Bhutan and India: Evolving Ties in Changing Times (Part 1)

Hydropower Development

Bhutan has a total hydro power capacity of 30,000 MW, and an economically viable total capacity of 23,760 MW, of which 1,400 MW has been built.

A major development in the Bhutan-India hydropower cooperation is that the target of harnessing 10,000 MW by 2020 will no longer be feasible –mainly due to cost and funding concerns from India.

In 2008, India and Bhutan had jointly agreed to construct 10,000 MW of hydro projects in Bhutan by 2020. The approximate investment required during 2008 costs, itself, was Rs 50,000 crores or around USD 9bn.  Therefore, to reach the 10,000 MW target, the figures were expected to increase to Rs 100,000 crores or around USD 18bn on completion – by conservative measures.

It is now certain that only 6,476 MW is possible to be completed within a new deadline of 2022. The remaining bilateral projects, which are the reservoir dam projects of 2,585 MW Sunkosh and 2,640 MW Kuri Gongri is now uncertain. The 620 MW Amochu reservoir project will also not be constructed due to security concerns.

This is a setback for Bhutan’s 10,000 MW by 2020 goal, especially since the above there projects were bilateral in nature, whereby, Bhutan would have full ownership. This will also affect India as the power supply from these projects was to meet the growing power demand in India.

Financing issues for the 10,000 MW emerged in 2009 when the then former Power Secretary, H.S Brahma, held a meeting on the issue of financing difficulties for 10,000 MW by 2020. The Power Secretary had pointed out the adverse effect of the financial investment on India’s budgetary arrangement. Even if Rs 50,000 crores was invested in 10,000 MW, it would mean investing around Rs 5,000 crores every year.

By that time, the financing model for Punatsangchu I (P I) had been kept at 40 percent grant and 60 percent loan at 10 percent per annum. It was popularly assumed that this would be the same formula for all 10,000 MW projects.

However, after discussions on financing concerns between the two governments in 2010, the formula was changed to 30 percent grant and 70 percent loan at 10 percent interest for the remaining bilateral projects, like 1020 MW Punatsangchu II (P II) and 720 MW Mangdechu.

Financing issues also saw the introduction of 50-50 joint venture projects for 650 MW Kholongchu, 670 MW Chamkarchu I, 600 MW Wangchu and 180 MW Bunakha Reservoir.

Indian PSU’s were given a 50 percent ownership in these projects for 30 years with a possible extension of 15 years in return for providing financing for the construction phase.

There have also been issues with the timely release of funds for the ongoing construction of the three hydro projects, P I, Mangdechu and P II. The issue of financing has almost always been a perennial issue in high level discussions between the two countries.

Given the new uncertainty in the hydropower sector with revised targets, financing concerns and the ongoing projects impact on the economy, there is a new thinking that Bhutan cannot solely rely on hydropower, or put all its economic eggs in one basket.

There is also an increasing realization that the national obsession with hydropower has created a self-inflicted resource curse with the other sectors suffering. There is an attempt to change this now with focus on others sectors, like agriculture, tourism, small and cottage industries, big industries, etc.

Given the inflation rate and Bhutan’s growing developmental needs, there is now a realization that the revenue generated from future projects could be outpaced by our expenditure.

This has happened in the case of Chukha and Tala hydro power projects, where initially the revenue from both projects were thought to be enough to meet the bulk of Bhutan’s developmental needs. The reality is that the total hydro revenue from all hydro projects, coming to around Nu 7 bn a year, is barely enough to even cover our fuel imports.

The launch of three mega projects (P I, Mangdechu, P II) had had a strong impact on the domestic economy, heating the Bhutanese economy to the point of causing a credit crunch and Indian Rupee shortage in the country.

The official position of both governments is to keep the 10,000 MW target, but to now considerably change the timeline and funding parameters of the remaining projects.

However, even if both the countries can deliver 6,476 MW by 2022, it will still be a huge achievement for both countries.

It will be in the interest for both countries to ensure the timely completion of the projects with adequate supply for funds. It will also contribute to the development of clean energy capacity in South Asia.

Even if the timeline has changed it will be appreciated if India in the coming years can fulfill its 10,000 MW commitment through the provision of grant and soft loan model in the form of bilateral projects where the Bhutanese government will have 100 percent ownership.

The overall success of the India-Bhutan model in hydropower development has even convinced an earlier skeptic, Nepal, to open its doors and invite Indian investment.

