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India–Bhutan Hydropower Cooperation and Bhutanese Economy

Mr Opangmeren Jamir is Research Analyst at Manohar Parrikar Institute for Defence Studies and Analyses Click here for profile
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  • May 26, 2022

    India–Bhutan bilateral relationship has been based on ‘utmost trust’ and ‘mutually beneficial cooperation’, since the establishment of diplomatic relations in 1968. To maintain the tradition of regular high-level exchanges, External Affairs Minister, Dr S. Jaishankar, visited Bhutan on 29–30 April 2022, at the invitation of his counterpart, Lyonpo Dr Tandi Dorji.1

    Hydropower cooperation is an important feature of India–Bhutan bilateral relations. Since the first hydropower agreement (the Jaldhaka project) signed in 1961, a series of agreements have been signed over the years accelerating the pace of hydropower development.2 In July 2006, an agreement on ‘cooperation in the field of Hydroelectric Hydropower’ was signed.3 In March 2009, the protocol to the 2006 agreement was signed to help Bhutan install 10,000 MW by 2020. Subsequently, on 22 April 2014, the two countries signed the ‘Framework Inter-Government Agreement’, concerning development of ‘Joint Venture Hydropower Projects’.4

    India has supported the development of hydropower projects in Bhutan through a mix of grants and loans and technical support relating to design and construction of the projects. Such arrangements were seen as a win-win arrangement for several decades. However, over the years, several pressing issues have emerged from the accelerated hydropower development approach.

    Increasing Hydropower Debt

    For Bhutan, hydropower is a ‘strategic renewable energy resource’. It has stimulated high economic growth and has been fundamental in achieving prosperity for its people. Bhutan has an estimated hydropower potential of 36,900 MW with annual production capability of 154,000 gigawatt hours.5 In 2020, the hydropower sector contributed 17.74 per cent to the Gross Domestic Product (GDP).6

    Though India and Bhutan consider the development of hydropower projects as a win-win, the economic feasibility from the implementation of several projects remains a big concern, particularly on the part of the Bhutanese government. One of the major worries of Bhutan’s hydropower sector is the steep rise in public debt. As seen in Table1, there has been an increase in the debt to GDP ratio. As of 30 June 2021, the government debt was Nu. 238,398.910 million of which Nu. 17,074.437 million is internal debt and Nu. 221,324.473 million is external debt. According to a report by the Royal Audit Authority (RAA), the major portion of the debt relates to borrowings for hydropower loans, amounting to Nu. 162,359.048 million, which is 73 per cent of the total external debt for the financial year (FY) 2020–21.

    Table 1: Bhutan’s Public Debt (in million Nu.)

    Financial Year
    Non-hydro debt Hydropower debt Total outstanding debt
    2018–19 42,136.39 142,038.14 184,174.52
    2019–20 56,010.34 159,359.50 215,369.84
    2020–21 76,039.86 162,359.05 238,398.91

    Source: Annual Audit Report 2020-2021, Royal Audit Authority, Royal Government of Bhutan. 

    Deteriorating Economic Benefits

    India's role in providing financial and technical support for development is much appreciated. However, it has been seen that since 2007, the hydropower sector's financial performance is deteriorating.7 Several reasons have contributed to the decline of economic benefits. One reason that has been flagged is the change of the financing system of hydropower projects by India from a 60:40 model (60 per cent grants and 40 per cent loans) to a 30:70 model (30 per cent grants and 70 per cent commercial loans) (Table 2).8

    Table 2: Financing Pattern in Hydropower Projects of Bhutan by India

    Total cost (Rs Crores) Financing pattern (Rs Crores) Year of commissioning
    Loans Grants
    Chukha 246.00 98.40 (40%) 147.60 (60%) 1986–88
    Kurichu 555.00 222.00 (40%) 333.00 (60%) 2001–02
    Tala 4125.85 1650.34 (40%) 2475.51 (60%) 2006–07
    Mangdechhu 5044.89 3531.42 (70%) 1513.47 (30%) 2019–20

    Source: “Note on Cooperation with Bhutan”, Central Electricity Authority, Government of India.

    Further, the commissioning of projects has been delayed, and massive escalations in the cost of construction of hydropower projects has also occurred. For instance, from an estimated cost of Rs 34 billion for the 1,200 MW Punatsangchhu-I, the cost went up to Rs 97 billion; for the 1,020 MW Punatsangchhu-II from an estimated cost of Rs 38 billion, it went up to Rs 74 billion.9

    According to the 2017 report of the Bhutan Electricity Authority (BEA), one of the reasons for cost escalation in hydropower projects is the failure to take into account the inflation rate in the initial cost estimates.10 Besides, the report underscored the failure to undertake rigorous Environmental Impact Assessments (EIA). Due to a major landslide in July 2013 at the site of the 1,200 MW Punatsangchhu-I project, not only was it delayed but the cost of the project increased as well.

    Poor Employment Opportunities for Local Population

    The development of hydropower projects is highly capital-intensive but only diminutive employment opportunities are available for the local populace, leading to discontentment. Such displeasure among the Bhutanese officials and communities is evident from the ongoing construction of the 600 MW Kholongchu hydropower project, a joint venture project of Satluj Jal Vidyut Nigam (SJVN) of India and Druk Green Power Corporation (DGPC) of Bhutan. Reports noted that the SJVN wanted to allocate the construction work to an Indian contractor with the Bhutanese side acting as a sub-contractor. On the other hand, the DGPC is against such rules as it will impact Bhutan’s capacity development.11

    One of the main reasons behind the jobless growth in the hydropower sector for local population is the cheap and easy accessibility of both skilled and non-skilled workers, especially from India. For instance, in FY 2017–18, as shown in Table 3, of the total 54,972 foreign workers that were issued work permits, Indian workers represent the majority compared to other nationalities. For FY 2019–20, the import of foreign workers declined due to restrictions on mobility of workers in the wake of the COVID-19 pandemic.

    Table 3: Work Permits Issued to Foreign Workers in Bhutan
    Financial Year No. of Foreign workers No. of Indians issued work permit
    2017–18 54,972 54,533
    2018–19 50,057 49,677
    2019–20 16,417 N.A.
    2020–21 18,688 18,509

    Sources: “Annual Reports”, Ministry of Labour and Human Resources, Royal Government of Bhutan; Annual Report 2021, Royal Monetary Authority of Bhutan. 


    The model on which India–Bhutan cooperation operates seems to be unravelling and deeper introspection is necessary to address the emerging issues. During the Doklam stand-off, the Editor of The Bhutanese, Tenzing Lamsang, pointed out that though Doklam was a serious issue, for the Bhutanese, the decline of economic feasibility in the hydropower sector is more worrisome.12 Both India and Bhutan need to engage profoundly and consider the economic, social and environmental impact of the development of hydropower resources.  

    The idea of development in Bhutan is rooted in the overall development philosophy of Gross National Happiness (GNP).13 The guiding principles for Bhutan in harnessing hydropower resources has been ‘The Sustainable Hydropower Development Policy (SHDP) 2008’. Such policies have, however, led to a rise in debt from the hydropower sector and have provided few employment opportunities for local communities. As a result, SHDP 2021 was launched, which aims to “guide the overall development of Bhutan’s abundant hydropower resources in consonance with national economic development goal”.14 It is to be hoped that hydropower cooperation between India and Bhutan will not only help achieve the larger aspirations of the Bhutanese people for peace, prosperity and happiness but also further strengthen bilateral bonds.

    Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.