Concerns over impact on exports, tourism, more expensive imports and joint projects
The first chapter of Bhutan’s National Budget Report for the financial year of 2018-19 says that the International Monetary Fund (IMF) has estimated growth for India to be around 7.3 percent in 2019 and 7.5 percent in 2020 and that this strong outlook for India is expected to benefit Bhutan and other neighboring countries.
The budget report says that Bhutan’s economy in the 2019-20 financial year is projected to grow by 7.2 percent on the back of strong service sector performance and increased production of power from the 720 MW Mangdechu.
Bhutan’s GDP growth linked to India’s GDP growth
The above statement from Bhutan’s budget report should not come as a surprise given that India is Bhutan’s largest trading partner and so any major impact on the Indian economy ultimately impact’s Bhutan’s economy.
In 2018, 84.77 percent of Bhutan’s total exports worth around Nu 31 bn was to India, while 80.56% of Bhutan’s imports worth around Nu 60 bn was from India.
Also, a timeline (see main picture) of the GDP growth rates of the India and Bhutan by the IMF show very similar growth rates for both countries except when Bhutan inaugurated Chukha in 1986 and Tala in 2007 and when it faced the impact of the Rupee crisis in 2013
The time line shows Bhutan’s GDP rates going down with India when Bhutan and India faced the global oil crisis in the 1970’s when oil became very expensive; India faced a balance of payment crisis in 1992; Asian Financial crisis in 1998 and the Global Financial crisis in 2008.
Bhutan’s GDP has also generally picked up when the India GDP is doing well.
The slowdown in India
The first quarter of the 2019-20 financial year (April to June 2019) GDP numbers for India show GDP growth at a six-year low of five percent.
This has raised alarm bells in India which by all indicators now appears to be heading into a major slowdown.
Credit rating agency CRISIL said that India’s slowdown is more broad-based and deeper than previously estimated.
However, the above numbers are not the only reason for concern. India’s manufacturing growth crashed to 0.6 percent in this same first quarter compared to 12.1 percent last year.
Similarly, growth in its agricultural sector has come down to two percent in the same period compared to five percent last year.
Its revenue and tax collections including GST are also well below expectations forcing the Indian government to lean on its Reserve Bank of India to part with more dividends than normal.
Credit rating agencies in India have also started to downgrade India’s annual GDP growth rate.
Moodys has cut India’s GDP growth estimate in 2019 to 6.2 percent from the earlier 6.8 and other rating agencies are also doing the same.
Bhutan has already started feeling some of the pain as India’s rupee went above INR 72 to 1 USD this week before settling at INR 71.67 to the dollar on Friday.
The pain would be higher import costs from third countries since Bhutan is primarily an import driven economy and it would also mean higher costs for Bhutanese travelling to third countries like Thailand.
This is because Bhutan’s Ngultrum is pegged to the Indian Rupee and any downward movement of the Rupee also impacts the Ngultrum.
According to economists and commentators, the slowdown in the Indian economy is caused by a drop in consumption, private investment and non lending by banks due to high non performing loans, long term and deep structural issues in the Indian Economy among other factors.
There are quite a few who point out that India’s decision to withdraw around 85 percent of its bank note in 2016 through demonetization caused a huge crisis in its large informal and cash driven economy which is estimated to be up to 30 percent of the economy and a major employer.
This was followed by the complicated Goods and Service Tax (GST) and its implementation issues that hit small businesses.
India’s auto sector which accounts for half its manufacturing sector is in deep crisis as it lays off 350,000 employees and could lay off up to a million people, if the situation continues.
This is when the unemployment situation in India is already at a 45-year high showing also the jobless nature of its growth.
A deep problem is also the high proportion of Non Performing Loans in India’s financial institutions and consequently they have limited their loans to the private sector.
Recently, India’s NITI Ayog Vice Chairman Rajiv Kumar underscored the extent of the problem while talking about the financial sector when he said it was, ‘An unprecedented situation and that India had not faced a liquidity situation like this in the last 70 years where its entire financial sector is in a churn and nobody is trusting anybody else.’
NITI Ayog is India’s new body in place of the old planning commission.
