A view of Phuentsholing from Chukha (Photo:TripAdvisor)

Knowing where we truly stand and what to do about it

His Majesty The King’s Royal Address at the opening of the recent Parliament session is the most honest assessment to date of our nation’s situation.

The frank views from the very top coupled with the Transformation Reforms should make every Bhutanese do an honest reassessment of where we truly are as a nation and people, and what we can do individually and collectively to improve our lot.

For a long time, the conventional wisdom has been that Bhutan’s location between the two giants of China and India is a security threat, but a great commercial opportunity that our industries, agriculture and other sectors can take advantage of.

The commercial opportunity logic came from the two billion plus market size of India and China, and how we can utilize opportunities there.

However, if we do a proper reassessment, it should be clear by now that our location is not a commercial opportunity, but a major commercial disadvantage or even threat to us.

The reason being that both countries can manufacture and make everything cheaper and even better than us.

Forget about electronics and consumer goods, but our traditional Gho and Kira is manufactured in Indian factories and imported into Bhutan.

Bigger and faster Power and Hydropower in India

Our main export was supposed to be hydropower with 10,000 MW by 2020, but a handful of large Indian private companies and Public Sector Undertaking companies generated enough power within less than a decade to make India self-sufficient in power.

When you look at the list of top 10 Indian power generation companies, each of them generate far more power (including hydro) than the whole of Bhutan combined with most generating several times over.

Even though hydropower had become one of the cornerstones of the relationship between the two countries and was both an economic and strategic project, we never had a chance as any Indian government will always give preference to its private companies.

Bhutan can also never compete with the sway that these companies have over their government.

We wanted to export power to Bangladesh as a trilateral project by aiming to get India’s permission to use existing power lines or building new ones, but again a major private power generator in India stepped in to offer the power to Bangladesh.

As a result, our proposal for a trilateral project to export power to Bangladesh will likely go nowhere.

The commercial interests of even a single major Indian corporate house will have much more importance and lobbying power in Delhi than Bhutan will ever have.

So like everything else, even when it comes to hydropower, which was our sole trading advantage with India, their companies can do it faster and bigger.

Industries and Agriculture

When it comes to factories and industries, the imposition of the GST taxes in India has made our exports uncompetitive as they face higher taxes than before in India.

Earlier, Bhutanese companies had to only pay Excise Duty which was lesser, and so we enjoyed a narrow tax advantage as opposed to our higher labour and transportation costs, but this tax advantage is now gone.

This will not be a problem for a manufacturing powerhouse like China with its scale, monopoly and competitive prices and their exports to India are only going up.

However, it is a disaster for a country like Bhutan which only had a wafer thin advantage riding on tax differences and power prices.

Our other great export hope was agricultural products, but after the formalization of trade at the border even that is suffering with all kinds of impediments and barriers, and trade is often carried out based on requests and exemptions, and even that does not work for certain items.

For mass agriculture, we simply do not have the landscape for it with only limited arable land. This is why we still can’t even feed ourselves.

Even exports like boulders get hampered regularly due to official and non-official issues, including non-tariff barriers.

When we cannot compete with India, trying to compete with the products of the factory of world, which is China, will be an even more distant dream.

Location disadvantage

In terms of Geographical location our another well known disadvantage is that we are landlocked and so not in a position to be a center of even sub-regional trade, forget about regional or global trade.

Forget about Phuentsholing, Gelephu or Samdrupjongkhar becoming sub-regional trading hubs, but instead the old Indian villages across these towns have turned into overnight commercial centers largely due to the customers from Bhutan.

This is not because Bhutanese business people are particularly bad at business, but what happens when goods and services flow from India to Bhutan.

With our borders in the north being closed due to an unresolved boundary issue, our traditional trading opportunities available to Bhutan since centuries is not there.

Australia and failing Entrepreneurs

Bhutanese people have an innate and practical natural intelligence and seeing the writing on the wall many young Bhutanese are moving in droves to Australia, Canada, Middle-East etc.

They know in the current economic set up there is no way they can build a future or wealth for themselves in Bhutan.

The domestic market is too small to support their dreams, and when it comes to exports we cannot compete with our biggest trading partner.

A trail of mostly failed or struggling domestic entrepreneurs is proof as their products get out priced, out marketed and out competed by foreign imports. The common refrain from most of them from farmers to manufacturing units is government subsidy or support to even survive.

