Bhutan: Review of 2022 and the Way Forward
Aarushi Gupta, Research Assistant, VIF

Bhutan, surrounded by rising powers and big players, stands out in its aspirations and achievements while being strongly connected with its religious and cultural roots. Despite being sandwiched between two significant giants, it has aimed to promote socio-economic development while maintaining its territorial integrity through strategic partnerships with its neighbours. The year 2022 saw some significant developments on the economic, environmental, travel, and on the neighbourhood front.

Bhutan’s economy depends on two primary sectors: hydropower and tourism. Since most of the revenue generated depends on other countries, Bhutan is more susceptible to external shocks. The Himalayan nation experienced an economic slowdown and inflation in 2022 due to COVID-19 lockdowns within and outside the country. Another geopolitical factor that played in was the breakdown of supply chains due to the Russo-Ukrainian war.

Bhutan’s Gross Domestic Product (GDP) growth is projected to be 4.95 per cent in 2022, which is marginally higher than 4.09 per cent achieved in 2021. The growth projection for the year 2022 in the services sector is at a reasonable 5.42 per cent, while the industrial sector is also projected to grow at a decent 4.37 per cent.[1] The inflation rate stood at 4.89% in October this year as compared to the prices last year.[2] According to the Consumer Price Index, the inflation rate fluctuated up to 13.53 per cent in the year 2022[3].

With soaring grain and oil prices, the foreign exchange reserves had reduced dramatically to just $970 million at the start of 2022, compared to $1.46 billion in April 2021. To correct the dwindling foreign exchange reserves, Bhutan first banned the import of vehicles apart from utility and heavy agriculture machinery[4]. Later in December, to tackle the rising inflation, the Ministry of Finance enacted the Tax Act of Bhutan 2022 on 142 goods, which reduced the sales tax and customs duty for consumers[5].

Bhutan focuses greatly on the environment and sustainable living. It is important to note that despite its economic hardship, Bhutan did not compromise on the environment, peace and happiness. After months of lockdown and two and half years of “Zero Covid-19” policy, since March 2020, it opened itself to tourists on 23 September 2022. Bhutan generates significant revenue from its tourism industry[6]. However, they have adopted a ‘high-value, low-volume’ tourism policy that helps preserve their environment and promote their rich culture and traditions. A sustainable development fee of Rs.1200 per person per day was imposed on all tourists from India, Bangladesh and Maldives and $200 for tourists from other countries to ‘mitigate the negative impact of tourism on the cultural landscape and natural environment.’[7] Tourism has not picked up to its full potential yet; however, the number of tourists is increasing gradually.

India is Bhutan’s biggest trading partner and its most important development partner. Bhutan, acting as a buffer state between India and China, has immense strategic importance for India. India and Bhutan has a long-standing partnership in military engagement to ensure the territorial integrity of both nations. The year 2022 was a year of transformation for India and Bhutan relations.

India’s External Affairs Minister, S Jaishankar, met with his Bhutanese counterpart Lyonpo Tandi Dorji in Thimphu on 29 April 2022 to strengthen bilateral cooperation[8]. Further, His Majesty the King of Bhutan, Jigme Khesar Namgyel Wangchuck, visited New Delhi on 14 September 2022 to meet Prime Minister Narendra Modi to strengthen the “unique friendship” between the two countries[9]. Bhutan was one of the first countries in 2021 to benefit from the “Vaccine Maitri” grant assistance programme. Bhutan appreciated and recognised India’s “heart-warming goodwill” and “valuable support” in timely assistance of the vaccinations for COVID-19 at the 77th Session of the United Nations General Assembly in September 2022[10]. Given that India is the biggest trading partner of Bhutan, two formal trade routes were also approved from Lhamoidzingkha and Chhuchungsa, resulting in an 80 per cent reduction of the transit cost[11].

India has also been deeply involved in developing Bhutan’s space and digital technologies. In November 2022, in a milestone moment, a jointly developed India-Bhutan satellite, India-Bhutan SAT, was launched along with eight other satellites by the Indian Space Research Organisation (ISRO). India had assisted in the space capacity building of Bhutan through training at the UR Rao Satellite Centre in Bengaluru[12]. With India’s assistance, a massive 720-megawatt Mangdechhu Hydroelectric Project was developed in Bhutan. It was handed over to Bhutan’s Druk Green Power Corp in December 2022[13]. Successful completion and handover of the project have given the stimulus for initiating talks on the Sankosh Hydropower Project.

As far as China is concerned, in October 2022, the Chinese Ambassador visited Bhutan to maintain and expand cooperation and friendly relations. However, in July 2022, satellite pictures emerged, showing 9kms east of the Doklam plateau under Chinese control[14]. The Chinese villages are entirely inhabited and have road connectivity.

