India-Bangladsh Trade Relations: Problem of Bilateral Deficit

The paper analyzes the reasons behind persistent bilateral trade deficit of Bangladesh with India. It finds that the Bangladesh has export similarity with India and hence faces high export competitiveness. The lack of match between Bangladesh export and Indian import also generates a constraint of complementarity. The paper uses different trade-related indices like RCA and Cosine measures to examine the extent of trade similarity and complementarity in inter-industry bilateral trade. The possibility of intra-industry trade between the two countries is also studied with the help of G-L indices. Finally, an econometric time series analysis is done to identify the determinants of Bangladesh bilateral export and trade deficit. Export has been found to be of random nature and trade deficit has a perverse relation with exchange rate, driven by flow of remittances. The paper suggests that Bangladesh should pursue an appropriate exchange rate policy and aim at increased diversification in her export structure in order to avoid Dutch disease and to reduce the bilateral trade deficit.