Introduction

• The traditionally unique bilateral relations, characterized by trust and understanding have matured over the years. The basic framework of India-Bhutan bilateral relations is the Treaty of Friendship and Cooperation signed in 1949 between the two countries. Until 2007, India exercised significant leverage over Bhutan's foreign policy due to this treaty.
• When Bhutan transitioned from an absolute monarchy to a constitutional democracy in 2008, the Friendship Treaty was renegotiated to give greater autonomy to Bhutan in its foreign policy and its military purchases. But Indian investments, technical support, and the India-Bhutan free trade agreement mean that India continues to play a key role in supporting Bhutan’s infrastructure development and economy.
• PM Narendra Modi’s first foreign visit was to India’s small neighbour, Bhutan in 2014. The move made it apparent that India acknowledges its solid and special friendship with Bhutan. One reason was strategic, with the landlocked Himalayan country lying on the border with China, just south of Tibet. The other was the large hydropower potential of Bhutan, which has been seen by India as a source of cheap electricity.

Main Bilateral issues

Hydro-electric cooperation

• The major rivers in Bhutan have an estimated potential of 30,000 MW of hydropower. Given the marginal size of its domestic economy, Bhutan has been mostly unable to exploit much of its hydropower potential on its own. Thus, Bhutan has been looking up to assistance and aid from foreign countries and agencies for its hydro projects. India has been the most stable and trusted partner of all.
• India’s investment in hydropower projects in Bhutan since the 1960s has undoubtedly been an arena providing impetus to cordial bonding. Hydropower development in Bhutan has been the cornerstone of India-Bhutan cooperation. The model consists of India supporting Bhutan in building hydropower projects, by providing finance, a mix of grants and loans, and technical support to design and construct the projects.
• Hydropower in Bhutan, as supported by India, is by far the country’s primary source of energy for domestic use and local industrial consumption, and has been a major export and revenue carrier for the last two decades. Hydropower exports contribute around 40% to Bhutan’s revenue and 25% of its gross domestic product. Bhutan is a net exporter to India while India gets relatively cheap power, thus making hydropower a ‘win-win’ condition for both sides.
• Three hydroelectric projects (HEPs) totaling 1416 MW, (336 MW Chukha HEP, the 60 MW Kurichu HEP, and the 1020 MW Tala HEP), are already exporting electricity to India.
• For many decades this has been seen as a win-win arrangement and there are plans to expand it massively. While Bhutan’s installed hydropower capacity in 2015 was 1608 megawatts, the 2006 India-Bhutan agreement on hydropower, with an additional protocol in 2009, stated that India would help Bhutan install 10,000 MW of hydro capacity by 2020 and purchase all the surplus power.
• However, this model now threatens to unravel. One of the most important points coming to the fore is that economically and commercially, this model is making less and less sense. The Punatsangchhu I and II and the Mangdechhu projects are under construction, accounting for 2,940 MW of the total 10,000 MW to be generated. However, not only the commissioning of the projects has been delayed but their costs have escalated massively.
• Hydropower has also contributed to a steep rise in Bhutan’s debt. The challenges are emanating from the growing debt burden Bhutan carries due to delays in major hydropower projects. As of July 2017, Bhutan’s debt to India for three major ongoing projects: Mangdechhu, Punatsanghhu I, and II is approximately 12,300 crore which amounts to 77% of the country’s total debt and is 87% of its GDP. While the cost of the 720 MW Mangdechhu project has nearly doubled in the past two years, both Punatsangchhu 1 and 2, each of 1200 MW capacity have trebled in cost and been delayed more than five years over the original completion schedule.
• Another issue has been the fact that India is now a power-surplus country, while the demand growth has been slower than expected. Added to this is the government’s push for other renewable energies like wind and solar power. Meanwhile, the interest repayments on projects, that are being financed by India as 30% grant and 70% loan at 10% annual interest, are piling up. Also, Bhutan’s overdependence on India as the only customer of its hydropower makes Bhutan extremely vulnerable to any fluctuation in India's demand.
• These projects are also having massive environmental impacts like loss of forest lands, disturbance to wildlife habitat, heavy dust pollution from construction work, damage to water bodies such as streams and ponds, severe stress on water resources in the region, etc.
• The considerable amount of voice has been coming up from the environmentalists who critique the viability of the big dams. The issue has been raised in the northeastern part of India which shares a direct land border with Bhutan. The construction of mega hydropower projects in Bhutan has an adverse impact on the lives and livelihood of the people living in downstream areas in Assam and other states in the northeastern parts of India.