Bhutan’s budget report states that India’s economic growth rate in 2018 was 7.3 percent mainly due to consumption and investment and currently both these factors are down.
Again, reflecting a deeper problem in the Indian economy there are an army of Indian and international economists who doubt India’s current GDP numbers since it changed the method of calculation from 2015.
Many of them estimate India’s current GDP to be lower by 2 to 2.5 percent.
Its own former Chief Economic Adviser to the Government of India from 2014-18, Arvind Subramanian says that India’s GDP is overestimated by 2.5 percent.
The IMF and other agencies GDP projection data for India is based on data supplied by Indian government agencies.
India’s economic woes could get much worse if the current global economic slowdown turns into a recession.
Worries for Bhutan
An official from the Ministry of Finance said that they are aware of the latest developments in India.
The official said, “Most of our trade and transactions are with India and if there is a slowdown in Indian then it will affect us but the extent and nature of the impact needs to be studied.”
The official said that the rate of inflation in India already has a direct and major impact on Bhutan.
The official said that the MoF as part of its regular functions would be doing an impact analysis of the developments in India on Bhutan’s economy.
The official said that a slowdown in India will not only hit Bhutanese exports but it can also make imports from India more expensive.
“When demand for commodities goes down; when there is more unemployment; there is loss of productivity; spillover impact on other sectors and a chain reaction the cost of production also goes up and this can make imports to Bhutan more expensive. This is unlike when the Indian economy is doing well and there is surplus production of goods and prices are lower,” explained the official.
With a global slowdown happening and possible recession on the cards the official said that a global impact would have to be in terms of the impact on tourism in Bhutan and also in terms of of its impact on remittances to Bhutan.
This is because the 2008 global economic crisis did impact the arrivals of tourists in Bhutan. The official said that Bhutan also has certain investments abroad and they also need to be looked at.
Another area to look at would be how fuel prices would behave and its impact on Bhutan.
The official, though, clarified that the 2008 lessons had been learnt and a global crisis of that magnitude would be unlikely.
One possible impact area of a global slowdown, according to the official could also be in terms of the cost of credit and financial transactions abroad for Bhutan.
The President of the Bhutan Chamber of Commerce and Industries (BCCI) Aum Phub Zam also said that since India was Bhutan’s main trading partner any slowdown in the Indian economy would definitely impact Bhutan.
She said that the government should be prepared with policies and other measures incase there is a major impact as the private sector would be worst hit.
The BCCI President said that apart from the general exports to India, an additional concern of the impact of a slowdown in India is the impact on Indian tourists coming to Bhutan.
A large number of hotels who already make up the second largest loan portfolio for banks (after housing) that have come up in the last few years depend on Indian tourists as a major source of revenue.
A big and sudden drop in numbers, according to the BCCI President would hit the tourism and hotel industry.
The General Secretary of the Association of Bhutanese Industries, Jochu Thinley said that the main export items from Bhutan to India are essentially industrial products like Ferro alloys, carbides, dolomite, Gypsum and other materials and products.
He said of them the most important is Ferro alloys given its size. He said the ABI in the 2008 crisis saw how badly the industries got hit and at the time the steel industry nearly went bankrupt.
Jochu said a slow down in India will impact exports from Bhutan but it needs to be seen how exactly the impact will come and if it will hit critical exports like Ferro Alloys.
Apart from worries for the private sector there can also be issues of concern for future hydro projects.
One main reason holding up a final agreement to implement the 2,560 MW Sunkosh project is the size of the investment required which has had India proposing 80 percent loan and 20 percent grant with the loan to not be given by the Indian government but raised from Financial Institutions.
If the state of finances of the Indian government gets hit, then it could end up impacting such mega projects.
Coincidentally, Bhutan and India agreed to 10,000 MW by 2020 in early 2008 but then the global financial crisis of 2008 went global from September 2008 impacting other countries including India, which spent huge sums of government money as stimulus to protect its economy.
From 2009 onwards Indian officials indicated inadequate resources for 10,000 MW by 2020.
Bhutan’s GDP in the 2019-20 financial year or the 2019 calendar year may be cushioned to a certain extent by Mangdechu but a strong slowdown in India will have both short-term and long-term impacts on Bhutan’s economy.