New Delhi: Bangladesh has replaced Sri Lanka as India’s largest subcontinental trading partner, with tariff issues and New Delhi’s growing tensions with its southern island nation hurting the commercial relationship between the two countries.

Meanwhile, India’s better ties with Bangladesh have seen an increase in agricultural exports to and textile imports from that country; New Delhi has even allowed concessional tariff rates on textile products from Bangladesh.

“There has been a fair amount of surge in agricultural commodity exports to Bangladesh. Their exports have also increased due to concessions given on textiles. Total trade volumes will be touching in excess of $5 billion (around 27,350 crore today) in the current financial year," said a commerce ministry official who spoke on condition of anonymity.

Between April and January in the current fiscal year, India’s trade with Bangladesh rose to $4.5 billion from $3.3 billion in the year earlier, while trade with Sri Lanka fell to $3.5 billion from $4.2 billion. Sri Lanka was one of the first countries that India signed a comprehensive economic partnership agreement with in 1998.

The commerce ministry official attributed the drastic fall in trade with Sri Lanka to the increase in customs duty by that country on automobiles imported from India, starting April last year. Sri Lanka increased the import duty on cars from 120-291% to 200-350%; from 51-61% to 100% on three-wheelers; and from 61% to 100% on scooters and motorcycles. Sri Lanka has also substantially increased the excise duty on automobiles. As a result, several Indian auto makers, including Bajaj Auto Ltd and Maruti Suzuki India Ltd, for which Sri Lanka is an important export market, have taken a hit.

“Because automobile exports to Sri Lanka is a high-value item, that one single measure has meant exports to the country have suffered," the commerce ministry official added.

In April-December of the current fiscal year, India’s automobile exports to Sri Lanka were $357 million; automobile exports amounted to $1 billion in 2011-12.

The relationship between India and Sri Lanka has been testy in recent times over the issue of the treatment of Sri Lankan Tamils and also after some fishermen from Tamil Nadu were captured by the Sri Lankan coast guard for allegedly straying across the maritime boundary.

India has been pushing Sri Lanka to devolve more political rights to the minority Tamils to ensure their integration into the mainstream—something Sri Lanka has been resisting.

A United Nations vote in Geneva on a resolution censuring the Sri Lankan government on its human rights record regarding the treatment of Tamils is expected later this month.

Last year, India had voted in favour of such a resolution, souring relations with Sri Lanka. India’s approximately 62 million Tamils share strong cultural links with Sri Lanka’s Tamil minority. Sri Lanka’s Tamils and majority Sinhalese have a troubled relationship mainly owing to the three-decade-old civil war that ended in May 2009.

A second government official, who also did not want to be identified, said that apart from political reasons and higher tariffs, the dip in India’s exports to Sri Lanka was caused by the latter’s desire to have more companies “set up manufacturing units in the country".

Still, the strained relationship between the two countries wasn’t making it any easier, this person added.

“To move to the next phase of economic ties with Sri Lanka is going to be difficult," the official said. “Let me put it this way—there is no bonhomie (between India and Sri Lanka) that they would want to push trade relations to the next level."

Referring to Bangladesh, the government official said there is no rancour in relations. There are three outstanding issues between the two countries that needed resolution—India ratifying the additional protocol to the 1974 land boundary pact; reaching an agreement on the sharing of the waters of the river Teesta; and the killing of people by the border guards of the two countries because of the un-demarcated front line.

“But look at the temperature (of political relations between the two countries)," the second official said, pointing to the increase in trade as a natural consequence of a number of steps taken by the Indian government, including allowing duty-free access of textiles, the opening of border haats (markets), improved banking facilities and the opening of transport links.

Indian foreign secretary Ranjan Mathai told reporters earlier this month that the choice of Bangladesh as the first country President Pranab Mukherjee visited after taking office reflects the importance India attaches to ties with that country.

“Bangladesh itself is a fast-growing economy. They have recorded something like 6% growth consistently. It is a large market, 150 million, with a very growing middle class. So Bangladesh itself, apart from the export opportunities or the opportunities of access to India, presents a number of opportunities," Mathai said.

India is looking for better ties with Bangladesh as a means to develop its insurgency-riven North-East. Growth in the region should lead to jobs for the young, making it difficult for insurgent outfits to recruit disillusioned and jobless young people, goes the logic.

The second government official said that later this year, India will start exporting 500 megawatts (MW) of power to Bangladesh. While 250MW will be given at concessional rates, the rest will be at market rates, he added.

On the Teesta, the official said Bangladesh was receiving 100% water without any cuts as there is no barrage on the river. “The Teesta pact will be symbolic" rather than anything else, which is also important, the person said.

C. Uday Bhaskar, an analyst with the South Asia Monitor think tank in New Delhi, said India would like to engage with Bangladesh irrespective of who is in power. “But (Prime Minister) Sheikh Hasina has been more receptive to India’s overtures, so it’s easier to realize India’s objectives," he said.

Another expert said that India’s emphasis on Bangladesh and Pakistan may have come at the cost of its relationship with Sri Lanka.

“In the process, we have actually neglected Sri Lanka. The negotiations for a services agreement (broke down) after 13 rounds of negotiations. We have not been able to pick it up," said Nisha Taneja, a professor at the Indian Council for Research on International Economic Relations.

Taneja said India should again start focusing on Sri Lanka and reduce its sensitive list with that country, even if it doesn’t want to restart the services negotiations.

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