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As Bangladesh Races Ahead, India Will Take ‘Years To Recover’ From Economic Contraction

The IMF report on Bangladesh overtaking India in per capita GDP made headlines, but the neighbouring country has been ahead in key social indicators for years now.
Bangladesh's booming export-driven readymade garment sector contributes about 20% to its national economic output.
NurPhoto via Getty Images
Bangladesh's booming export-driven readymade garment sector contributes about 20% to its national economic output.

When the International Monetary Fund’s (IMF) biannual World Economic Outlook report was published last week, Shamsul Alam, a senior member of the Bangladesh Planning Commission, was busy overlooking the progress of an important irrigation project a few hours drive from his office in Dhaka.

“It is risky to travel during the pandemic but I had to come here [personally] because it is important to monitor it at this time. There has been a lot of rainfall this year,” Alam told HuffPost India over a phone call, referring to Teesta Barrage, the largest irrigation project in Bangladesh.

In its report, the IMF had projected that Bangladesh’s real per capita GDP would surpass India’s this year, and India’s economy would contract by over 10%, the sharpest slide among all emerging economies. On the contrary, the Fund said Bangladesh would grow its economy by 4% in the same time, becoming one of only a handful of countries globally to avoid a contraction.

After Congress leader Rahul Gandhi fired a salvo at the Narendra Modi government over Bangladesh closing in on India in terms of per capita GDP and criticised its handling of the economy, many economists quickly pointed out an anomaly in IMF’s projection. Former chief economic advisor Arvind Subramanian said that GDP per capita is only an estimate for one indicator of the average standard of welfare in a country and on “more appropriate” economic metrics such as GDP at constant, purchasing power parity (PPP) exchange rates, “India has not been surpassed and, according to IMF, unlikely to be in near future.”

Alam, who is the longest serving member of Bangladesh’s planning commission and one of the early architects of the country’s development policymaking under prime minister Sheikh Hasina, said he isn’t reading too much in the numbers projecting Bangladesh to be surpassing India. “It is all right,” he said, but pointed out that the IMF has managed to capture the churn taking place in the country’s economy.

“Forget the per capita GDP for a moment and look at how we have beaten India in women empowerment,” Alam said, citing an array of reports from global multilateral institutions such as the World Economic Forum’s Global Gender Gap Index, which ranked India at a lowly 112 out of 153 countries, while Bangladesh, ranked 50, topped gender parity in south Asia.

In the last decade, Bangladesh has performed better than India in most social indicators such as child mortality, life expectancy at birth, and female literacy and participation in labour force, and this trend, according to Alam, is due to sustained economic growth and a push for widening targeted welfare measures and programmes.

Once dismissed as a “test case for development” after its independence in 1971, at a time when the country had high levels of poverty, a dense population threatened by natural disasters, and prevalence of political turmoil, Bangladesh is now being called a development miracle. Since 2009, its economy has clocked growth rates of more than 6% and the size of its economy has nearly tripled to $302 billion.

One of the strongest factors behind this is an early reckoning among the country’s economic policymakers to prioritise and push for a boom in low-skill manufacturing. “We had to come up with an economic model which could absorb the labour force coming from rural households,” Alam told HuffPost India. “Before any other thing we needed growth. We needed growth to create employment. And we needed employment to reduce poverty.”

This is evident in the country’s booming export-driven readymade garment sector, which accounts for more than 80% of its exports and contributes about 20% to its national economic output. More than 4 million people are employed in the garment manufacturing factories, about 80% of them women.

“It’s not just the readymade garment sector but also an array of allied industries and associated service sectors that are growing, thereby boosting employment and wages. So this has created a multiplier effect that has created a positive vibe in the economy,” Selim Raihan, Professor of economics at the University of Dhaka and executive director at the Dhaka-based South Asian Network on Economic Modeling (SANEM), told HuffPost India.

“Forget the per capita GDP for a moment and look at how we have beaten India in women empowerment.”

- Shamsul Alam, member of the Bangladesh Planning Commission

For emerging economies such as India, there is an important lesson to learn from Bangladesh’s garment sector: the benefits of large female labour force participation and making women central to the development process. This is something that Bangladesh’s economic planners learnt early, while India’s policymakers still fail to grasp

In a 2014 study on Bangladesh’s garment sector, University of Washington’s Rachel Heath and Yale School of Management’s A. Mushfiq Mobarak found that access to factory jobs for women produced remarkable welfare effects. The duo found that “the rise of the garment industry can help explain the declining [rates of] fertility, increasing age at marriage, and rapid increase in girls’ educational attainment during this period,” and that “the garment industry has likely played a key role in the remarkable progress Bangladesh has made in improving women’s lives over the past 40 years.”

Bangladesh’s female labour force participation rate has increased to about 37%, while India’s has declined from 30.3% in 1990 to 20.5% in 2019, according to the World Bank. Even when India was experiencing higher GDP growth, the economy could not create enough factory jobs because most of the growth was driven by a relatively small and high skills-based services sector, while a majority of the labour force worked in India’s huge informal economy.