Trade

• The Double Taxation Avoidance Agreement (DTAA) was signed in March 2013 between the two governments. Internal procedures for implementation have been completed both in India and Bhutan. The DTAA entered into force on 17 July 2014.
• India is Bhutan's largest trading partner. A free trade regime exists between India and Bhutan. The India-Bhutan Trade and Commerce Agreement was first signed in 1972.
• India and Bhutan signed an agreement on trade, commerce, and transit on 12th November 2016, which provides for free trade regime between the countries aimed at boosting bilateral trade for mutual benefit. It was last renewed on July 29, 2006, for ten years. The validity of this agreement was extended for one year or till the new agreement comes into force through the exchange of diplomatic notes.
• India and Bhutan mutually decided to bring into force the ‘new’ bilateral Agreement on Trade, Commerce, and Transit with effect from July 29, 2017.
• The new agreement will further strengthen the bilateral trade relations between India and Bhutan. The agreement also provides for duty-free transit of Bhutanese merchandise for trade with third countries. The bilateral agreement aims at cutting down on documentation and adding additional exit and entry points for Bhutan’s trade with other countries.
• In 2015-16, the major commodities exported from India to Bhutan were petroleum products, machine tools, motor vehicles/cars, products of iron and steel, etc. while the major imports from Bhutan were power, iron, and steel, inorganic chemicals, plastic sheet and film, alcoholic beverages, etc.

Bhutan rejects BBIN Motor Vehicles Agreement

• In a major setback to India's regional cooperation strategy, Bhutan's Upper House rejected a motion to have the country join the Bangladesh, Bhutan, India, Nepal Motor Vehicles Agreement (BBIN-MVA), citing environmental concerns in November 2016. Earlier, the Lower House had passed this pact.
• The four South Asian nations signed the BBIN agreement in June 2015 in Thimphu, Bhutan, in what was seen as a significant symbol of sub-regional unity. The sub-regional pact was seen as an important milestone in Prime Minister Modi's diplomatic agenda to 'Act East' and forge a regional cooperation boosting trade ties in the region. It was India that introduced and pitched for the pact in the 2014 SAARC Summit in Kathmandu, urging the South Asian neighbours to fortify regional economic ties.
• The MVA was proposed to reduce transport costs drastically and foster the development of multi-modal transport facilities for better connectivity between the four countries. It allowed the member states to ply their vehicles in each other's territory for the transportation of cargo and passengers, including third-country transport and passenger vehicles or personal vehicles.
• However, there have been reservations among some sections within Bhutan about the viability of this agreement given that it was a small country.
• Bhutan's reservation about damaging its environment is not unfounded. Tourism is Bhutan's single largest revenue-generating industry, and the small Himalayan nation has carefully guarded its pristine natural habitat. It has even worked out a "low-volume, high-value" tourism strategy and maintained its status as an elite tourist destination.
• Threat to the environment is not the only loophole in Bhutan's eyes. The land-locked nation finds itself gaining little from the agreement amid a long list of demerits. Bhutanese truckers have raised concerns that a large number of foreign transporters plying into Bhutan could eat into the local businesses. The unrestrained influx of vehicles and people could dilute Bhutan's culture and religion and possibly give rise to the crime rate in the region. Also, the pact was in conflict with Bhutan's immigration act. Bhutan severely lacks the basic infrastructure of roads, bridges, checkpoints, etc to implement the agreement.
• After Bhutan’s upper house, the National Council, rejected the bill last November, the only way to get parliamentary approval was to table the draft legislation at a joint sitting of both chambers. A joint parliamentary committee was formed to find a compromise. The committee in its meeting on April 20, 2017, failed to reach an agreement, with all sides sticking to their positions. The Bhutanese government later withdrew the Bill to ratify the pact from the agenda of the upcoming parliamentary session.
• In New Delhi, there is an understanding of Bhutan’s decision, with the People’s Democratic Party government having to keep an eye on parliamentary elections next year. In the initial stages, there was a perception in India that the Bhutan government had not exerted itself as strongly as possible in its outreach activities with various sections. But now, with the BBIN MVA not finding many takers among lawmakers and being genuinely unpopular, the assessment is that any attempt to bulldoze the legislation through would have likely depleted the political capital of the Tshering Tobgay government ahead of the general elections in 2018 and given fodder to the opposition.
• Meanwhile, with Bhutan out of the picture till the next elections at least, officials in Delhi are working to find out if there was a possible way to operationalize the deal with just Bangladesh, Nepal, and India, who are still on the same page.

