More than the Doklam issue, Bhutan worried about hydropower deficits

To make it eminently clear, while Doklam is allegedly “disputed” territory between Bhutan and China it has a far bigger impact on India’s security, in the analysis of India’s own experts and commentators.  This is one key reason why Bhutan did not accept a generous ‘package deal’ from China in 1996, that offered not only the larger disputed 495 sq km in the central sector but also a part of the 269 sq km western sector, in exchange for sections of the 269 sq km which includes Gyemochen, claimed by China as the tri-junction.

In short, though Bhutan stands to gain more disputed territory and also solve the border issue with China, it has steadfastly not done so in 24 rounds of border talks from 1984 onwards, so as to protect India’s security interests in the western sector.  The assertion by some in India that Bhutan did not protest past road building activities by the Chinese is not accurate. There are records of the issue being raised in not only repeated protests with the Chinese embassy in Delhi, but also raised numerous times in Bhutan’s Parliament sessions in the past.

Apart from the matter of the tri-junction, Bhutan as a buffer country shares 477 km of its northern border with China — which India doesn’t have to worry about — and another 600 km of southern border with India including on the narrowest part of the “Chicken’s Neck,” that sliver of territory which starts from Siliguri going all the way to Assam up to Arunachal Pradesh. It must be mentioned here that in the 1962 Sino-Indian conflict, Chinese troops did not make any incursions into Bhutanese territory along the entire 477 km northern border.

Similarly, when it comes to India’s internal security, in 2003 the Fourth King, His Majesty Jigme Singye Wangchuck personally led his troops to flush out thousands of ULFA, Bodo and Kamtapuri militants based in the thick jungles of southern Bhutan. This is apart from the support Bhutan provides to India at various international forums, including the UN, apart from being the only country which, along with India, has not joined China’s One Belt One Road (OBOR) summit. Bhutan is also not a member of the China-led Asian Infrastructure Investment Bank (AIIB), where India is a member. Bhutan, as is well known, does not have diplomatic ties with China.

Now some observers have taken all of the above to imply that Bhutan is an Indian ‘protectorate,’ which is not only an inaccurate assessment, but shows a lack of understanding of the increasingly complex and diversified nature of the relationship between the two countries.

It also shows a lack of understanding of Bhutan both domestically and externally. In Bhutanese culture we have a set of values and cultural philosophy called the ‘Driglam Namzha,’ which some refer to as codes of conduct but it is much more than that.  One of the important messages and lessons of this philosophy is having the ability to stoop and conquer, and this message, imbibed by the Bhutanese leadership, is all the more important for a small country stuck between two giant neighbors.

This is what Bhutan has done over the decades winning India’s trust and benefitting from its generosity in the form of grant assistance for our five year plans and other projects, and at the same time not giving any reason for China to see Bhutan as a hostile neighbor.

Bhutan, at the same time, is not a pushover, as imagined by some. For example, the Parliament recently refused to pass the Bhutan-Bangladesh-India-Nepal (BBIN) Bill on improving land connectivity in the region (citing superior pollution norms, carrying capacity of Bhutan’s transport infrastructure, illegal immigration, cultural impact), which even the usually more argumentative Nepalese agreed to.

However, this practical and close relationship between Bhutan and India is getting tested, not so much in the heights of Doklam, as with issues in the growing and unsustainable trade imbalance and setbacks in the hydro projects promised by India. India is Bhutan’s largest aid donor in its five-year plans, but even though Indian assistance has been increasing in absolute numbers, its share of the plans has been falling primarily on account of Bhutan’s own growing economy and needs.

It is also a fact that any Indian assistance for Bhutan’s five-year plans is virtually wiped out in a year or a year and a half’s worth of trade deficit, mainly with India. This trend has only been increasing over the years. India committed Rs 4,500 crores out of Bhutan’s Rs 20,210 crore expenditure for the ongoing 11th plan from 2013-2018. However, just in 2016, Bhutan’s trade deficit was Rs 3,200 crores, of which more than 90 percent was with India.

This is what led to a severe rupee crisis or shortage in 2012 for Bhutan, leading to a lot of economic pain in the form of slow growth, frozen credit, import bans and cut backs, and it more than anything else, played a decisive role in the 2013 elections. The impact of the last minute withdrawal of subsidies by India is over hyped as the former Druk Phuensum Tshogpa government, by all accounts, was set to lose due to the painful 2012 economic crisis and some governance issues.

Bhutan has always been acutely aware over the decades that it cannot sustain an economy without becoming self sufficient and restoring this trade imbalance. In that sense, selling hydropower to India and contributing in its economic growth has long been held as the one main salvation to Bhutan’s economic woes.

