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  • Writer's pictureGenevieve Donnellon-May

Bhutan's Downstream Dilemma

Bhutan's landlocked position between geostrategic rivals China and India is creating a difficult balancing act, as both nations seek to secure valuable water and hydroelectric resources from the small kingdom. The Red Line's Genevieve Donnellon-May takes us through the geopolitical and environmental pressures facing Bhutan as it tries to secure its future.

Water-rich Bhutan, the world’s first carbon-negative country, is a tiny kingdom nestled in the foothills of the Himalayas, with towering snow-capped mountains in the north and lush rainforest in its southern lowlands. With a population of less than 800,000 people and limited land, the country is increasingly struggling with the consequences of climate change impacts, most of which are water-related. Estimates from the Asian Development Bank suggest that climate change-linked extremes could cause annual losses of more than 6 per cent of Bhutan’s gross domestic product (GDP) by the end of this century.

The Mangdechhu Hydroelectric Project in Bhutan. Credit: Central Water Commission

Rising temperatures are causing glaciers to melt, thereby impacting glacial lakes to burst with flooding, affecting communities and agricultural production in the downstream region of the kingdom. Bhutan’s agriculture sector depends heavily on favourable monsoon conditions; an expected future rise in temperatures by as much as 4.5ºC could potentially result in a decline in annual rice yields of over 22 per cent in low-altitude growing areas by the 2080s, undermining food security. At the same time, Bhutan is on the receiving end of the impacts of climate change in other countries, both near and far from its borders. Without changes to current global behaviour, Bhutan could see an average economic loss equivalent to 1.4 per cent of GDP by 2050, increasing to 6.6 per cent by the end of the century.

In addition to raising fears of future water scarcity and energy insecurity, an increased frequency of extreme weather events (such as droughts and flooding) raises questions about the viability of dams during flooding and droughts. In particular, more than 20 glacial lakes could be at risk of significant overflow as a result of ice melts, causing landslides and floods which could also impact Bhutan’s hydropower sector, responsible for nearly all of Bhutan’s power along with almost one-third of its revenue. Degradation of the kingdom’s expansive river systems would also undermine water supplies and tourism, and as temperatures continue to rise, vector-borne diseases like malaria are likely to spread from low-altitude southern regions into higher-altitude areas.

While climate change impacts raise questions about Bhutan’s long-term water and energy security, it also allows the country to seek to prioritise cooperation over conflict with neighbours - China and India - for environmental security and strengthening relations through joint development projects in Bhutan. Although India has long been Bhutan’s leading strategic and economic partner, in recent decades China has slowly expanded both its presence and influence in Bhutan, despite the two countries not having established diplomatic relations.

Nonetheless, simmering tensions and geopolitical challenges in the region, notably the growing geopolitical and geostrategic rivalry between these two Asian powerhouses make the small kingdom increasingly vulnerable as it seeks to secure its interests while also maintaining peaceful ties with both.

The Value of Water

Rich in water resources from snow and rain, the kingdom has four major river basins – Amo Chu, Wang Chu, Punatsang Chu, and Drangme Chu basins – and tributaries. In Bhutan, water, the most important natural, economic, and life-sustaining of resources, has a special meaning in Bhutan, particularly in temples where water is blessed by monks.

Bhutan is landlocked between China to its north, India to its south and east, and both nations to its west.

Although the kingdom’s mountainous topography and significant water resources mean that Bhutan has considerable potential for hydropower development, Bhutan’s water and energy security are under threat. In the past couple of decades, new challenges to the water sector in Bhutan have emerged, forcing the country’s leaders to rethink their approach to water and energy security. While water was mainly used for domestic and agricultural purposes in Bhutan in previous decades, rapid socio-economic development and urbanization and concomitant lifestyles, along with increasing water scarcity at a local level and competing water demands from different uses,) are reshaping water use patterns. Further exacerbating matters, increasing water demands from the country’s hydropower industry are also needed to meet growing energy demands.

Hydroelectric power is one of the world’s most abundant and cheapest renewable electricity sources. In both developed and developing countries, hydropower dams are constructed to boost economic development and better manage existing water resources as well as meet various national and international climate goals. Importantly, hydropower also improves accessibility and reduces the cost of electricity to consumers.

In Bhutan, hydropower is a strategic, important renewable energy resource. As the only South Asian country with surplus energy available for export, it has large reserves of untapped hydropower, with an estimated output of over 30,000 megawatts (MW). Yet despite the country’s enormous water resources and mountainous geography, only about 10 per cent of this potential has been developed. Bhutan is keen to further develop hydropower in Bhutan, as are its neighbours in water-scare China and India.

Hydropower represents the majority of Bhutan’s energy consumption, making it the primary energy source for domestic use and local industrial consumption. In the past couple of decades, hydropower has been a major export and significant revenue carrier for the country. Recent estimates suggest that the hydropower sector in Bhutan contributes nearly 25 per cent of the national GDP along with an enormous 40 per cent of the total national revenue. Much of the country’s hydropower industry is supported by foreign direct investment (FDI) from India, which has highly cooperative water interactions with Bhutan, and which has funded hydropower projects in Bhutan for a number of decades.

