All Eyes Will Be On Indo-Bangla Bilateral Trade Developments

The recent developments in Bangladesh- the socio-economic unrest, uncertainties, violence, change of government- haven’t had a significant impact on India’s trade, much to the relief of the economy’s managers. Going forward, the effect could vary based on industry and sector-specific nuances and exposure. More importantly, when it comes to the credit quality of India Inc., in general, experts do not foresee any near-term impact on it. The latest study by CRISIL Research echoed more or less similar sentiments. There is, however, a word of caution. One has to keep in mind that a prolonged disruption can always adversely affect the revenue profiles and working capital cycles of some export-oriented industries for which Bangladesh is either a demand centre or a production hub. This and the movement of Bangladeshi currency-Taka will bear watching. As regards, industry sectors, experts think that sectors like cotton yarn, power, footwear, soft luggage and fast moving consumer goods (FMCG) may see a small but manageable negative impact, while shipbreaking, jute and readymade garments (RMG) could stand to benefit. The good thing is that the impact will be insignificant for most other sectors.

The earlier geo-political proximity and diplomatic closeness notwithstanding, India’s trade with Bangladesh is relatively low, accounting for 2.5 per cent of its total exports and 0.3 of total per cent imports last fiscal. Merchandise exports mainly comprise cotton and cotton yarn, petroleum products and electric energy, while imports largely consist of vegetable fat oils, marine products and apparel. Interestingly, for cotton yarn players, Bangladesh accounts for 8-10 per cent of sales, whiso the revenue profile of major exporters could be affected. Their ability to compensate sales in other geographies will be an important decider, though their operating profit margins may not be significantly impacted because cotton-yarn spreads are already modest at present. That’s what the CRISIL study also suggests. Companies, which are into footwear, FMCG and soft luggage, could also see some impact because manufacturing facilities are located in Bangladesh. These facilities faced operational challenges during the initial phase of the crisis. However, most have since commenced operations, though a full ramp-up and the ability to maintain the supply chain will be critical.

There is an apprehension that engineering, procurement and construction companies engaged in power and other projects, in Bangladesh could see execution delays at least this fiscal as a sizeable portion of their workforce has been recalled to India for almost a month now. With only a gradual ramp-up in workforce expected, revenue booking could be less this fiscal compared to earlier expectations. Besides, apprehensions over companies supplying electricity going through delayed payment of dues cannot be ruled out either. It is also pertinent to note that debtor-risk for most sectors may eventually increase with major transactions being carried out through letters of credit (LCs), which could be invoked in the event of non-payment, leading to dependence on Bangladesh banks for settlement. Besides, forex issues are also rising due to the depreciation of taka versus the rupee and other currencies. Interestingly, companies in ship breaking, jute and RMG sectors are seeing an increase in sales inquiries from key export destinations such as the US and Europe. The Indo-Bangla bilateral trade will be an interesting space to watch in the days to come.