Indians do not need a visa to enter Bhutan?and that is one of the great advantages that Indian citizens have. It is also one of those idyllic tourist spots that is popular with visitors?English is spoken with ease by the inhabitants, and that reduces the stress of communication.
The India-Bhutan partnership has been a vibrant example of ?deep integration?. It has evolved against the backdrop of globalisation: new technologies and more liberal trading regimes have led to higher trade volumes, larger investment flows, and increasing exchange of factors of production.
Many factors lay behind the growing partnership between India and Bhutan, of which three developments are worth mentioning: first, India?s investments in hydropower projects in Bhutan since the 1960s?Asia?s oldest cross-border infrastructure investments. Second, a trade agreement signed between the two countries in 1995 is perhaps India?s first free trade agreement (FTA) with any foreign neighbour. Third, the free flow of investments in industry and services between the two countries since 1990s.
The important distinction is that the cross-border hydropower projects between the two countries have changed the composition of Bhutan?s export-basket. Rising exports of hydro electricity to India has addressed Bhutan?s adverse trade balance with India. Now, Bhutan has trade surplus with India. The real key to the ever-growing partnership between the two countries is the general policy stance by Bhutan in areas like energy and power trading.
The hydropower cooperation between Bhutan and India started with the signing of Jaldhaka agreement in 1961. The Jaldhaka hydropower plant is located on the India side of the Indo-Bhutan border in West Bengal state. The 27 mw Jaldhaka hydropower station stage-I was commissioned in 1967-72 and the stage-II power house, with and installed capacity of 8 mw was commissioned in 1983. The major part of power produced at Jaldhaka hydropower plant was exported to the southern part of Bhutan. This, the benefit of cross-border energy trade, has encouraged Bhutan to seek Indian investments in setting up hydropower plants.
The India-Bhutan partnership in hydropower was effectively started in 1978, when India extended $200 million for construction of 336 mw hydroelectric plant at Chukha in Bhutan. The Chukha hydropower project was entirely funded by the Government of India with 60:40 ratio of grant and loan. It was successfully commissioned in 1988, and the project was handed over to the Bhutanese Government in 1991. About 70% of power generated by this project is exported to India, which later helped Bhutan to reduce the trade gap with India.
To date, Bhutan has 26 hydropower stations that consist of four major hydroelectric power plants. So far India has implemented three hydropower projects, namely Chukha, Kurichhu and Tala, in Bhutan, of which Tala is the largest one. Recently, Bhutan requested India to develop a 1,095 mw hydro plant at Punatsangchhu, the foundation stone of which was laid by the Indian Prime Minister during his visit to Bhutan in May 2008.
The Tala hydroelectric project is the biggest cross-border power project in South Asia. This 1,020 mw project was constructed with an investment of about $1 billion, which is entirely funded by the Government of India by way of grants and loan (with a ratio of 60 and 40). The entire electricity produced at Tala is being exported to India. The first phase (170 mw) of this project was commissioned in May 2008 during the visit of Indian Prime Minister to Bhutan in May 2008. This project has attracted several public and private sectors in construction (as contractors) such as Bharat Heavy Electrical Ltd., Hindustan Construction Company, Larsen and Toubro and Jaiprakash Industries, among others.
Tala hydropower project has also generated private sector investments downstream. For example, the JV company formed under public private partnership (PPP), namely, Powerlinks Transmission Ltd (PTL), owned by Tata Power and government-owned Power Grid Corporation of India (PGCI), transfers the generated electricity from Tala hydropower station in Bhutan to the northern part of India. In 2003, the Asian Development Bank (ADB) approved a $62 million loan for this power transmission. The power lines were developed under Build Operate Transfer (BOT) contracts for a period of 30 years and then the ownership will be transferred to the government-owned PGCI. Specifically, this transmission project had involved construction of the transmission lines (1,166 km.) from Siliguri in West Bengal via Bihar to Mandola in Uttar Pradesh.
Bhutan government has also planned the Dagachhu hydropower development (114 mw), which aims to export power to India. This project is proposed as a demonstration project to be financed by leveraging public and private capital in line with a new policy for private participation in hydropower. It will be a run-of-the-river type with barrages where water will be diverted to the powerhouse, and no major backwater will be created. The Government of Austria has supported the feasibility study and preparation of the project design document.
Since the country?s electricity generation is significantly higher than the maximum domestic demand of 130 mw, Bhutan is a net exporter. These cross-border, hydro-power projects offer ?win-win? benefits to both India and Bhutan.
In case of Bhutan, the share of customs revenue in the total revenue of Bhutan from electricity exports has been significant, and additional income from power exports and the enhanced levels of economic activity have been invested in social infrastructure in Bhutan. For example, revenue earned from exporting 1,472 GWh of power to India from the Chukha project in 2002-03 was $ 52 million. The 1,020 mw Tala project is expected to provide $ 214 million as revenue to Bhutan from power exports to India annually.
However, despite the nation?s net power surplus, most people in Bhutan do not yet have access to electricity. About 36% of the population had access to electricity as of 2005. The Government of Bhutan aims for 100% electrification by 2020 as outlined in the Vision 2020
(Electricity for All).
The Rural Electrification Master Plan targets increasing the electrification ratio to 52% under the 9th Five Year Plan and to 86% under the 10th Five Year Plan (2008-2013). The major need is therefore rural electrification, which could encourage electrically operated industrialisation and increase supplementary income and jobs.
The Asian Development Bank (ADB) has been helping Bhutan expanding rural electrification through three consecutive loans since 1995, covering over 19,250 households. The theoretical potential for hydropower in Bhutan is 30,000 mw, and only about 5% has been tapped. The hydropower sites are mainly export-oriented and run-of-the-river types. To accelerate them on a sustainable basis, Bhutan has to come out with a policy and institutional framework for private participation such as PPP and independent power producers (IPPs).
The India-Bhutan power trading arrangement offer important lessons for Nepal and Bangladesh. A similar arrangement between India and Nepal and India and Bangladesh or among the four will provide much needed incentives for industry to agglomerate in the eastern South Asia sub-region. Eventually, this will encourage clustering by increasing market size and allowing more effective exploitation of the natural resources.
The author is fellow at Research and Information System for Developing Countries (RIS), New Delhi. These are his personal views
