relationship. In several quarters, India’s close ties with the Awami League are being perceived to be at the cost of the BNP and other opposition parties. India will need to respond carefully to dispel this perception and convince the new authorities in Bangladesh that while they may be anti-Sheikh Hasina, they do not have to be anti-India. It is important to convey that all Indians wish them well and genuinely desire a prosperous and peaceful neighbour. No doubt it will be an arduous task in which potential interventions from China could act as a spoiler. India will need to double down on its efforts to sustain the multidimensional ties that have been assiduously built over the years.
India’s overall economic aid to Bangladesh may need to be stepped up, similar to the bailout that was provided to Sri Lanka a couple of years ago under President Wickremesinghe, despite his being a nominee of the outgoing President Rajapaksa and not entirely independent. With China having turned down Bangladesh’s loan request in early July and Bangladeshi authorities reluctant to accept the full spectrum of IMF conditions, India would need to step in. Besides acting as a source of bridge financing, India may have to intercede with the IMF, ADB, and World Bank to assist Bangladesh. A similar supportive role played by India for Sri Lanka had met with a high degree of success and goodwill for it.
After all, Bangladesh and India are neighbours with over 4,000 kilometres of common land borders—a geographical reality that will endure. Millions of people on both sides have close ethnic, linguistic, and cultural affinities. Until the departing English colonial rulers divided India for political expediency, leading to the creation of East Pakistan (now Bangladesh) as part of Pakistan purely based on religion, they had all been citizens of a united country for centuries.
A majority of the seven northeastern Indian states and West Bengal share closer geographical and familial ties with adjacent Bangladesh (formerly East Pakistan) than with the more distant mainland India. Since 1947, the region’s social and economic development has been hampered, largely due to the near-severing of these ties and the reliance on the narrow Chicken’s Neck near Siliguri in West Bengal as the only land route connecting the seven states with the rest of India.
The traditional and historical bond between the residents of India and Bangladesh must serve as the foundation for their future relationship, regardless of the faith or origin of their citizens. Authorities on both sides of the highly porous border must actively promote the diversification of contacts and facilitate easier people-to-people movement. The idea of a common trade union between the two countries, similar to those in Europe and North America, should not be dismissed as unrealistic. The Free Trade Agreement currently under negotiation between the two governments should be seen as a first step toward this goal, not as an end in itself.
Dr Ajay Dua, a development economist, is an ex Union Secretary Commerce & Industry.