A key part of India’s interest in Bhutan is due to the country’s enormous hydropower development and export potential. India’s rapid economic and population growth and concomitant urbanization is pushing energy demand at a rate much faster than current capacity can provide, with demand for electricity alone expected to nearly double by 2040. As part of efforts to meet energy demands by addressing India’s shortfall, New Delhi is looking to poorer, water-abundant neighbours like Bhutan alongside increasing domestic hydropower generation.

A satellite map of the tri-border junction between Bhutan, China, and India.
The tri-border junction between Bhutan (orange), China (red) and India (green).

Bhutan, for its part, has increasingly helped meet India’s enormous energy demands by selling the overwhelming majority – around 80 per cent of its surplus power – to India, with the latter offering both financial and technical assistance to Bhutan. Various Indian-Bhutanese government agreements support the development of joint hydropower projects in Bhutan such as the Jaldhaka Agreement of 1961 and the Agreement on Cooperation in the field of Hydroelectric Power (2006).

India-Bhutan Relations

Over the past decades, India and Bhutan, which share a 605-kilometer border have enjoyed a "special relationship". Bhutan was one of the first countries to recognise India’s independence in 1947. Until 2007, India exercised significant leverage over Bhutan’s foreign policy, as per the 1949 India–Bhutan Friendship and Cooperation Treaty. Following Bhutan’s transition from an absolute monarchy to a constitutional democracy in 2008, the Friendship Treaty was renegotiated with India, thereby giving the country greater freedom in both its foreign policy and its purchases of military equipment.

Indian PM Narendra Modi shakes hands with Bhutanese Prime Minister Lotay Tshering
Indian PM Narendra Modi, seen here with his Bhutanese counterpart, Lotay Tshering, was awarded Bhutan's top civilian honour, the Ngadag Pel gi Khorlo, in December 2021. Credit: ANI Photo

At present, the two countries have strong relations, particularly in terms of trade, energy, investment, and cultural exchanges. Notably, India has played a significant role in Bhutan’s economic development. Aside from having helped fund Bhutan’s first Five-Year Plan in 1961, Bhutan is the largest beneficiary of India's foreign aid, with a significant share of Bhutan’s total external grant borne by India.

But Indian investments, technical support, the India–Bhutan free trade agreement and New Delhi’s ‘Neighbourhood First’ policy mean that India, continues to play a key role in supporting Bhutan’s infrastructure development, economy, and to some extent, foreign policy. As Bhutan’s largest trading partner, India is accounts for around 80% of the country’s overall trade and is also the largest source of foreign direct investment (FDI).

Another aspect of the India-Bhutan relationship to consider is China. Due to New Delhi’s national security and geostrategic considerations, India has long sought to prevent China from negotiating a territory exchange deal with Bhutan as the deal would not benefit India. New Delhi remains wary of Beijing’s intentions for the small kingdom. From New Delhi’s perspective, growing geostrategic rivalry with Beijing and China’s increasing aggressive behaviour in Asia, including along the disputed Sino-Indian border and territories, as well as regular reports of repeated, aggressive incursions into India’s Ladakh region along with Beijing’s continued interested in the Chumbi Valley (Tibet), demonstrate Beijing’s ill-intentions to not only Bhutan and India, but also in the wider South Asian region. Indian media has also played on this by creating a sense of urgency for New Delhi to remain involved in Bhutan’s border negotiations and to prevent China from opening an embassy in Thimphu, partly due to fears that this would lead to China gaining a foothold in Bhutan.

Growing Chinese Influence

In recent decades, China has become increasing interested in Bhutan. Although Bhutan has maintained an officially neutral relationship, albeit without any diplomatic relations due to border and territorial disputes which date back to the Chinese annexation of Tibet in 1951. Since then, Bhutan undertook an embargo on cross-border trade with China, which remains in place today, while also strengthening ties with India.

The publication of maps by China during the 1950s and 1960s exacerbated Sino-Bhutanese relations as the maps claimed which claimed significant parts of central and northwest Bhutan as part of Chinese leader Mao Zedong’s ‘Five Fingers of Tibet’ (Ladakh (India), Nepal, Sikkim, Bhutan, and disputed territory Arunachal Pradesh), raising fears of a Chinese invasion.

The 'Five Fingers of Tibet' is a Chinese foreign policy originating under Mao Zedong that considers Tibet to be China's right hand palm, with five fingers on its periphery: Ladakh, Nepal, Sikkim, Bhutan, and North-East Frontier Agency (now known as Arunachal Pradesh). The 'liberation' of these former Chinese imperial territories is believed to be a long-term strategic aim of China, creating significant tensions with its neighbours.

Since the 1980s, China and Bhutan have conducted regular talks on border and security issues to reduce tension. In 1996, China made a proposal to exchange a large claim over the Pasamlung and Jakarlung valleys in Central Bhutan for a relatively smaller geographical portion of Bhutan’s north-western territory in Chumbi Valley. Chumbi Valley borders Tibet and is near to the Siliguri Corridor, one of India’s most strategic and sensitive territories.