Bhutan’s Economic Push and Connectivity Issues on the Indo-Bhutan Border

Bhutan faced a domestic economic crisis from 2012 onwards, in the form of the Indian Rupee shortage and credit crunch. The economic crisis is related to the simple fact that Bhutan imported more than it exported. It resulted in a Rupee shortage as India is Bhutan’s biggest trade partner. There was also a credit crunch as Bhutan’s central Bank the Royal Monetary Authority restricted credit to slow down imports and lift the pressure on the rupee and dollar reserves.

Consequently, from an era of around 8 percent growth, Bhutan’s GDP growth rate slumped down to 4.06 percent in 2012 and then a record low of 2.05 percent in 2013.

The only major long-term solution for Bhutan is to increase exports, especially to the largest trading partner, India. As a result the PDP government, which came to power in mid 2013, laid out a major economic plan.

A key component of the plan is to build around four major Industrial Estates in Bhutan’s small but limited plains, mainly adjoining to the border Indian states, like West Bengal and Assam. All Industrial Estates are to host several factories and processing plants, and produce goods for export to India, Bangladesh, Nepal, and beyond.

The government plans to complete setting up the four Estates by 2017. Bhutan will be spending more than Nu 2bn in just the basic infrastructure set up in these estates.

Although Bhutan lays the groundwork for the success of these estates, however, it can only be successful if the two countries can cooperate on improving connectivity and transport infrastructure between the two countries.

While Bhutan and India are close and friendly neighbors, there is only a basic level of road highways between two countries. The main highway between Siliguri and Phuentsholing is of poor quality and often ends up with potholes after the monsoons, remaining in disrepair for years to come. Similarly, the road networks between Assam and Bhutan’s southern districts are unreliable and in poor condition. India has built the Asian Highway on National Highway 33 near Bhutan, but there are no good connecting roads to Bhutan from the highway.

Bhutan has also recently had to put on hold the construction of two major highways in southern Bhutan. These are the 68.3 km Nanglam-Dewathang highway and the 98 km Lhamoizingkha-Sarpang highway. This has naturally led to unhappiness in the areas the road would have been passing through.  The suspension of these major projects are due to security issues emanating from Bodo militants who may try to cross into Bhutan with ongoing Indian Army operations in Assam and perennial militancy problems there. The focus is on our armed forces patrolling the border preventing the entry of any militants into Bhutan. Bhutan has been successful in keeping the militants out. India has to appreciate the continuing impact of its Assam militancy problem on the development of a significant part of Bhutan’s southern areas.

In 2005-2006, India and Bhutan announced that the Indian Railways would study the possibility of connecting Bhutan to India railways by studying the feasibility of railway links at five sites, Hasimara to Phuentsholing in Bhutan (18 km); Kokrajhar in India to Gelephu (70 km) in Bhutan; Pathsala in India to Nanglam (40 km) in Bhutan; Rangla–Darranga in India to Samdrupjongkar (60 km) in Bhutan; and Banarhat in India to Samtse in Bhutan.

In 2008, the visiting Indian Prime Minister Manmohan Singh assured the Bhutanese Parliament that India would start construction of the first ever rail link between India and Bhutan, connecting Hashimara to Phuentsholing, called the “Golden Jubilee Rail Line” which would connect Bhutan to the entire railway network of India.

The link would have been an important one as it would connect Bhutan’s commercial centre of Phuentsholing and the nearby Bhutanese Industrial Estate of Pasakha to India by railway.

However, bureaucratic delays and the land politics of West Bengal shelved the entire project, in 2014. According to Indian officials, there was stiff opposition from some tea garden owners and some local residents who did not want to give up any land for the project.

One would have expected these projects to be feasible as they consist of connecting the main existing railway lines to relatively short distance links to Bhutan’s borders. The railways would not only improve connectivity between the two countries, but also make it easier to carry out trade. It would have also helped in boosting Bhutan’s economy, making both import and export cheaper.

Meanwhile, several international reports show that China, at great cost and effort, will be extending its railway line in Tibet to the borders of Nepal, Bhutan and India. Apart from improving connectivity for China, these railway lines are expected to provide China with a strategic advantage. This is in spite of Bhutan’s borders with China being closed from the 1950s.

The failure of rail links between Bhutan and India should also be seen as a failure in the strategic dimension beyond the connectivity and trade issues.

Apart from actual connectivity issues, Bhutan’s business community faces a variety of Non Tariff Barriers (NTB) to trade with India or through India.

One NTB, according to business people in Bhutan, is the demand for bribes by a few corrupt low level Indian officials at various checkpoints along the way to let goods pass through, even though there is a free trade regime between the two countries. This is especially detrimental to the trade of perishable export items, like fruits and vegetables from Bhutan, which can get spoilt if held up for too long.

