India–Bhutan Hydropower Cooperation and Bhutanese Economy

India–Bhutan bilateral relationship has been based on ‘utmost trust’ and ‘mutually beneficial cooperation’, since the establishment of diplomatic relations in 1968. To maintain the tradition of regular high-level exchanges, External Affairs Minister, Dr S. Jaishankar, visited Bhutan on 29–30 April 2022, at the invitation of his counterpart, Lyonpo Dr Tandi Dorji.1

Hydropower cooperation is an important feature of India–Bhutan bilateral relations. Since the first hydropower agreement (the Jaldhaka project) signed in 1961, a series of agreements have been signed over the years accelerating the pace of hydropower development.2 In July 2006, an agreement on ‘cooperation in the field of Hydroelectric Hydropower’ was signed.3 In March 2009, the protocol to the 2006 agreement was signed to help Bhutan install 10,000 MW by 2020. Subsequently, on 22 April 2014, the two countries signed the ‘Framework Inter-Government Agreement’, concerning development of ‘Joint Venture Hydropower Projects’.4

India has supported the development of hydropower projects in Bhutan through a mix of grants and loans and technical support relating to design and construction of the projects. Such arrangements were seen as a win-win arrangement for several decades. However, over the years, several pressing issues have emerged from the accelerated hydropower development approach.

Increasing Hydropower Debt

For Bhutan, hydropower is a ‘strategic renewable energy resource’. It has stimulated high economic growth and has been fundamental in achieving prosperity for its people. Bhutan has an estimated hydropower potential of 36,900 MW with annual production capability of 154,000 gigawatt hours.5 In 2020, the hydropower sector contributed 17.74 per cent to the Gross Domestic Product (GDP).6

Though India and Bhutan consider the development of hydropower projects as a win-win, the economic feasibility from the implementation of several projects remains a big concern, particularly on the part of the Bhutanese government. One of the major worries of Bhutan’s hydropower sector is the steep rise in public debt. As seen in Table1, there has been an increase in the debt to GDP ratio. As of 30 June 2021, the government debt was Nu. 238,398.910 million of which Nu. 17,074.437 million is internal debt and Nu. 221,324.473 million is external debt. According to a report by the Royal Audit Authority (RAA), the major portion of the debt relates to borrowings for hydropower loans, amounting to Nu. 162,359.048 million, which is 73 per cent of the total external debt for the financial year (FY) 2020–21.

Deteriorating Economic Benefits

India’s role in providing financial and technical support for development is much appreciated. However, it has been seen that since 2007, the hydropower sector’s financial performance is deteriorating.7 Several reasons have contributed to the decline of economic benefits. One reason that has been flagged is the change of the financing system of hydropower projects by India from a 60:40 model (60 per cent grants and 40 per cent loans) to a 30:70 model (30 per cent grants and 70 per cent commercial loans) (Table 2).8

Further, the commissioning of projects has been delayed, and massive escalations in the cost of construction of hydropower projects has also occurred. For instance, from an estimated cost of Rs 34 billion for the 1,200 MW Punatsangchhu-I, the cost went up to Rs 97 billion; for the 1,020 MW Punatsangchhu-II from an estimated cost of Rs 38 billion, it went up to Rs 74 billion.9

According to the 2017 report of the Bhutan Electricity Authority (BEA), one of the reasons for cost escalation in hydropower projects is the failure to take into account the inflation rate in the initial cost estimates.10 Besides, the report underscored the failure to undertake rigorous Environmental Impact Assessments (EIA). Due to a major landslide in July 2013 at the site of the 1,200 MW Punatsangchhu-I project, not only was it delayed but the cost of the project increased as well.