The negotiations ended in a stalemate followed by an agreement in 1998 to continue negotiations and maintain the status quo. As of November 2022, the two countries have held 10 expert group meetings along with 24 rounds of border negotiations. Considering its geographical size and strategic stakes, Bhutan has been very defensive. In 2021, Bhutan and China signed a Memorandum of Understanding (MoU) on a “Three-Step Roadmap” solve their border disputes.

Although Beijing has demonstrated an increasing willingness to improve relations with Thimphu and its interests in Bhutan, Beijing has also increased its claims to Bhutanese territory. In 2020, China made new territorial claims in eastern Bhutan in the Sakteng sanctuary. Beijing currently maintains claims to certain territories in Bhutan: Pasamlung and Jakarlung valleys (north or central Bhutan), which have significant cultural significance for Bhutan; Doklam, Drama, and Shakhatoe, Yak Chu, and Charithang Chu, and Sinchulungpa and Langmarpo valleys, which are strategically located in the Bhutan-India-China trijunction, and near India’s important Siliguri Corridor.

Satellite images from 2020-2021 showing China building villages in Bhutan’s western and northern regions. Credit: Twitter/@detresfa_

Furthermore, since the late 1990s, Beijing has encouraged citizens to relocate to the disputed areas while also building infrastructure within Bhutanese territories. Between 2020 and 2021, satellite images showed China building villages in Bhutan’s western and northern regions, reinforced by military outposts or police and infrastructure. Such movements are further supported by China’s “Land Borders Law”, under which Beijing seek to increase the construction of border town and settlements alongside efforts to strengthen borderland defence. In response, Bhutan has extended its claims in the western region and called for China to be more generous during negotiations.

Bhutan in the middle of the Sino-Indian rivalry

At present, Bhutan finds in itself in the middle of the intensification of rivalry between India and China, especially as both countries have interests in the strategic areas of western Bhutan.

For Beijing, Bhutan’s “special relationship” with India combined with unresolved Sino-Bhutan border issues and the lack of official diplomatic relations and channels between Bhutan and China continue to haunt Beijing’s ambition of being an Asian superpower. To this end, Beijing has engaged with Thimphu, notably by through negotiations over the ongoing border dispute, while Chinese (state) media has points to the resurgence of Buddhism in China as benefitting Bhutan along with emphasizing China as being “by far the largest contributor to Bhutan’s tourism industry” vis-à-vis India, whose citizens do not need visas to enter Bhutan.

However, Bhutan’s continual rebuff of China’s efforts to establish formal ties is viewed by the Chinese authorities as a policy posture reflecting India’s game plan to keep China at bay. From China’s perspective, India’s “long-term comprehensive control and influence” on Bhutan, aside from controlling Bhutanese expression and politics, not only prevents Bhutan from forging closer ties with China, such as the rejection of Chinese economic incentives, but also restricts its external engagement with the rest of the world. To undermine India’s presence and influence in Bhutan, China has accused India of bullying Bhutan and of seeking to exert “influence on every detail of the China-Bhutan border negotiations”.

At the same time, growing Sino-Indian rivalry has also been a motivating factor for Beijing to put significant pressure on Thimphu as part of broader efforts, including military incursions and the establishment of Chinese settlements in Bhutan, to gain control of the disputed areas in western Bhutan. In this context, a Chinese settlement alongside a road network and other infrastructure not only entrenches China in the region, but also gives China access to a key ridge overlooking India’s Siliguri Corridor, making India even more vulnerable by empowering Beijing’s offensive poisoning against India.

Chinese settlements alongside the border regions of west Bhutan give China access to a key ridge overlooking India’s Siliguri Corridor.

As Bhutan receives much less attention in both regional and global relations in comparison to other small states, Beijing may consider strengthening ties with Thimphu advantageous as this could receive less media attention than the strengthening of bilateral relations with other countries, while simultaneously establishing itself in South Asia. In this context, strong China-Bhutan relations could not only support China’s attempts to test waters in South Asia and better handle India militarily, but also reduce the prospect of Bhutan (and potentially India) aiding potential unrest in Tibet.

From Beijing’s perspective this could further project Chinese military and strategic power in the region and increase Beijing’s sphere of influence while reducing India’s role as the security provider in the Indian Ocean region, and also make China into a strong military force in Asia. Such efforts would also help counterbalance the United States (US) — which China considers an extra-regional power by China – in its sphere of influence, further supported by frameworks like the Global Security Initiative. Doing so enables Beijing to challenge both the US and India while seeking and strengthening new and existing partnerships to support China’s long-term strategic objectives.

For New Delhi, further Chinese expansionism is a grim prospect. India has long viewed Bhutan as a “buffer state” against increasing Chinese aggression and military activities. Furthermore, Bhutan is the only South Asian state to have consistently acknowledged and respected New Delhi’s security concerns over China and the BRI, with Bhutan having so far resisted Chinese financing and joining the BRI. In return, New Delhi has sought to accommodate Bhutan’s interests, including financing and constructing hydropower development project, to ensure their economic integration and pursuit of common security goals.


Written by Genevieve Donnellon-May.

Edited by Wade McCagh.


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