Context

• Recently, Prime Minister of Bhutan, Lyonchhen Dr Lotay Tshering was on visit to India. This is his first visit abroad after assuming office, which shows the importance Bhutan attaches to relations with India.
• The year 2018 celebrates the Golden Jubilee of the establishment of formal diplomatic relations between India and Bhutan. Marking the completion of 50 years, Bhutan opened a Consulate in Guwahati.
• The primary objective would be to conclude discussions over development assistance package for Bhutan's 12th Five Year Plan (November 2017-October 2023).

Background

• The Himalayan kingdom of Bhutan’s graduation in 2007 from an Indian protectorate to a constitutional monarchy has happily translated into a more substantive equation between Thimpu and Delhi.
• Bhutan, since 2008, is a constitutional monarchy, with powers apportioned between the king and the democratically elected government.
• Bhutan has been following a five-year plan system since 1961.
• These plans articulate the government’s socio-economic development priorities that are implemented over a five-year period.
• India has closely been associated with them since the beginning: it solely financed the nation’s first three five-year plans and has continued to play a major role in financing the others.
• The 11th Five Year Plan ended and the 12th Plan is now approved in principle.
• According to the Gross National Happiness Commission, Bhutan’s equivalent of India’s erstwhile Planning Commission, the total indicative outlay for the 12th Plan is expected to be about 38% more than the 11th Plan (2013-2018) outlay.

About

The recent visit

The new Bhutanese Prime Minister had four main agendas during his visit, and these, in order of priority, are:

1. A fair tariff for the 720 MW bilateral Mangdechhu project;
2. seeking India’s support for Bhutan’s 12th Five Year Plan (FYP);
3. starting the 2,560 MW Sunkosh Reservoir project and
4. waiving off the Central GST for Bhutan.

Positive developments in Bhutan:

• The new government’s vision is ambitious with economic diversification, more robust tertiary healthcare system, and a self reliant Bhutan.
• The new prime minister sees tourism as the next big thing and wants to re-energise the sector through a diversification of services and products.
• Emphasis is on the need to move from subsistence to commercial farming.
• Some fresh impetus is being provided to growth in the private sector, which is seen as a major employment provider.

Challenges for Bhutan:

• Bhutan’s geographically disadvantaged location that has made its economy hugely dependent on India, giving India an undue advantage over Bhutan’s trade and commerce. 60 percent of Bhutan’s expenditure is on imports from India; 90-95 percent of what Bhutan borrows from India finds its way back to India, tilting the relationship more in favor of the latter.
• The country’s economic growth has shrunk to 5.8% in 2018 from 7% in 2017.
• As of March 2018, Bhutan’s external debt stood at $2.6 billion or 115% of its estimated gross domestic product. Of the total rupee debt, 94.1% was outstanding public debt on hydropower projects.
• The economy has failed to create jobs and exports have declined. The youth unemployment rate has now reached 13.2% from 10.7% just a couple of years ago.
• There are concerns about Bhutan’s total dependence on hydropower, a sector that is becoming increasingly vulnerable to climate shocks.
• There are other problems that need to be tackled such as external debt, crime, disaster management, rural poverty, and trade deficit.
• The World Bank has identified four key risks facing the Bhutanese economy:
  • delays in hydropower construction that could lower exports and revenue,
  • possible constraints on government spending because of limited financing sources,
  • policy uncertainty in the aftermath of the 2018 elections, and
  • climate shocks to the hydropower and agriculture sector.

Areas of cooperation:

• Bhutan has been central to India’s two major policies – the ‘Neighborhood First Policy’ and the ‘Act-East Policy’.
• Both sides will focus on development and infrastructure projects.
• India’s budgetary grants have been critical for the success of Bhutan’s five-year plans, more so in the face of declining donor financing.
• Bhutan’s focus on hydropower for the past five decades has been mainly because of Indian support and its assurances to buy back the electricity generated.
• The new government’s vision of economic diversification needs more Indian engagement, and the possibility of expanding engagement beyond the Indian borders to Bangladesh and Nepal.
• Bhutan government has decided to soon launch the RuPay cards which will further strengthen people to people relations between the 2 countries.

Areas of conflict:

• After the implementation of the Indian Goods and Services Tax (IGST) in July 2017, Bhutanese products became more expensive for Indian importers.
• India remains Bhutan’s largest creditor with 73.53% of overall external debt. All this points to a moderate risk of debt distress.
• After the 2017 Doklam standoff between Indian and Chinese troops over a piece of territory disputed by China and Bhutan, the issue of Bhutan’s perceived sovereignty and independence overall from India rose to the fore in the lead up to the 2018 National Assembly elections.
• Last year, Bhutan decided to withdraw from the BBIN Motor Vehicle Agreement for the reason that it would adversely affect its environment and sovereignty.
• India’s subsidized imports to Bhutan comprising of almost all essential goods have hurt the growth of domestic sectors within Bhutan while helping India exercise its hold on Bhutanese market.

Way forward:

• PM Modi said that the ground station being built by Indian Space Research Organization in Bhutan is expected to complete soon which would benefit Bhutan in tasks such as weather information, telemedicine and disaster relief in the far-flung areas of the country.
• Bhutan is already a major exporter of energy to India and the new hydropower project will expand that capacity. India’s current priorities in the country focus on expanding trade and connectivity.

Conclusion:

India and Bhutan enjoy exemplary ties of friendship and cooperation, based on utmost trust, goodwill and mutual understanding at all levels. The upcoming visit of the Prime Minister Dr Lotay Tshering will provide an opportunity to the two sides to review the progress in the multifaceted partnership and to discuss ways and means to expand the enduring ties of friendship and cooperation for the benefit of the citizens of both the countries.