A large country bureaucracy

The bureaucracy in Bhutan is based on the Indian model which in turn is based on the colonial bureaucracy of the British interested in control, security and establishment of authority, and not so much the welfare of the local natives.

The other problem with our bureaucracy is that since it is based on the Indian model, it has adopted the mentality and culture of a large country bureaucracy which is totally unfit for a small country.

The bureaucracy in India can afford to be slow, revel in red tape, make mistakes, be corrupt and be in efficient, but given its size and scale, India can absorb these issues and still grow and thrive. The popular saying about the Indian economy is that it grows in spite of the government.

Bhutan as a small country cannot afford this as our bureaucracy has to be much more agile, efficient and practical and be able to adapt quickly to situations on the ground.

However, our large and bloated bureaucracy, which consumes far more resources than the goods and services it delivers, is not suited to the realities and needs of a small and vulnerable country and a fast changing world.

Our options

So when everything looks so bleak, what are our options? There are a range of them in different fields like digital economy, getting better prices for our power, having real free trade with India, playing to our strengths in agriculture and industries, getting more assistance and having a more informed and engaged bureaucracy. We will explore each of them below.

The Digital Economy

While we cannot compete with India or China in terms of manufacturing, agriculture, etc the one area where competition is possible is in the field of the digital economy.

Here you do not require a large population, huge resources and physical accessibility like sea ports etc, but only a small number of high quality IT workers and an economy and system that supports a digital economy in Bhutan.

The early possibilities are already there with some Bhutanese digital workers in Thimphu, instead of rushing to Australia, are working online from their home for IT companies across the world and making handsome amounts.

We have to work very hard on His Majesty’s vision of a digital Bhutan, digital economy, fin tech, AI, machine learning etc for Bhutan so that we can build a talented and skilled manpower base that can become a global talent pool, and also build an IT industry of the future in Bhutan generating quality jobs and large revenues.

The future of Bhutan will have to follow this path in other areas too where we leverage on quality and niche and compete at the global level.

The step towards this is already afoot with the various transformation reforms and we will need changes in our education sector too.

Fair Hydropower competition

Since it is clear that India is power self sufficient with the capacity to scale up more, the future of the Bhutanese power sector is in convincing India to allow our small hydropower sector to compete in its energy trading markets where the prices are more competitive.

This way, Bhutan can build small or even medium sized projects on a commercial basis and it can compete in the power market in India.

We must also pursue the power deal with Bangladesh under the SAARC or BIMSTEC umbrella with Indian cooperation.

The tariff of projects like Tala and Chukha are among the lowest in the world, and so here, given the failure of the 10,000 MW by 2020 commitment, if some leeway can be given for power from these projects to also compete in the commercial market.

Otherwise, it will make make better commercial sense for Bhutan to consume this cheap power internally than export it.

If Bhutan and India want to do future mega projects, then it must be under a much more efficient and accountable model than the ones that led to lapses in Punatsangchu-1.

Free Trade with India

Bhutan is one of the very few countries with which India has a Free Trade Agreement (FTA), however, on the ground, Bhutan is almost treated like any other normal trading partner of India when it comes to our imports and exports.

This is visible in all our export sectors like industries, agriculture, boulders etc where there are both tariff and even non tariff barriers.

It is time that our staff in the Foreign Ministry and the Economic Affairs Ministry work on this along with the political leadership to realize the full understanding and potential of such a free trade agreement.

A blanket understanding and agreement at the higher levels would mean Bhutan would not have to keep running to seek exemptions or requests for individual items or when issues crop up.

Agriculture and Industries

In agriculture, there is no hope in competing in the already very competitive mass Indian or other markets.

Our only hope to see real money is niche products that can get higher returns not only in India, but across the world.

We know our potatoes, chilli, rice and other products are higher quality, but we end up selling them dirt cheap across the border and sometimes not even that.

For this, instead of selling at Jaigaon, we should actively explore markets further afield in West Bengal, other Indian states and abroad.

On the domestic front, in the longer run, a richer population of Bhutanese can also pay more for higher end Bhutanese agricultural products.

For Industries, we have to work with India and Bangladesh to reduce transportation prices by securing rail and river links, then make it easier for both skilled and unskilled labour to come and work in Bhutan’s industries, and then secure access to loans for big projects that our banks may not be able to finance.

