Neighbourhood First: Building Bhutan

Neighbourhood First: Building Bhutan
India is Bhutan’s most significant neighbour across dimensions. How can we foster this relationship to develop the South Asian region?

The Perpetual Friendship

India and Bhutan have a long history of diplomatic ties preceding India’s independence. China’s neo-military border skirmishes in the 1940s forced Bhutan to seek support from India. This resulted in the Treaty of Perpetual Peace and Friendship with India in 1949, which established the foundation of contemporary India-Bhutan relations across dimensions. In terms of trade, it even brought forward the concept of a free trade region to enable a landlocked Bhutan access to new markets for trade. More importantly, it formally established India as a foreign policy advisor and ally to Bhutan, which successfully deterred China’s movements into the region. 

India holds a 92 per cent share in Bhutan's export market, 88 per cent of its imports, and is the largest source of foreign direct investment (FDI). The two nations also collaborate on a hydropower project that aims to produce 10,000 MW of Bhutan's 30,000 MW production capacity and sell the surplus electricity back to India. The partnership has not been one-sided as India also stands to gain strategically. Bhutan’s location is critical to India’s national security, especially in the narrow Siliguri corridor which connects mainland India to its seven eastern states. This military component has survived many crises, including the most recent one in Doklam.

Bharat to Bhutan 

From 2014, India and Bhutan have renewed their friendship with agreements that focused on widening Bhutan’s trade portfolio, liberalised FDI, set hydropower targets, and improved regional connectivity. The continual dialogue between the two states led to massive developments across sectors such as education, tourism, infrastructure, and trade. This includes a joint venture between the Ground Earth Station and South Asia Satellite to enable Bhutan to use a transponder on the satellite for broadcasting and disaster management. Rupay, an Indian electronic payment card scheme, was also launched in Bhutan to ease financial transactions between them. 

Bhutan has 35 export products with comparative advantages, and India offered ₹400 crores towards trade support to expand their production and widen their export potential beyond the region. Other development plans in Bhutan include its 12th five-year plan, to which India is contributing ₹5000 crores. At the Bhutan-India Start-up Summit 2020, the Indian Railway Minister Piyush Goyal announced his plan to build a railway system connecting the two nations via Nagarkatta. This would be a major step in increasing connectivity for trade and tourism and will boost the economic growth of this Himalayan Kingdom.

South Asia: A Shared Road to Prosperity

The South Asian region still has many hurdles to its development and India, as a major power in the region, has a responsibility to its smaller neighbours for a shared, prosperous future. India is increasingly collaborating in infrastructural and economic projects to unite the region and increase the individual states' ability to integrate into the global economy. The geographic barriers in the region require special attention to connectivity and the Motor Vehicles Agreement between Bangladesh, Bhutan, Nepal and India were meant to address it. By reducing customs delays and intermediary stops between origin and ports, it aimed to reduce transaction costs and time involved in trading. However, due to historical strains in Nepal-Bhutan ties, Bhutan could not domestically ratify the agreement and asked the other members to proceed without them. 

A Shadow over the Land of the Dragon

Prior to 2018, the agreements between India and Bhutan were restrictive to FDI from non-government sources and hydropower operations with third party nations. Once amended, it opened up the economy for a more diverse investor pool. This, however, did not quell the concerns of rising unemployment and foreign debt to India, as hydropower remained the centrepiece of Bhutan's economy, contributing to 14 per cent of its GDP.

The increasing dependence on bilateral relations with India still worries young Bhutanese professionals, who see India’s influence in Bhutan’s foreign policy as a threat to their sovereignty. When Bhutan attempted to open dialogue with China in 2012, India was swift in its economic retaliation. Since then, the Bhutanese government has been facing pressure from the private sector to open diplomatic ties with China as well as reduce economic dependence on India. 


  • Bhutan’s relationship with India is a good example of how India can strengthen its neighbours and stabilise the region through strategic partnerships and multilateral trade agreements. Though India may not have the cash flow to support massive FDI in entire South Asia, it can still offer diplomatic, technical and infrastructural support to develop the region.

  • India needs to be sensitive to the concerns of the Bhutanese people regarding India’s overreach. Its endeavours to protect its neighbourhood and their borders from rising Chinese influence, both economic and military, should not come at the cost of its relationship with its neighbours.

  • A diverse economic structure and market-oriented domestic policy are important for sustainable GDP growth. Bhutan must seek out new markets for its key exports, expand its import portfolio into developing new partnerships globally and most importantly, stimulate new industries domestically to reduce reliance on hydropower.  

Image Courtesy: KNN India