China Factor

• While India holds an important strategic position in China–Bhutan relations, there is no guarantee that this position is permanent. Bhutan’s position as a small landlocked country situated between two major Asian giants creates an imperative to maintain peaceful ties with both India and China. The 24th round of China–Bhutan border talks held in Beijing in August 2016 brought several aspects of South Asia’s geopolitics into focus. China’s increasingly cozy relations with Pakistan, and more recently Nepal, have concerned India for many years. The country now appears to be expanding its presence in the Himalayas through negotiations with another of India’s neighbors, Bhutan.
• Earlier in 2012, China and Bhutan indicated for the first time the possibility of establishing full diplomatic ties following a meeting between the then Bhutanese Prime Minister Jigme Thinley and then Chinese premier Wen Jiabao on the sidelines of the Rio+20 Conference in Brazil - without India’s knowledge. This development was taken very seriously by the Indian government, resulting in the withdrawal of India’s petroleum subsidies to Bhutan on the eve of Bhutan’s 2012 general election. This led to the defeat of this government in an election. India’s response was considered by many political strategists as a definitive message to Bhutan.
• It is to be remembered that Bhutan is also the only country in the region that joined India in its boycott of Chinese President Xi Jinping’s flagship project, the Belt and Road Initiative.

Bhutan’s Border dispute with China

• China–Bhutan tensions date back to the Chinese occupation of Tibet in 1951, which was followed by the publication of Chinese maps that claimed considerable territory in central and northwestern Bhutan. This resulted in closer ties between India and Bhutan along with an embargo on cross-border trade with China. Loosely demarcated through much of history, efforts to formally delineate the Bhutan-China date back to 1980, when Thimphu decided to open border negotiations with Beijing. In 1990, Beijing offered Thimphu a swap, saying it would concede its claims to the Pasamlung and Jakarlung valleys in the country’s north if Bhutan would hand over the four enclaves along the Chumbi valley.
• Even though Bhutan is believed to have been initially inclined to take the deal, it soon changed course: in November 1996, Thimphu’s negotiators returned to the table with claims to the western enclaves that were more expansive than those that they had made earlier. Furious, Beijing alleged that India was behind this about-turn. Though both countries signed a 1998 agreement committing them to maintain the status quo, the actual border talks rapidly got bogged down around Bhutan’s new claims in Doklam and broke down completely from 2006 to 2009.
• In these years, Beijing ramped up the pressure, building at least six roads cutting deep into the western enclaves - among them, one cutting through the Torsa Nature Reserve towards the Zompelri ridge, the closest point to the Bhutan-China-India junction where the Royal Bhutan Army is stationed.
• Ever since 2010, a joint Bhutan-China technical commission has been engaged in verifying the border on-ground, in an effort to develop shared 1:100,000 scale maps that would allow the two sides to agree on common landmarks and features to facilitate technical discussions on their claim lines, diplomatic sources said. There has, however, been little forward movement on the substantial disagreements.
• From China’s point of view, the most critical of these are over western enclaves, which overlook its highway linking the town of Yatung with Lhasa - a key logistical route for the PLA, which is at a tactical disadvantage in the sector. Beijing has also said it plans to build a railway along the route.
• Though the PLA had long carried out patrols up to the Zompelri ridge, asserting its claims to the territory, the construction of the road marked a physical assertion of its case — and a violation of the 1998 agreement committing both sides to respect the status quo.