“India has clearly failed on its manufacturing front. Services became a big distraction for a long time. Exceptions apart, industry continues to remain distracted,” Mahesh Vyas, managing director and CEO of the Centre for Monitoring Indian Economy, told HuffPost India. “In recent years [industry is distracted] with infrastructure contracts more than [focusing] on building global competitiveness in manufacturing.”

Little govt support in India

According to Vyas, for Bangladesh, apparels have been the engine of growth. “This has provided employment to women and the country has gone through the transition from providing informal jobs in very poor conditions to better jobs with a focus on exports.”

The garment sector in Bangladesh has benefited from low cost of production and loose labour regulations, harbouring economies of scale owing to market dominance by large firms and duty free access to European markets, a major import hub. On the other hand, about 80% of India’s garment sector comprises small firms and industry associations say that unlike Bangladesh, there is lack of support from the Indian government.

A strong criticism of Bangladesh’s garment sector is centred around factory working conditions and the safety of workers, a majority of whom are women. Even though improved safety protocols were put in place after the Rana Plaza collapse in 2013, which killed more than 1,100 workers and called for action in the fast fashion industry, women continue to face workplace violence in factories that range from physical and verbal abuse, constant pressure and withholding pay.

“The entire economy of Bangladesh has been dependent on this one sector so their government would bend over backwards to make sure all the requirements of the industry are met. But beyond a certain point, the Indian government could not do the same here because garments are a small part of our total exports,” Rahul Mehta, chief mentor and former president of the Clothing Manufacturers Association of India (CMAI), told HuffPost India.

Another big reason for Bangladesh’s continuous success in the garment’s sector, according to Raihan, is the political economy, which has boosted the sector’s growth over the years. “There is one thing that successive governments—and we have seen governments change every five years in Bangladesh—did that helped the garment sector: they continued with the policies of the previous government and built on it rather than tinkering with it,” said Raihan.

When the first tranche of fiscal stimulus in Bangladesh was announced this year in response to the pandemic, most of it went to the garment sector.

In India, Mehta says that as many as 20-30% of the garment manufacturing firms were shut down during the lockdown owing to a lack of working capital even as CMAI repeatedly requested the government for a stimulus.

For instance, in June this year, CMAI released a press note which read more like a desperate plea for survival than an industry requesting government assistance. It noted that until 15 May, only 26% of the total firms that had applied for a working capital loan under RBI’s Covid-line credit guarantee had received it. It warned the government that while the garment industry in India was “heading for an unmitigated disaster” and “million of jobs were at stake”, the rest of the firms had their applications with the banks under a “processing stage.”

Earlier this month, when Finance Minister Nirmala Sitharaman announced a $10 billion stimulus package for the upcoming festive season, Mehta was hopeful. In order to boost demand, the government allowed millions of its employees to spend tax-exempt travel allowances on goods and services. “I thought it was a brilliant plan because these people would anyway not travel and it would be better if one could make them spend,” Mehta said, adding that he was finally hoping for a surge in demand for clothing and apparels.

But when the finer details of the package started to come out, Mehta was surprised to find out that the employees could spend their travel allowances only on goods and services taxed (GST) at 12% or more, which would completely exempt the textile industry because, according to Mehta, “more than 95% of the textile industry is taxed at 5%.”

“I mean...I don’t know…sometimes…kabhi kabhi kuch samajh me nahi aata hai,” Mehta said.

A file photo of Bangladesh Prime Minister Sheikh Hasina with Indian PM Narendra Modi.
Altaf Hussain / Reuters
A file photo of Bangladesh Prime Minister Sheikh Hasina with Indian PM Narendra Modi.

Growth in agriculture, reliance on remittances

For more than a decade, a boom in the garment sector has led to huge migration from rural to urban areas in Bangladesh, and this, in turn, has boosted remittances coming into the rural economy. But Bangladesh is also one of the highest earners of external remittances—mostly from West Asia—which, after the garment sector, is the second largest foreign exchange earner for the country.

However, the pandemic has hit global remittances, and according to Bangladesh Bank, the country’s central bank, remittances would fall by 25% this year to $14 billion, affecting millions of households in the country. But experts have pointed out that it will be the rural households that will be worse hit.

In 2019, more than 10 million migrant workers sent home about $18 billion, amounting to 7% of Bangladesh’s GDP.

According to Raihan, cash inflows from both internal and external remittances, backed by a robust growth in agricultural production have not only led to poverty reduction, but also helped create demand in the rural non-farm economy. But more importantly, migration to factories has created labour shortage in rural areas, thus creating pressure on wages in the crop sector, which is dominated by paddy, the country’s staple diet.

“Eventually it led to a shift from crop sector to [high value] non-crop sector such as poultry, vegetable, livestock and fisheries,” Raihan said. By 2019, the country was the fifth and the fourth largest producer of vegetables and inland fisheries respectively.

