How the Bangladesh crisis may impact Indian FMCG companies?

India has strong trade relations with Bangladesh due to their geographical proximity and cultural similarities. Bangladesh is India’s largest trading partner in Southeast Asia, the fiscal year 2022-23 witnessed a total of 14.01 billion dollars of bilateral trade between the countries. This highlights the significance of both countries in each other’s economies by way of trade.

However, the Bangladesh crisis recently has sparked several concerns regarding the loss in trade. A trade worth 1 Lakh Crore Rupees is at risk. The resignation of Bangladesh’s Prime Minister because of the escalated protest has created instability in the State. The Indo-Bangladesh trade has been suspended for 3 days because of the significant disruption in key trade ports like Petrapole port and Benapole port. Interim Prime Minister Mohammed Yunus will assume the PM’s office soon.

The Indian FMCG companies are particularly hit by this crisis as many of them have their manufacturing units in Bangladesh and have a significant share of revenue coming from the sales in the Bangladesh market.

The Bangladesh Crisis

Ex-Bangladesh Prime Minister Sheikh Haseena resigned from her position as the protests against her speech escalated in a fatal way. She left the country and landed in India, and political instability has grappled the State. We can understand the Bangladesh crisis under the following heads:

1. Political Instability

For several years Bangladesh was brimming with issues that were bound to create political instability. Allegations of corruption, and disputes over election legitimacy created a highly volatile political environment. The uncertainties that could crop from these were bound to lead the foreign investors to abrupt policy changes which actually happened.

2. Economic Challenges

In the past decade, Bangladesh went through a constantly widening trade deficit. From 15.3 billion USD in 2011 to 27.5 USD in 2015, the trade deficit troubled the State. Bangladesh was in its recovery period after the pandemic badly affected its economy. The inflation rate in June itself was above 9%  for which the central bank aimed to bring it down to 6.5% by fiscal 2025. There was some resentment among the people because of this.

3. Immediate Cause

The Sheikh Haseena government had given reservations to the people whose family members had fought in Bangladesh’s 1971 War of Independence. The students had dissent regarding it that was further aggravated when Mrs. Sheikh Haseena called the opponents of the reservations as ‘razakars’. The term is considered as derogatory in Bangladesh as it is used to refer to the people who supported Pakistan during the Bangladesh Liberation War.

An Overview of India’s Exports to Bangladesh

The export data for the fiscal year 2022-23 from India to Bangladesh as published by the Ministry of Commerce and Industry, signifies a significant growth of trade between the two nations. The key statistics are as follows:

1. Bilateral trade between India and Bangladesh stood at approximately 14.1 billion USD in the fiscal year 2022-23.
2. India exports agricultural products to Bangladesh that amount to 2 billion USD
3. In the textile sector, India exports up to 3.5 billion USD
4. In machinery and equipment exports of India amount to roughly 2.8 billion USD
5. The chemical sector exports amount to 1.5 billion USD
6. Consumer goods exports value up to 1.2 billion USD

A discussion of a Free Trade Agreement between India and Bangladesh had started in 2023. If the FTA had been entered, Bangladesh’s exports to India would have increased by 297% and India’s exports by 172%. Such has been the overall trade situation between India and Bangladesh.

Implication on Indian FMCGs

This crisis points towards a long instability that will create many uncertainties for foreign investors when investing in Bangladesh. It is essential to analyse the implications on the Indian FMCGs, as some of them even have manufacturing units in Bangladesh. It can be understood under the following heads:

1. Supply Chain Disruptions

The supply chain disruptions have affected two areas of the FMCG business.

1. Sourcing of raw materials:
2. The Indian FMCGs located in Bangladesh often rely on a mix of local and imported raw materials. The political instability has caused disruptions in the supply chain that are further delaying the manufacturing process of these companies.
3. Logistics and distribution:

The constant strikes and protests have created transportation challenges for the companies. The movement of goods cannot be safely done. Such conditions may lead to stockouts in the retail markets, delayed deliveries, and increased logistics costs that will further hamper the economic health of Bangladesh and distress the companies functioning there.

2. Regulatory and Policy Risks

The change in the government of Bangladesh points to several risks to the companies, especially FMCGs. This can be understood under the following heads:

1. Policy changes:

Change in the government of Bangladesh translates to a change in the policy of the government.  Abrupt policy changes with respect to import-export regulations, taxation, and foreign investment may take place. This not only creates several risks for the FMCGs in compliance but also creates uncertainty in the financial outcomes.

2. Trade barriers:

Countries especially when they are in a state of crisis adopt protectionist policies restricting imports. Bangladesh may impose trade barriers like higher tariffs or import restrictions that might hamper India’s exports to it as well as the cost structure and competitiveness of the Indian FMCGs in Bangladesh.

3. Market Fluctuations and Consumer Behaviour

The change in the economic situation of Bangladesh will highly impact the market dynamics and consumer behaviour.

1. Reduced Consumer Spending:

The economic downturn and inflationary pressures in Bangladesh have eroded consumers’ purchasing power. Since the essential goods have become more expensive, the discretionary spending has declined. This consumer behaviour will significantly impact the sales of non-essential FMCG products.

2. Changes in Consumer Preferences

During such economic shifts the consumers move more towards affordable products. Indian FMCGs will have to adapt accordingly to offer budget-friendly products.