Poor Employment Opportunities for Local Population

The development of hydropower projects is highly capital-intensive but only diminutive employment opportunities are available for the local populace, leading to discontentment. Such displeasure among the Bhutanese officials and communities is evident from the ongoing construction of the 600 MW Kholongchu hydropower project, a joint venture project of Satluj Jal Vidyut Nigam (SJVN) of India and Druk Green Power Corporation (DGPC) of Bhutan. Reports noted that the SJVN wanted to allocate the construction work to an Indian contractor with the Bhutanese side acting as a sub-contractor. On the other hand, the DGPC is against such rules as it will impact Bhutan’s capacity development.11

One of the main reasons behind the jobless growth in the hydropower sector for local population is the cheap and easy accessibility of both skilled and non-skilled workers, especially from India. For instance, in FY 2017–18, as shown in Table 3, of the total 54,972 foreign workers that were issued work permits, Indian workers represent the majority compared to other nationalities. For FY 2019–20, the import of foreign workers declined due to restrictions on mobility of workers in the wake of the COVID-19 pandemic.

Conclusion

The model on which India–Bhutan cooperation operates seems to be unravelling and deeper introspection is necessary to address the emerging issues. During the Doklam stand-off, the Editor of The Bhutanese, Tenzing Lamsang, pointed out that though Doklam was a serious issue, for the Bhutanese, the decline of economic feasibility in the hydropower sector is more worrisome.12 Both India and Bhutan need to engage profoundly and consider the economic, social and environmental impact of the development of hydropower resources.  

The idea of development in Bhutan is rooted in the overall development philosophy of Gross National Happiness (GNP).13 The guiding principles for Bhutan in harnessing hydropower resources has been ‘The Sustainable Hydropower Development Policy (SHDP) 2008’. Such policies have, however, led to a rise in debt from the hydropower sector and have provided few employment opportunities for local communities. As a result, SHDP 2021 was launched, which aims to “guide the overall development of Bhutan’s abundant hydropower resources in consonance with national economic development goal”.14 It is to be hoped that hydropower cooperation between India and Bhutan will not only help achieve the larger aspirations of the Bhutanese people for peace, prosperity and happiness but also further strengthen bilateral bonds.

Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.

• 1. “Press Release”, Ministry of Foreign Affairs, Royal Government of Bhutan, 29 April 2022.
• 2. “Bhutan-India Hydropower Relations”, Royal Bhutanese Embassy, New Delhi.
• 3. “Agreement Signed between India and Bhutan”, Minister of External Affairs, Government of India, 28 July 2006.
• 4. “Inter-Governmental Agreement between Bhutan and India on Development of Joint Venture Hydropower Projects”, Minister of External Affairs, Government of India, 22 April 2014.
• 5. “Strategic Environmental Assessment (SEA) for Project on Power System Master Plan 2040 in Bhutan”, Department of Hydropower & Power Systems (DHPS), Ministry of Economic Affairs, Royal Government of Bhutan, July 2019.
• 6. “Statistical Yearbook 2021”, National Statistics Bureau, Royal Government of Bhutan, October 2021.
• 7. Naoko C. Kojo, “Small Countries with Volatile Revenue: Botswana and Bhutan”,Working Paper Report No. 98089, World Bank, 2015.
• 8. “Note on Cooperation with Bhutan”, Central Electricity Authority, Government of India.
• 9. Shripad Dharmadhikary, “India Bhutan Hydropower Cooperation Fraying at the Edges”, The Third Pole, 4 October 2016.
• 10. “Report on Hydropower Project Cost Overrun”, Bhutan Electricity Authority, December 2017.
• 11. “No Progress on KHEL’s Dam and Powerhouse Construction”, Kuensel, 22 January 2022.
• 12. Tenzing Lamsang, “More than the Doklam Issue, Bhutan Worried about Hydropower Projects and Trade”, The Bhutanese, 7 July 2017.
• 13. The concept of GNH has often been explained by its four pillars: good governance, sustainable socio-economic development, cultural preservation and environmental conservation.
• 14. “Bhutan Sustainable Hydropower Development Policy 2021”, Ministry of Economic Affairs, Royal Government of Bhutan.