Bhutan is at an interesting juncture. While it has admirably balanced sustainable development in its growth objectives so far, the young median age of its population makes rapid growth a necessity.
At such a juncture, it is imperative to draw up an economic vision so that it can incorporate sustainability plans into growth with a long-term view.
If Bhutan wants to grow its economy from the current $2.5 billion to $7.5 billion by 2025, it would have to grow at a stellar 16% Compound Annual Growth Rate (CAGR) , at least 1.5 times higher than the 11% CAGR it has seen since the last 5-years.
Such a jump may sound daunting, but many nations have seen decadal double-digit growth in the initial years of their journey. Even India’s Maharashtra state announced a vision to grow its economy by 15% CAGR to reach $1 trillion. A high, yet achievable, target pushes the commitment from politicians to realize the economic agenda.
But to what extent should Bhutan focus on each growth-driver to realize this target of $7.5 billion? If the proportion of each growth-driver has to move closer to the average proportions seen in rapidly growing developing markets, that could roughly indicate by how much they should grow from current-levels in Bhutan. This is what we explore here.
Look at Services-sector: Only 41% of Bhutan’s GDP is estimated to come from services; mainly trade and tourism. The average in most emerging markets has been 60-70%; and is a major job-creator for the educated middle-class.
If Services have to make up 65% of Bhutan’s GDP by 2025, it would have to grow at a rapid 23% CAGR, much higher than the 16% estimated GDP growth. While trade, tourism and financial inclusion would remain policy priorities, deepening the services-sector through the digital economy would bring in efficiencies in public-services and reduce the dependence on imported talent in skill-deficit areas in a small-population country like Bhutan. It would also ensure delivery of subsidies to the intended recipients, like India’s Direct Benefit Transfer.
Services also include ramping up the quality of skill-centres like India’s NSDC, to improve productivity and employment. All these would expand its addressable consumer-base and purchasing-power, and bring more citizens into its organized economy.
Let us move to industry: 42% of Bhutan’s GDP is estimated to come from industry, higher than the average 30-35% seen in large emerging markets. If its industry has to make up 30% proportion, it would have to grow at a 10% CAGR.
Bhutan’s gross investment was 50% of GDP in recent years, way higher than the 35-40% seen in China and Malaysia in their initial years of industrialization. If this has to taper to 40% of GDP, its investment has to grow at a 13% CAGR, lower than the estimated GDP growth.
Investment also correlates with productive imports like machinery. In Bhutan, import comprised 40% of GDP, same as the share of investment. But recent industrializing nations have seen that their share of imports to be 50-60% of their share of investment.
This means part of Bhutan’s imports may be for non-productive purposes. That has to reduce, especially of categories outside of essential needs like food, etc. So if imports grow at only 8% CAGR, its share can dip to 24% of GDP by 2025 (i.e. 60% of the share of investment, estimated at 40% of GDP).
Where should investments go? Affordable housing, transport and infrastructure apart, there is a need for corridors that would connect commercial zones like Paro and Thimphu with the underdeveloped districts in its East. New industry clusters have to focus on hinterlands for inclusive growth across districts. But this also means addressing the Ease of Doing Business parameters, where it lost its rank by 4 places in the last 2 years.
Coming to agriculture: 16% of Bhutan’s GDP is estimated to come from agriculture, higher than the sub-10% share seen in most emerging markets. But the crux is to improve farm-productivity, as agriculture employs 57% of Bhutanese workforce. If its share of agriculture has to halve to 8%, it would grow at a 6% CAGR. But this growth has to be backed by significant productivity improvement.
For this, it has re-skill unproductive labour for high-growth sectors like construction, tourism and retail. That would mean investing in skill-training. It also means investing in irrigation, power and market linkages to improve acreage yield and ensure the end-farmer gets the correct market price. So part of the incremental gross investment also has to flow into the agro-sector.
Moving to export. Only 26% of Bhutan’s GDP is estimated from exports, most of which has been hydropower, timber and spices. Its export has to grow at a rapid 15% CAGR, in line with the estimated GDP, if it has to meet the forex demand for imports and keep trade imbalance nil. It has an advantage, as the Ngultrum gained against the USD last year, while the Bangladesh, Sri Lanka and Pakistan currencies fell. This reduces its export competitiveness, and makes it all the more imperative to draw up further Free Trade Agreements and export-promotion schemes to open more export opportunities.
Lastly, Bhutan has a moderate share of private consumption to GDP. Sri Lanka, Philippines and Morocco have a similar per-capita, but they spend more. It may have to let consumption increase slightly in discretionary sectors to reduce some burden from exports, in case exports are slow to take-off. However, that may impact its savings to meet the investment demand.
All in all, these segmental growth-rate estimates to target a GDP of $7.5 billion by 2025 may sound over-ambitious. But it is not unachievable, if one looks at similar markets. The country will have to create an enabling policy environment to balance a long-term growth vision with its focus on sustainable development.
By Sourajit Aiyer
Sourajit Aiyer is an author, financial services professional, and researches for South Asia Fast Track.