4. Currency Volatility

1. Exchange Rate Fluctuations:

The depreciation of Bangladesh’s Taka can impact the profitability of Indian FMCG companies operating in Bangladesh.  Currency fluctuations can lead to higher costs for imported goods and affect the conversion of profits into Indian rupees.

2. Hedging Strategies

To mitigate currency risks, Indian FMCG companies may need to employ hedging strategies, such as forward contracts and currency swaps. However, these financial instruments come with their own costs and compliances.

Strategic Responses To Transcend These Issues

1) To deal with the supply chain disruptions following strategies can be adopted:

1. Indian FMCGs should diversify the suppliers rather than depending on a few suppliers. In case of disruption in supply from some suppliers, they can always look for others to meet their manufacturing needs. This ensures a steady flow of inputs to their manufacturing units.
2. Adoption of better technologies, and leveraging technologies for supply chain management can enhance visibility and efficiency. Real-time tracking, predictive analytics, and automated processes can help companies to swiftly respond to disruptions and optimize their logistics operations.

2) The Indian FMCGs will have to navigate their way through the regulatory challenges. Following are the policies they can adopt to remain at par with them:

1. To remain updated with regulatory compliance, the Indian FMCGs can build strong relationships with the local authorities and industry associations. This will help them navigate their way through the compliances.
2. Ensuring strict compliance with local regulations is crucial to avoid legal issues. Additionally, Indian FMCG companies can participate in advocacy efforts to shape favourable policies and create a conducive business environment.

3) With regard to the market fluctuation and changes in consumer behaviour, the Indian FMCGs can adopt the following policies:

1. The Indian FMCGs will have to make available affordable products considering the economic conditions.
2. The Indian FMCGs will have to localise their products more by adapting to local tastes and preferences.

4) The risks related to currency fluctuations can be mitigated by implementing hedging. Opinions of financial experts should be taken to design effective hedging programs that minimize risks and optimize costs. If the Indian FMCGs consider Bangladesh’s financial institutions for credit facilities, it will help them to mitigate the exchange rate risks.

Current scenario with regard to certain Indian FMCGs

1. Marico Limited

Marico company, which is especially known for its flagship product parachute, has a significant presence in the Bangladesh market. After the political unrest, the shares of the company plunged over 4%. In 2022, Bangladesh contributed to 51% of its international business. Currently, Bangladesh occupies 44% of the international business of Marico. The company aims at lowering this percentage to less than 40% by 2027. Marico earns about 12% of its revenue from Bangladesh markets. The shares of the company after a plunge on 6th August 2024, took a rebound on 7th by an increase of 3.4%. The Marico units that were shut on the 6th, resumed their operation on the 7th itself. Marico is known for its supply chain management. Marico company’s supply chain management is a subject of study for IIM students. Marico is handling the present situation with resilience. It is a great example for other FMCGs. 

2. VIP industries

20-25% of the revenue of VIP industries is dependent on sourcing from Bangladesh. Over 30-35% of the production capacity of VIP relies on Bangladesh. VIP Industries are currently rethinking their supply sources from Bangladesh. All the seven plants of the company in the Mongla region are currently in operation. However, 20 Indian employees from the region had already shifted to Kolkata on 4th August before the protest escalated.

3. Pidilite Industries Ltd.

Pidilite has its manufacturing units in Bangladesh. It has two subsidiary companies namely, Pidilite Speciality Chemicals Bangladesh Pvt. which contributes to 4.23 % of its profit, and, Nina Percept (Bangladesh) Pvt. Ltd. which contributes 0.21% to its profit. It is closely assessing the situation and hoping for the best.

4. Jubilant FoodWorks Ltd. has acquired 100% of Domino’s  Pizza shares in Bangladesh. It also holds the rights to Popeye fried chicken restaurant which operates in around 26 stores in Bangladesh. Bangladesh’s investments contribute 2% of its total assets.

There are several other companies as well like Dabur, Asian Paints, Adani Wilmar, and Emami who have a presence in Bangladesh markets. The Bangladesh crisis impact them to certain measures.

Future Outlook

Despite the current challenges, Bangladesh’s long-term market potential remains promising. The country’s young and growing population, coupled with rising urbanization and increasing disposable incomes, presents significant opportunities for Indian FMCG companies. As the economic situation stabilizes, consumer spending is expected to rebound, driving demand for a wide range of FMCG products.

Indian FMCG can consider strategic investments to strengthen its presence in Bangladesh. Establishing local manufacturing facilities, distribution centers, and research and development hubs can enhance operational efficiency and reduce exposure to external risks. Collaborating with local partners and distributors can also facilitate market penetration and expansion.

The digital revolution in Bangladesh offers a unique avenue for growth. E-commerce and digital marketing are gaining traction, providing Indian FMCG companies with new channels to reach consumers. Investing in digital platforms, online sales, and targeted marketing campaigns can help companies tap into the evolving consumer landscape.

Conclusion

The Bangladesh crisis presents both challenges and opportunities for Indian FMCG companies. While political instability, economic challenges, and social unrest pose significant risks, strategic responses, and adaptability can help mitigate these impacts. By focusing on product innovation, supply chain resilience, regulatory compliance, and digital transformation, Indian FMCG companies can navigate the current crisis and position themselves for long-term success in the Bangladesh market. Despite the uncertainties, the potential for growth and expansion in Bangladesh remains substantial, making it a crucial market for Indian FMCG players in years to come.

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