The fallout of the Doklam episode on India-Bhutan ties

• While Bhutan has been a strong Indian ally and has stood by New Delhi during the standoff, the last several weeks of the standoff have emboldened those voices in Bhutan which seek a “balanced foreign policy”, that is, opening of ties with China. In all its statements following the disengagement, the Chinese have emphasized their sovereignty over the area. The Chinese offer of a swap for Doklam with disputed areas in the north is bound to be renewed, an offer which has always interested Thimphu.
• As China starts courting Thimphu and as Bhutan starts seeking greater ties with Beijing, it would be unfair to expect Bhutan to choose between India and China. The Bhutanese statement welcoming the resolution of the Doklam standoff is a pointer, however mild, in that direction.
• In view of some Bhutanese experts, the Indian Army was deployed on the soil of another country against a third country without a proper treaty mandate or unambiguous official invitation to intervene on behalf of the Bhutanese government. The 2007 India-Bhutan Friendship Treaty states that the two countries “shall cooperate closely with each other on issues relating to their national interests.” And that: “Neither Government shall allow the use of its territory for activities harmful to the national security and interest of the other.” Notwithstanding the special security relationship that India and Bhutan have shared over the past several decades, nothing in the 2007 treaty binds India to send troops to help Bhutan. Nor did Bhutan explicitly request military assistance from India during the stand-off even though the MEA statement of June 30, 2017, refers to ‘coordination between the two countries during the stand-off.
• Bhutan had the option of refusing Indian security assistance, which would have severely complicated matters for India.
• The argument here is not that India does not have legitimate security and strategic interests in Bhutan which would be undermined by the Chinese territorial aggression, but that there is a need to engage in careful scenario-building before India decides to take China on militarily.
• Talks between Bhutan and China on their border dispute — the root cause of the military standoff on the Doklam plateau which ended with the disengagement of Indian Army and People’s Liberation Army troops — are unlikely to take place as scheduled this year despite diplomats having defused the weeks-long crisis. Even if the Bhutan-China border talks are canceled this year, they are bound to resume next year.
• Beijing, sources said, has not called for this year’s round of negotiations, normally held between June and August, in a move that experts in Bhutan say indicates it is reluctant to publicly concede that its claims of sovereignty over the Doklam plateau have been disputed for several years.
• Failure to resume negotiations leaves open the prospect that a fresh crisis could erupt over disputed regions along China’s Chumbi valley, a narrow corridor separating western Bhutan from India’s Sikkim, where the PLA has cut roads towards Royal Bhutan Army outposts in Doklam, Sinchulumpa, Charithang, and Dramana.
• In view of Bhutanese analysts, India never intervened or even raised its voice in the past, about numerous Chinese incursions into the Bhutanese side, including the more serious road-building activities. This is because they did not affect Indian security, unlike Doklam. Also, it was, in fact, Bhutan’s firm and the uncompromising stand that the status quo should be maintained as per the 1988 and 1998 agreements, both in its public position and behind the scenes, that allowed the face-saver of a deal for both India and China.
• In the perception of many in Bhutan’s government, the conditions for future crises remain in place despite August’s disengagement deal. This crisis was never about a road and Troops seeking to use the Doklam road in a war would have been asking to be massacred by Indian positions higher up the ridge, and it would have disintegrated each winter anyway. The reality is that this crisis emerged from India’s decision to confront Chinese coercive action on the ground. For obvious reasons, this means the situation remains fluid until an actual border agreement is arrived at.
• Many herders had been told by PLA patrols to turn back this summer from high-altitude grazing grounds they had used for generations and asserting that the pastures belong to China, not Bhutan — a move that may have been designed to put pressure on Bhutan.

Lessons For India

• The Indian government must see that Bhutan’s sovereignty is no trivial matter, and avoid frivolous comments on it. The question does matter to Bhutanese people, and although their government had put out a gag request to newspapers on the Doklam stand-off, for now, blog posts and social media write-ups by respected commentators indicate there was much disquiet over the idea that Indian and Chinese troops may occupy the plateau in a tense stalemate for months. It cannot have escaped India’s notice that the only statement issued by the Bhutanese Foreign Ministry during the Doklam standoff made no mention of a “distress call” to India, only of its demarche to China.
• New Delhi would do well to refrain from differentiating between political factions inside Bhutan, unlike what it has done in Nepal, Bangladesh, and Sri Lanka, and recognize that there is no “anti-India” faction in Bhutan, even if some are calling for the establishment of ties with China.
• India must also be aware that other neighbors were watching the Doklam stand-off closely. It would be short-sighted not to recognize that Bhutan is at one tri-junction with India and China, but Nepal, Myanmar, and Pakistan too have tri-junctions (at least on the map) with both countries, and China’s reference to “third country” presence in Pakistan-occupied Kashmiris putting a spotlight on all of these.
• Perhaps one of the biggest learnings from the standoff is for India to reach out much more to the people of Bhutan. This is all the more important to counter critics who have been attacking India on social media. For example – the rupee is a legal tender in Bhutan and equivalent to the Ngultrum, and following the demonetization decision, thousands of Bhutanese found themselves stuck with cash they couldn’t use. Ordinary Bhutanese argue that India should have at least consulted Bhutan in advance to reduce the pain due to demonetization.
• India must calibrate both its message and its military moves in order to keep Bhutan on track with the special ties they share.

Other Important Points

• India has a special kind of relationship with Bhutan.
• India opened an office of a Special Representative in Thimpu in 1968, and Bhutan also reciprocated in 1971. These two offices were later elevated to full-fledged embassies in 1978.
• Both countries are founding members of SAARC.
• Both India and Bhutan are members of BIMSTEC and partners in BBIN.

Bhutan's importance to India

• Bhutan shares its border international border with India's very northeastern states - Assam, Arunachal Pradesh, West Bengal, and Sikkim.
• Stability and security of Bhutan are in the interest of India.
• Bhutan has special importance for India in terms of Bhutan's hydroelectricity, economy, and investment destination.
• Instability in Bhutan can provide a safe haven to anti-India elements.