How India is handling the recession better than Bangladesh

Much like Bangladesh, India - the fifth largest economy in the world - has also been grappling with a depleting foreign reserve as well as intermittent energy crises since the government decided to ease Covid-19-related restrictions and reopen the economy in late 2021. 

However, there are structural differences in how the two economies are governed and therefore, how each government has decided to address these crises. Both Bangladesh and India have faced three major crises over the past 12 months.

Rising trade deficits as supply chain bottlenecks stemming from the fallout of the Covid-19 pandemic and the Russian invasion of Ukraine made imports of inputs, fuel and raw materials significantly more expensive and put pressure on the balance of payments.
Rising prices of natural gas (in Bangladesh) and coal (in India) in the international market led to severe power shortages and stagnant production.
Price volatility in the international market for petroleum and crude oil and subsequent fuel price hikes in the domestic market.

To address these issues, Bangladesh, given its modest foreign exchange reserves and a contracted fiscal space, was forced to adopt austerity measures which included severe and ongoing power outages, restrictions on imports and an unprecedented rise in fuel prices. 

Although Bangladesh is still trying to figure out a way to counteract these issues, India seems to have addressed most of them, but at the cost of risking its foreign reserve which has decreased by around $92 billion after reaching its peak at $642 billion in October 2021. 

Dwindling foreign exchange reserves

Bangladesh, India and, for that matter, most economies around the world, have been struggling to manage their foreign reserves against a strong dollar thanks to the unusually large trade deficits brought about by high prices of imported inputs, fuel and raw materials in the international market and relatively slowly growing exports.

Bangladesh's foreign exchange reserves have fallen below $37 billion in September and the country has sought a $4.5 billion loan from the International Monetary Fund.
 
Similarly, India's foreign reserves are dwindling as well. However, the South Asian economy powerhouse remains well-covered, especially compared to Bangladesh. 

India's current foreign reserve of around $550 billion would cover around nine months of import payments, compared to Bangladesh's six-month coverage, despite austerity measures adopted by the GoB.
 
In fact, it was India's relatively larger foreign reserves which allowed it to import coal at a time of severe power shortage during October 2021 and April 2022. 

Furthermore, the country's larger fiscal space allowed the government to cut down on the excise duties imposed on imports of petroleum and crude oil and bring down the price of petrol and diesel. The price of these essential energy sources had risen by Rs10 per litre in March due to price volatility in the international markets. 

Bangladesh, on the other hand, had to let fuel prices rise by as much as 51.7% in August as it neither had the fiscal space to afford tariff reduction nor could it subsidise Petrobangla given the conditions imposed by the International Monetary Fund for a $4.5 billion loan.

India is still not out of the waters

That being said, India's rising trade deficit has already begun to raise concerns. At its peak, the Indian foreign reserve was able to cover 16 months of import payments, which have come down to only nine months due to the rising cost of imports as well as stagnant exports. 

India's merchandise exports in August stood at $33 billion (a 1.1% year-on-year decline) against a mammoth import bill of $61.68 billion. At this rate, India's total trade deficit is expected to rise by as much as $300 billion in the current fiscal year, putting further pressure on foreign reserves. 

A lack of demand in the international market for India's top export products such as engineering goods, textiles, gems and jewellery, as well as plastic products has led to this decline in exports. 
Moreover, stagflation - a combination of low demand and high inflation - in India's largest export markets, e.g., the United States, the European Union and China may also have adversely affected India's exports. 

Should India also devalue the rupee?

Exporters also blame the Reserve Bank of India's adamant attitude to defend the value of the rupee against the US dollar below Rs80.

As Ajais Shahi, the Director General of the Federation of Indian Export Organisations, recently told Reuters, "Indian exporters are outpriced in the global market. A rupee devaluation is required."

Interestingly, Bangladesh Bank held on to a similar attitude to keep the Bangladeshi Taka below 90 per US dollar at least up until April 2022 but later went on to change course as the policy began to harm RMG exports, the country's largest export product. 

Currently, Bangladeshi taka is valued at Tk108 per US dollar. 

But there is a caveat. Bangladesh Bank had adopted a managed floating exchange rate regime, as opposed to a flexible exchange rate regime in India. This is why most economists have cautioned against devaluing the rupee against the dollar and advised policymakers to let the market decide its value against the dollar. In terms of exports, they believe that the stagflation would eventually be over and India would be able to revamp its exports back to natural levels. 

A reluctance to evolve

Both Bangladesh and India have experienced intermittent, but severe power shortages since the reopening of the economy. India was most affected by the two episodes in October 2021 and April 2022, while the crisis in Bangladesh is ongoing.  

This shortage initially stemmed from a low coal reserve during the Covid-19 pandemic because of low demand and a subsequent bottleneck in the local as well as global supply chain which prevented coal production in India and the rest of the world to be ramped up promptly. 

Furthermore, heavy rainfall before reopening led to the flooding of many of the coal mines which halted coal production. Moreover, the disruption in the global supply chain and volatile international price of coal due to the Russian invasion of Ukraine of coal would also make it difficult to drastically raise imports as well. 

The Indian government promptly addressed the shortage of coal by taking emergency measures to encourage power companies to import coal. Consequently, coal imports in India reached a record high in June 2022, despite rising international prices. 

This was particularly helpful to independent power producers like Adani which reported mammoth revenues in the second quarter of 2022, which jumped 17 times to Rs4,780 crores. However, this recovery came at the cost of the country's long-term goals of sustainable development.

Given the volatility of coal prices in the international market, it made sense for developing countries like India to reduce their reliance on coal imports to ease the pressure on the balance of payments as well as foreign reserves. Consequently, coal production in India rose by 33% in June 2022. 

Interestingly, Bangladesh is also over-reliant on natural gas - most of which comes from domestic sources - for electricity production. And much like India, price volatilities in the international spot market for natural gas have significantly exposed Bangladesh and forced the government to adopt austerity measures.

However, both Bangladesh and India suffer from similar systemic deficiencies, albeit to different degrees. And ensuring future energy security in both countries would require addressing the underlying systemic deficiencies such as the countries' overreliance on fossil-fuel-powered (coal or gas) plants, reluctance and failure to foster a renewable alternative to the heavily coal-dependent power plants, the inefficiency in power generation which leaves a lot of generation capacity underutilised, distribution and transmission losses. 

Seikh Rafi Ahmed. Sketch: TBS