India and Bhutan are in a good mood these days. Both countries have seen a number of high-level exchanges and events since October, when the Druk Nyamrup Tshogpa swept the general elections in Bhutan, winning 30 of the 47 constituencies in the National Assembly.
Bhutan’s new Prime Minister Lotay Tshering has said his government is committed to strengthening the existing ties between Thimphu and New Delhi. This is perhaps why Tshering’s first official visit will be to India, on December 27.
Similarly, when India’s Foreign Secretary Vijay Gokhale visited Bhutan in November, soon after Tshering took charge as prime minister, he returned with assurances that the dynamics of Indo-Bhutan relations will not be affected with the change in the government. During his talks with Tshering, Gokhale perhaps sensed new opportunities for India and Bhutan to work together.
Tshering’s party came to power with big promises and new dreams for Bhutan. From economic diversification to a more robust tertiary healthcare system, the new government’s vision for a more self-reliant Bhutan sounds ambitious. 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. He has emphasised on the need to move from subsistence to commercial farming, and he hopes to provide some fresh impetus to growth in the private sector, which is seen as a major employment provider.
But Tshering also inherited a climate of economic uncertainties, including some real risks. The country’s economic growth has shrunk to 5.8% in 2018 from 7% in 2017. There have been multiple delays in the completion of new hydropower projects, Bhutan’s main source of revenues. The economy has failed to create jobs and exports have declined. External debt remains high. Tshering has also expressed concerns about Bhutan’s total dependence on hydropower, a sector that is becoming increasingly vulnerable to climate shocks.
Finding resources for the 12th Plan
But his immediate priority is perhaps securing financial support from India for Bhutan’s 12th Five Year Plan. 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 almost five months ago. The Tshering government announced on December 8 that the 12th Plan is now approved in principle. It has an outlay of Ngultrum 310 billion (the ngultrum is pegged to the Indian rupee at par.) 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.
New Delhi committed Rs 45 billion for Bhutan’s 11th Plan – about 68% of the total external assistance received – according to India’s Ministry of External Affairs. Additionally, another Rs 5 billion came in from India as part of the Economic Stimulus Plan.
Bhutan’s prime minister has said that about 80% of the budget for the 12th Five Year Plan will be met from internal resources. This hope is mainly pinned on the imminent commissioning of the 720 MW Mangdechhu hydropower project, where Bharat Heavy Electricals Limited played a major role in construction after a bilateral agreement was signed between India and Bhutan. Indeed, Gokhale said on December 4 that the project could be commissioned within this month.
However, Tshering has been candid about where the rest of the resources would come from. Discussions on India’s scope of assistance to the 12th Plan are expected to be on top of Tshering’s agenda during his visit to New Delhi. Reliable insiders in the Indian government have said that New Delhi will respond positively to Bhutan’s list of development priorities. In fact, India could significantly increase its financial assistance to Bhutan for the 12th Plan.
Things not right
But some of Bhutan’s multilateral development partners have cautioned Thimphu on overconfidence. They have spoken of a rather rough ride ahead. There are problems in Bhutan no elected government has been able to address satisfactorily. For example, job creation has been poor. The youth unemployment rate has now reached 13.2% from 10.7% just a couple of years ago. There are other problems that need to be tackled such as external debt, crime, disaster management, climate change, rural poverty, and trade deficit.
There have been delays in the hydropower sector for the past few years, and this has had an impact on Bhutan’s growth, as well as its exports and revenues. For example, the World Bank has attributed the decline in the country’s growth rate directly to delays in hydropower construction and the concomitant dip in electricity generation. It also subtly reminded the Bhutanese government not to throw caution to the wind when it comes to external debt. As of March 2018, Bhutan’s external debt stood at $2.6 billion or 115% of its estimated gross domestic product. Around $1.7 billion (Rs 118 billion) worth of the total debt is outstanding Indian rupee loans. Of the total rupee debt, 94.1% was outstanding public debt on hydropower projects. The rest was debt taken to finance balance of payments transactions with India. India remains Bhutan’s largest creditor with 73.53% of overall external debt. All this points to a moderate risk of debt distress.
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.
Opportunities to be had
These challenges provide new opportunities for Bhutan and India to work together. 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. Besides this mutually beneficial arrangement, 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.
The Tshering government’s vision of economic diversification needs more Indian engagement, and the possibility of expanding engagement beyond the Indian borders to Bangladesh and Nepal. This means new ideas and new risks that the two countries must be willing to take, as well as new investments in private sector development, so that growth results in jobs in the shortest possible time.
On December 4, India and Bhutan organised a conference in New Delhi to discuss the future of bilateral relations. Addressing the participants, Gokhale said the road ahead for India-Bhutan relations is “one of tremendous potential and opportunities”. For Bhutan, the imperatives are clear – the potentials and opportunities have to be harnessed as soon as possible.
Gopilal Acharya is a journalist based in Thimphu. He runs an independent current affairs blog, The Talking Hills.