Our industries should also be scaled up and built in areas where we have the advantage like access to raw materials and lower power cost like in Ferro Silicone with potential in Dolomite and Gypsum.

From aid to trade

In the 12th Five Year Plan (FYP) the Nu 45 in grant assistance Bhutan took from India representing 13.5% of the plan was the same as the Nu 45 bn Bhutan took in the 11th FYP representing 23% of the plan.

This was a major policy reversal as the past practice was to take increasing amounts of grant with each successive FYP, even though it reduced percentage wise as a part of the total plan.

This reversal in the 12th FYP was done to strengthen our self sufficiency and sovereignty as it was assumed more aid would mean more strings attached. This was done with full knowledge of delays in the P I and P II projects.

This was also in line with our new line of from ‘aid to trade.’ A strong underlying assumption here was that as our 10,000 MW by 2020 comes to some fruition we would get enough money from trade to not take aid. It was also hoped that our economy overall would get stronger.

This, however, has not played out as P II will be the last mega project that India will do with Bhutan with 10,000 MW by 2020 given a quite burial due to power self sufficiency in India.

It is partly due to this reduced grant we took in the 12th FYP combined with decreased revenue flows and the pandemic that the government has run record fiscal deficits and has had to carry out tough austerity measures.

From ‘aid to trade’ is fine as long as there are things to trade and provisions have been made to ensure smooth trade.

However, our biggest item of trade which is hydropower went belly up while even existing things like industries, agriculture, boulders etc got hit by overnight trade barriers and tax changes. 

Under the current circumstances and in the short term, Bhutan may have to reexamine and even postpone the ‘aid to trade’ concept.

India provides us grant assistance not only due to our friendly ties or as altruism, but also due our geo strategic location which seems to be the only real advantage we seem to have as far as our location is concerned.

So this is not a Kidu, Soelra or favour for Bhutan, but a practical understanding benefiting both sides that has worked until now.

After the failure of hydropower or 10,000 MW by 2020 commitments, Bhutan should look at asking for much higher and also more flexible  grants for the 13th Plan.

This is of course without giving more concessions or any additional strings.

The money should also be taken with a strategic view to push our development and economy to the next level.

This money, instead of only building more farm roads to nowhere, should be used for smart and innovative projects in priority areas to strengthen our national capacity, human resources and economy.

The money should be used to buy us some time in the interim with the failure of hydro projects, while the long term aim should continue to be self sufficiency.

A more informed and active India Desk

It took this newspaper to find out a simple fact that Bhutan is paying more for oil than Nepal from the same PSU suppliers in India.

When it comes to export of agricultural products we did not even know about the laws in India and various requirements.

On hydropower we had little to no clue on the developments in the Indian power market and how it would impact us.

We seem to have no clue how domestic political and economic moves and even legislations in India will impact Bhutan.

We still don’t really know why India has not moved on the Third Internet Gateway despite three governments requesting for it.

We are unable to convince a neighbouring state government of West Bengal that a Rail link will benefit Bhutan and her state’s residents along the border.

We are clueless on why our proposal for a trilateral power project is gathering dust.

Our officialdom only seems to know when the train has left the station.

Here we need to add much more attention, research and an unwavering eye on how our interests are playing out in India at all levels, and what can we do to make things go our way or if that is not possible then to prepare for what is coming.

As part of our reforms we need to put much more manpower, resources and effort in this direction.

Enabling Bureaucracy

On the domestic front our bureaucracy and system should realize how tough things are for Bhutan internally and externally on the economic front, including for the private sector, and it should work hard to make things happen instead of just stopping things.

It should be an enabler for doing business and not a roadblock at every turn.

The Performance Management System and the Performance Based Incentives should not reward processes or even efforts, but actual outcomes and results on the ground in both services and growth.

The whole bureaucratic culture and thinking should change to creating solutions.

Some may wonder why there are so many India references above, but this is only to state the obvious given our geographical location and reality, trading statistics and others. A look at the regional map may also help.

Our neighbourhood and large neighbours need not be a commercial impediment for us, but we can work to convert it into a real opportunity provided we know where we are at, what is happening around us and if we are ready to make the right moves at the right time.

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One comment

  1. Exceptional journalism Tenzing!

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