Not long after the 2003 operations by Bhutan, there were discussions between India and Bhutan at the highest levels and 5000 MW worth of hydro projects by 2020 was agreed to, on the lines of then ongoing 1,020 MW Tala project which had been completed by 2006 and which had pushed Bhutan’s total hydropower generation to 1,400 MW. It is a fact that Tala is Bhutan’s largest earner of foreign currency coming to around Rs 700 crores a year but it is also a fact that it barely covers Bhutan’s fuel imports for a year. Tala was built on 60 percent grant and 40 percent loan component.

The grant component while easing financing for Bhutan also benefitted India with the world’s cheapest tariff rate from 2007 onwards which even until recently was Nu 1.80 per unit even while prices in India’s Power Exchange markets reached around Rs 7 to 8 per unit in the past few years.

In 2008 the then Manmohan Singh government under UPA II committed to doubling this 5,000 MW to 10,000 MW by 2020 on the request of Bhutan’s first elected government, as hydropower was seen as the main economic activity that would make Bhutan self sufficient and reduce trade deficits. The ‘10,000 MW by 2020’ from a key economic project became a central diplomatic pillar and mantra between the two countries that defined the mutually beneficial relations between the two countries. It also became a frequently cited template by both India and Bhutan while having discussions on energy cooperation with Nepal and Bangladesh.

The initial 5,000 MW projects were largely understood to be ‘Tala like’ projects with soft financing and full RGoB ownership but since the ante was upped to 10,000 MW, India asked and was given, a 50 percent stake in four hydro projects as ‘Joint Venture’ projects. The earlier 60 grant and 40 loan scheme was changed to a more stringent 30 grant and 70 commercial loan scheme.

However, starting from 2014 onwards itself, Bhutan woke up to a rude economic shock when the new NDA government made it plain that 10,000 MW by 2020 would no longer be possible due to “financing concerns”.  Instead, in addition to the ongoing construction of the 1,200 MW Punatsangchu I project, 1020 MW Punatsangchu II project and 720 MW Mangdechu project, where Bhutan would have full ownership, the Indian side pushed to implement the four joint venture projects. These are the 770 MW Chamkarchu project, 600 MW Kholongchu project, 570 MW Wangchu project and 180 MW Bunakha project coming to a total of 2,120 MW.

This left Bhutan flummoxed as the four JV’s and tougher financing conditions of 70 loan and 30 grant had been agreed to as part of a larger 10,000 MW deal that included the 2,500 MW Sunkosh reservoir project and the 2,640 MW Kuri Gongri reservoir projects.

The two reservoir projects are important for Bhutan from the point of view that unlike the other run of the river projects that cannot generate much power in winter, the reservoirs would generate power on a year round basis and thus allow not only export of power but also enhance Bhutan’s industrial development.

The JV companies from the Indian side, which were Indian PSUs from day one, rubbed off the RGoB the wrong way, from making demands that went beyond the larger JV agreement between the two governments to asking for more management control and even refusing to come up with the agreed financing.

If this was not enough India’s power ministry on December 5, 2016 issued a Cross Border Trade of Electricity (CBTE) guidelines with inputs from India’s Ministry of External Affairs. The CBTE, though meant to be a general cross border electricity trade guideline, was seen to be mainly targeting Bhutan as it, using the monopoly of India being Bhutan’s sole power market, restricted the type of hydropower investments that could be made in Bhutan, put Bhutan at a disadvantage in setting future tariff rates beyond the current government to government formula and denied Bhutan access to India’s primary power market where tariff rates are more competitive. Strangely CBTE even asked that any power trading company exporting power to India from another country (read Bhutan) would be required to have 51 percent Indian ownership.

With such a drastic change in the 10,000 MW commitment followed by such unfavorable terms especially with the JV’s and CBTE, Bhutan has refused to sign the Concession Agreement for the JV projects citing the manner in which CBTE and the demands of JVs violate the agreement between the two governments.

As if matters couldn’t get any worse India declared itself to be power surplus in 2017 with falling tariff rates that now puts the entire hydropower sector of Bhutan in jeopardy.  In another additional blow, Bhutan’s trade deficit is set to worsen as India’s Good and Services Tax (GST) taxes makes its exports to Bhutan cheaper and imports from Bhutan more expensive. The small but important industrial belt in southern Bhutan that contributes in a major way to Bhutan’s taxes and economy is in a crisis mode. Though the RGoB recently asked the Indian government for an exemption from GST, based on GST regulations that allow for it in a bilateral context, the Indian government has asked Bhutan to wait for a while.

With Bhutan’s entire economic hopes pinned on selling hydropower to India falling short, there are now serious challenges and consequences for Bhutan’s economy in the face of a growing and unsustainable trade deficit. While some may assume or have calculated that this would make Bhutan more dependent on India, it may very well have the opposite impact as Bhutan would have to really explore a host of economic options to sustain its economy in the long run.

In the bigger picture for Bhutan, Doklam, no doubt, is a serious issue, but it is a comparatively minor distraction compared to the developments in the economic sector.