**Table 10: Bangladesh’s Increased Exports** **<u>to India – Three Scenarios</u>**

|||_Bangladesh has duty-_<br>_free market access in_<br>_India with no sensitive_<br>_list_|**Scenarios**<br>_Bangladesh has duty-_<br>_free market access in_<br>_India keeping India’s_<br>_sensitive list of 480_<br>_productsfor LDCs_|_Bangladesh has duty-_<br>_free market access in_<br>_India keeping India’s_<br>_sensitive list of 46_<br>_productsfor LDCs_|
|---|---|---|---|---|
|**Rise in**<br>**exports to**<br>**base (%)**|**Bangladesh**<br>**India, from**|133.53|19.12|85.09|

_Source_ : GTAP simulation results. The increase in exports is calculated with reference to the baseline.

The static export potential could be considered as an increase in exports of 134 percent (the first scenario above), i.e., with no sensitive list (Table 10). Other simulation results show that India‘s maintaining of the sensitive list of 480 products would only see an export increase of about 19 percent, much less than the first scenario. It should be noted, however, that Bangladesh‘s major export items––readymade garments (RMGs, HS codes 61 and 62)––have a very limited export base in India, so the GTAP model would always show a small rise in these product exports, even under a ―no sensitive list‖ scenario. Initially, India was wary of allowing Bangladesh‘s garments into its market. But after the September 2011 prime ministerial agreement, India has allowed Bangladesh‘s RMGs into its market under a duty-free, quotafree scenario. However, although the GTAP simulations show the removal of the 46 textile products from the negative list raises Bangladesh‘s exports to India by about 48 percentage points (difference between first and third simulations), the volume is very small in comparison to Bangladesh‘s global sales. Nonetheless, given India‘s massive market, it also suggests that Bangladesh has enormous potential to increase garment exports to India.

The projected trade outcomes imply that an FTA would stimulate Bangladesh‘s trade with India significantly; both countries would likely see a substantial increase in manufactured goods‘ exchanged under duty-free market access. Bangladesh, especially, would benefit from improved performance in its highly labor-intensive manufacturing sectors, thereby helping to reduce poverty.

For India, closer economic cooperation with Bangladesh would be an important stepping-stone to reducing the economic isolation of its eastern and north-eastern states. A bilateral FTA between the two countries could help address this isolation, and provide an impetus to resolve problems relating to nontariff barriers.

A very important caveat for policy makers is that the above analysis based on the GTAP model simulation is static in nature and is therefore not capable of capturing the dynamic impacts of bilateral trading arrangements. Also, when trade is restricted (for whatever reason), the model cannot capture ―new trade‖; if the initial base of trade in any product is very low (or even zero), there would not be any substantial increase (or no increase, in the case of zero base) in trade for that particular commodity. However, as evidence suggests, mutual tariff concessions can generate trade in new items. For instance, in the bilateral FTA between India and Sri Lanka, the latter benefited by initiating exports of _vanaspati_ oil to India, which had been almost nil before the FTA.

Thus, these simulation results represent only a part of the additional trade that will be generated—in particular, Bangladesh could gain by creating a production base in new products. Indian FDI into Bangladesh could play a key role in that process. Seen in this light, the above simulation results could be seen as a lower bound of the potential increase in Bangladesh‘s exports to India.

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