Another major trade barrier for Bhutan is the politically unstable nature of the regions bordering Bhutan, be it Assam’s restive Bodo dominated regions or West Bengal’s North Bengal region where there is an attempt to establish a Gorkhaland state.

Security along the Indo-Bhutan Border

The Indo-Bhutan border is around 700 km long. It falls along the Indian states of Assam (267 km), Arunachal Pradesh (217 km), West Bengal (183 km), and Sikkim (32 km).

Of the above the borders, West Bengal and Assam are the most important for Bhutan as it is through these borders that almost all Bhutanese trade and transport is done.

Bhutan, for some time, has been affected by the political turbulence and violence along the border regions of Assam and West Bengal. In the case of West Bengal, Bhutan has seen more than 15 recent cases of robbery of Bhutanese travelers in the Alipurduar highway stretch on the Indian side. It is hoped that the recent arrest of the eight robbers will relieve the problem.

There is also the problem of political agitation and demand for Gorkhaland that now encompasses all the Bengal Duar areas bordering Bhutan. The frequent strikes in the recent past hurt Bhutan as North Bengal is Bhutan’s economic and trade lifeline. This political time bomb can explode anytime again with consequences for Bhutan.

In its 2003 ‘Operation All Clear’, Bhutan removed a few camps of the Kamtapur Liberation Organization (KLO) militant group that is active in North Bengal and Assam with the aim to establish a separate Kamtapur country.

The main border security issues emanate from Assam where two militant outfits, National Democratic Front for Bodoland (NDFB) and United Liberation Front of Assam (ULFA), have been at odds with both the Assam State Government and the Indian Government for decades.

These militant groups, taking advantage of the vast forest cover straddling the two countries borders, hid in the forests when faced with pressure from Indian security forces and then established multiple camps in the 1990s.

Bhutan had repeatedly tried to negotiate with these militant groups to close their camps and to peacefully leave, since Bhutan, as a close friend of India, could not allow anti-India activities on its soil. The negotiations failed, and as a result, in 2003 the Royal Bhutan Army launched ‘Operation All Clear’ led by none other the His Majesty the Fourth King. The operations cleared out all NDFB, ULFA and KLO camps from Bhutan.

The 2003 operations dealt a near death blow to NDFB, ULFA and KLO, and it is only because of their camps in other countries, like Myanmar and also support in their own areas in India, that they have survived. This is coupled with what seems to be unresolved domestic political problems and issues in Assam.

However, even though there are no more camps in Bhutan, the restive regions of Assam still border Bhutan, affecting our transport and trade with India through frequent strikes and violence. Even safe travel between Phuntsholing and Gelephu and Samdrup Jongkhar has been affected and vehicles, on occasions, have to travel in convoys.

A recent and disturbing phenomenon seen along Bhutan’s border with Assam is a spate of kidnappings of Bhutanese citizens. It started in 2012 and increased over the years, leading to a total of 13 reported kidnappings of Bhutanese citizens since 2014.  Two men were kidnapped in 2012, four in 2013 and six in 2014.The people doing the kidnapping usually want some ransom money. Of the 13 kidnappings, 10 victims have been released so far, except for the case of two kidnapped drivers and a recent case of a student being kidnapped. There is a national concern in Bhutan over the security of its citizens along the border areas.

In response to the kidnappings and security situation along the borders, the government is working closely with India, at the centre, state and district levels.

Security along the borders have been tightened, and His Majesty the King has personally visited the affected areas and commanded for the deployment of additional troops along the border including special commandos.

It is in the interest of both countries to ensure a peaceful border. However, the problems are largely due to the fall out of political and social problems in Assam and to a lesser extent West Bengal.

While Bhutan will always secure its borders and not allow any anti-India activity, it is up to Indian politicians at the state and national level and Indian security agencies to bring peace and stability to these fairly unstable border areas. This is especially since the activities of these militants are harming Bhutan’s developmental activities

To be continued

This paper was presented by the writer at a regional conference organized by the School of International Studies, Jawaharlal Nehru University from 24th to 25th March 2015 in New Delhi. The aim of the conference titled ‘India and its Neighbors: Policy Priorities for the new government’ was to solicit independent views and recommendations on India’s regional foreign policy. All recommendations will be published as a book and will be presented as policy advice to the new Indian government.

By Tenzing Lamsang

The writer is the Editor-in-Chief of  The Bhutanese

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