The border dispute between Bhutan and China is a long-standing one. China claims more than 764km of Bhutan’s territory. China has laid claim to Pasamlung and Jakarlung valleys in the north, Doklam, Dramana, Shakhatoe, Yak Chu and Charithang Chu, and Sinchulungpa and Langmarpo valleys in the west of Bhutan, all of which hold immense cultural and strategic significance[15]. Bhutan and China signed a memorandum of understanding (MOU) in October 2021, constituting a three-step roadmap for border dispute settlement between the two countries[16]. However, expansionism by China within the Bhutanese territory has been a constant feature. Bhutan and China do not have diplomatic relations, but they maintain engagement through frequent official visits and periodic dialogue.[17]

Way Forward
  • Bhutan will be conducting the National Council (NC) elections in the year 2023. It will be the fourth Parliament, and the term of the current NC members ends on 9 May 2023.[18]
  • Multiple smaller parties have emerged for the upcoming elections. A total of six parties have registered so far to contest in the 2023 elections.[19]
  • Bhutan was facing a similar fate of economic crisis as many of the South Asian nations. However, due to pre-emptive and proactive measures adopted by the government, it reduced and controlled the economic situation spiralling out of control. The effectiveness of the measures will be closely monitored this year.
  • Bhutan’s economy is expected to shrink in 2023 and is expected to stand at 4.63 per cent, according to Bhutan’s finance ministry’s report. The services sector is expected to grow at a striking 8.08 per cent, while the industrial sector is expected to reduce to -0.15 per cent in 2023.[20]
  • The space and technological partnership between the two countries is witnessing a dawn of a new era. Bhutan expects more investment and cooperation in space technology and the service sector with India in the year 2023.
  • There is an undeniable urgency to limit China’s expansionism within Bhutan. However, it seems unlikely that Bhutan will take an official stance on the matter.[21]
  • Bhutan’s growth model relies on economically and environmentally sustainable investment and projects to comply with the Gross National Happiness. Hence, this will certainly limit the economic diplomacy opportunities for China[22].
  • Chinese exports to Bhutan have been increasing consistently. Despite the instituted restrictions on certain imports by Bhutan, the trade deficit has been rising with China owing to increasing import costs, draining the foreign exchange reserves of Bhutan. The trend of growing imports is expected to stay the course in 2023.[23]

Bhutan’s year started with a massive surge in COVID-19 cases, leading to more economic hardships and uncertainty for the country and the people. However, it had adopted many corrective and pre-emptive measures to allow Bhutan and its economy to resume its growth. Throughout the process, Bhutan made sure not to compromise on its environment and the sustainable agenda of the nation. It opened its borders for quality tourism and responsible travelling practices. It had also been a year of balancing between the two mammoth nations. It has always acted as a buffer between the two countries, and managing the ties has always been tricky. Preserving its sovereignty, integrity, development aspirations, and economic growth in such a position requires being adept in diplomatic strategic balancing. Bhutan has many challenges and opportunities for cooperation ahead in 2023. It is on the optimal path to sustainable overall growth and development of the Himalayan nation.

Endnotes :

[1]https://www.nsb.gov.bt/
[2]https://kuenselonline.com/residents-complain-of-inflation/
[3]https://take-profit.org/en/statistics/inflation-rate/bhutan/#:~:text=What%20is%20Inflation%20Rate%20in,Monthly%20by%20Royal%20Monetary%20Authority.
[4]https://auto.economictimes.indiatimes.com/news/passenger-vehicle/uv/bhutan-bans-import-of-most-vehicles-as-foreign-exchange-reserves-plummet/93667121
[5]https://www.mof.gov.bt/notifications/notification-on-the-enactment-of-tax-act-of-bhutan-2022/
[6]https://kuenselonline.com/tourism-rules-and-regulations-come-into-effect/
[7]https://theprint.in/world/you-can-holiday-in-bhutan-again-but-theres-a-development-fee-of-rs-1200-day/1140340/
[8]https://www.timesnownews.com/india/s-jaishankar-calls-india-bhutan-partnership-unique-admires-kings-vision-article-91189827
[9]https://www.mea.gov.in/press-releases.htm?dtl/35714/Prime+Minister+meets+with+His+Majesty+the+King+of+Bhutan+Jigme+Khesar+Namgyel+Wangchuck
[10]https://www.thehindu.com/news/international/at-unga-bhutan-nepal-express-gratitude-for-indias-supply-of-covid-19-vaccines/article65940530.ece
[11]https://www.newsdrum.in/analysis/bhutan-opens-two-more-formal-trade-routes-with-india
[12]https://www.thehindu.com/news/national/launch-of-india-bhutan-sat-marks-new-era-in-ties-bhutan-king/article66188509.ece
[13]https://www.aninews.in/news/world/asia/india-assisted-mangdechhu-hydroelectric-project-handed-over-to-bhutans-druk-green-power-corp20221228150718/
[14]https://www.aninews.in/news/world/asia/chinas-encroachment-tactics-near-bhutan-ring-alarm-bells-in-neighbouring-
[15]https://www.orfonline.org/research/the-china-bhutan-border-deal-should-worry-india/
[16]https://www.thehindu.com/news/national/bhutan-china-sign-mou-for-3-step-roadmap-to-expedite-boundary-talks/article37011831.ece
[17]https://www.orfonline.org/expert-speak/bhutans-border-conundrum/#:~:text=Landlocked%20between%20India%20and%20China,albeit%20without%20any%20diplomatic%20relations.
[18]https://kuenselonline.com/nc-elections-in-early-2023/
[19]https://kuenselonline.com/a-new-dilemma-2/
[20]https://kuenselonline.com/bhutans-economy-likely-to-grow-stronger-in-2023/
[21]https://thediplomat.com/2022/07/china-advances-into-bhutans-doklam-india-watches/
[22]https://www.orfonline.org/expert-speak/bhutans-border-conundrum/
[23]https://economictimes.indiatimes.com/news/international/rising-imports-from-china-draining-bhutans-forex-reserves/articleshow/93804399.cms?from=mdr

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>


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