Electricity fosters structural transformation of the Economy

Bhutanโ€™s economic growth has been fortified by the hydropower development and subsequent export of electricity across the border. However, this venture has also fostered a structural shift in the economy contributing to further growth of other sectors of the economy.


Structural transformation occurs when a sustained period of rising income and living standards follows changes in the distribution of economic activity.


For instance, the commissioning of the 360MW Chukha Hydropower plant in 1986 registered at 29 percent GDP growth for Bhutan in the following. This was primarily on the back of power export to India.
Then in 2006, the 1020 MW Tala hydropower project came on line, which again spiked the GDP growth rate to 19.7% in the following year. During this period of two decades the Bhutanese economy grew from Nu. 10.3 billion to Nu. 36.3 billion.


However, the Bhutanese economy has undergone significant changes in its structure since the commissioning of the two power plants of Tala and Chhukha.


Between 1980 to 2003, the share of primary sector consisting of agriculture and mining has declined from 56 percent in 1980 to 27 percent in 2003. On the other hand, the share of secondary sector consisting of manufacturing, energy and construction sectors increased to 42 percent in 2003 from 11 percent.
On account of hydropower development, manufacturing sector such as cement industries, food industry, basic iron & steel industries, wood based Industries came up in the country adding more than Nu 2 billion to the GDP during the same time.


While the power sector has given impetus to the manufacturing sector, in 2010 the construction of two mega projects in Punatshangchu has resulted in construction sector registering an expansion of more than 15 percent, resulting in a GDP growth of more than 10 percent. Despite the huge expansion of GDP, the share of electricity sector still remained as major contributor forming about 16 percent of the GDP today.


In 2019, the commissioning of Mangdechhu has revived a weakening growth rate to 5 percent. Within the secondary sector, electricity and water sector observed an accelerated growth of 12 percent. It may be noted that the performance of the sector is largely dependent on the performance of the electricity sub-sector, since it constitutes almost 99 percent of the sector.


The countryโ€™s GDP in 2020 receded by 10 percent in the red due to the pandemic. However, this was largely due to contraction in hospitality and mining sectors. The electricity sector experienced an accelerated growth of 25 percent mainly due to the full commissioning of Mangdichhu Power and subsequent export of energy to India.


Every time a new hydropower project is commissioned, there has also been a spurt in the growth of small, medium and large energy intensive industries due to the access to reliable and affordable electricity making domestic industrial products competitive in the local and export markets. Besides, the export of power to India is identified as highest revenue earner for the country, aiding in replenishing the INR reserve of the country to finance the imports. In 2019, electricity export earned a revenue of INR Nu 27B.
For Bhutan, cross border electricity trading is associated with single buyer which is deemed risky otherwise. However, the long term bilateral relationship between the two government of India and Bhutan substantially reduces the risk. The export tariff is based on cost plus model and thus the actual project completion cost is accounted in the tariff. Moreover, the projects are financed by India through a component and loan and grant.


On the other hand, the construction of these mega projects has helped Bhutan electrify 99 percent of its households with grid connection.


On the flipside, development of hydropower at an accelerated pace has also exploited the countryโ€™s economic vulnerabilities.

The story is being covered by the Institute of Happiness for a research conducted on the effects of cross border energy trade.

Contributed by Tshering Dorji