Even though agriculture contributes just 14% to Bangladesh’s economic output, it employs over 40% of the total workforce. But according to a World Bank report, compared with most other developing countries, “Bangladesh’s share of agriculture in total employment is falling faster than the share of agriculture in GDP,” a pattern generally observed in transforming economies worldwide.

In the past five years, Bangladesh’s compounded annual per capita has grown at 9.1%, while India has managed just 3.1% growth. During this period, export growth has stagnated in India, while Bangladesh’s has grown. While agriculture in India has been under stress since 2012, many have pointed out that it has worsened under the Modi government: it kept agricultural prices low by focusing too much on inflation-targeting, thereby depressing farm gate prices, which had a knock-on effect on the rural economy; and in 2016, demonetisation created lasting stress in the sector.

In 2019, according to the National Crime Records Bureau, 10,281 farmers and agricultural workers died by suicide in India.

Even though Bangladesh’s agricultural sector also faces issues such as land degradation owing to changing climate, lack of adequate credit support to farmers and unfair producer pricing, Bangladesh Planning Commission’s Alam says that agricultural wages have been steadily rising and there are seasonal shortages of agricultural labour, specially in the crop sector. “I think this is a good sign.”

“If you lock down the economy and tell all the businesses to stop and keep people at home, you will depress economic activity. And once you allow businesses to open and people to go back to work, then the economy will improve. This is obvious. What is not obvious is that in the meantime you have damaged the economy very badly.”

- Josh Felman, a senior economist and director of JH Consulting

‘Years for India to recover’

The IMF in its report said that Indian economy’s contraction of over 10% this year, which is the worst slide among emerging economies, is because of the nature and size of India’s fiscal stimulus, which it said leaned heavily toward liquidity infusion and amounted to less than 2% of GDP in actual fiscal expenditure.

Since then, there has been a clamouring for another round of strong fiscal stimulus but the government has not dropped any hints that it is working on one.

“It is not often that world over, the fiscally most conservative institutions—be it the IMF or Financial Times or The Economist—make a plea for more government spending. With a different political dispensation, one could have turned the economic shock resulting from the pandemic to remedy long-standing wrongs of economic policy,” Reetika Khera, associate professor of economics at the Indian Institute of technology (IIT) Delhi, told HuffPost India.

The government, Khera says, rushed into a complete lockdown very early. “This was a disastrous move as a substantial proportion of Indian workers are casual workers or self-employed. The earnings of this group evaporated overnight. More than easy borrowing, the need was to find ways of putting money back in their hands.”

Josh Felman, a senior economist and director of JH Consulting, said that it would take a long time for the Indian economy to recover.

“If you lock down the economy and tell all the businesses to stop and keep people at home, you will depress economic activity. And once you allow businesses to open and people to go back to work, then the economy will improve. This is obvious. What is not obvious is that in the meantime you have damaged the economy very badly,” Felman told HuffPost India.

It could take years for India to fully recover from this.”

Bangladesh’s Vision 2021

“You might ask me ‘what is the trick, how did we do it?’” Alam said, referring to Bangladesh’s impressive track record on social indicators and robust economic growth. He said that one of the first things Sheikh Hasina did after coming to power was draft an economic vision for the future. It was called Vision 2021.

“For the first time in the history of the nation the government had announced a vision for economic progress,” Alam said. “I was hired by her government and made responsible for preparing and drafting the next two five-year plans. Later on, we had also conducted mid-term evaluation of these plans to do some course correction.”

Alam pointed out, with surprise, that while India had abandoned the five-year plans, they were emphasising more on it. He said that over a period of time, the political discourse in Bangladesh has increasingly become preoccupied with economic growth to the extent that it has become a political issue.

In recent years, the country has been hit by issues such as Islamic radicalism, political corruption and bureaucratic red tape that could arrest its plan for economic growth, but Alam says these are issues the government is dealing with.

“We don’t have internal conflicts in our country or even any long-running external conflicts. For instance, India has to focus on issues such as Kashmir and external threats from Pakistan and China so there is little time to [singularly] focus on growth. So your national issues are not completely aligned with economic growth,” Alam said.

IIT Delhi’s Khera agrees that there is a lack of longer-term economic vision in India. “There is too much emphasis on the optics.”

The next challenge for Alam, and Bangladesh, is a daunting one. “We want to make up for the losses during the pandemic as soon as possible and then we want to continue towards the goal of becoming an upper middle income country by 2031.”

Selim Raihan, of the University of Dhaka, says that it is not a very easy task—“These economic targets are very steep”—but Alam says that even if it is a challenging goal, his government has the commitment and intent to do it.

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This article exists as part of the online archive for HuffPost India, which closed in 2020. Some features are no longer enabled. If you have questions or concerns about this article, please contact indiasupport@huffpost.com.