…on the back of delays in hydropower, GST and demonetisation issue

Slow progress and delay in the hydropower construction, demonetisation issue, and the introduction of goods and services tax (GST) in India is likely to disrupt Bhutan’s macroeconomic prospects and downscale economic growth projections.

The World Bank has revised the country’s economic growth projections  from 9.9 percent to 6.8 percent in 2017. The 2018 growth projection was revised down from 11.7 percent to 7.7 percent.

Delay in hydropower is likely to have significant negative impact on growth, revenue and exports, according to the World Bank. This is according to a paper on economic update of the country titled ‘hydropower sector clouds macroeconomic prospects.’

A one-year delay in the completion will reduce GDP growth rate by 3–4 percentage points, exports by US$250–300M (about 50 percent of the current exports), and revenues from tax, dividend, and royalty by 0.5–1.0 percent of GDP.

How much should the country worry about public debt?

The World Bank team claims that the dominance of hydropower external debt means that debt sustainability is closely related to the sustainability of hydropower debt.

About 90 percent of hydropower external debt is financed by India with interest rates at 9–10 percent for the Punatsangchhu I and II and Mangdechhu projects.

The first interest and principal payments are expected in 2018. This timing is earlier than the scheduled commissioning dates of Punatsangchhu I and II, and construction costs are increasing.

However, it was stated that the Government of India covers both financial and construction risks of these projects and buys the surplus electricity at a price reflecting cost plus a 15 percent net return. “As long as the 15 percent net return is secured, while the delays affect economic growth, government revenues, and repayment capacity of non-hydropower debt, hydropower external debt is considered sustainable. Hydropower external debt is, therefore, unlikely to lead to a debt crisis.”

The loans from India led to an increase in external debt from US$2.3 B (119 percent of GDP) in June 2016 to US$2.5 billion (122 percent of GDP) in March 2017. “The increase in external debt requires careful monitoring, although the most recent debt sustainability analysis shows that Bhutan faces a moderate risk of external debt distress,” the paper stated.

Maximising access to non-debt financing such as foreign direct investment (FDI) and remittances would ensure stable financing for development and less reliance on debt financing.

While, the revenue and grants are projected to decline from 28.6 percent of GDP in 2017-18 to 21.6 percent in 2019-20, domestic revenues are projected to increase to 20.4 percent of GDP in 2018-19.

However, tax revenues are projected to decline from 13.9 percent of GDP in 2015-16 to 11.9 percent in 2019-20. It is mainly because of the decline in excise duty refund from India starting to take effect in 2018-19 because of the GST.

The decline in tax revenues is partly covered by the increase in nontax revenues due to profit transfer from the Mangdechhu Hydropower Project starting in 2018-19. Capital expenditures are also projected to decline significantly to 9.9 percent of GDP in 2019-20. “The decline is consistent with the government strategy to consolidate past investment in infrastructure and effective use of operations and maintenance expenditures.”

Because of the GST, Bhutanese products are becoming more expensive and Indian products cheaper.

For example, before the introduction of GST, Bhutanese products were subject to value added tax (VAT) at the point of sales in India. On products imported from India, excise duties and VAT were levied. Excise duty, which is about 10 percent of the domestic revenue, was later refunded by the Government of India to the Bhutanese government on an annual basis with a two-year lag. Now with the introduction of GST, Bhutan’s exports to India are subject to GST both at point of entry and point of sale in India. They are treated same as local goods in India. On the other hand, India’s export to Bhutan is zero-rated with no excise duty (except for five petroleum products).

This will potentially lead to an increase in trade deficits and fall in domestic revenue from excise duty refunds.

“As India accounts for about 90 percent of Bhutan’s international trade, GST is likely to affect the economy through trade and revenues,” the report stated. Moreover, there is still confusion about the implementation of GST, which has adversely affected trade flows.

The World Bank officials are of the view that delays in hydropower construction and increase in expenditures have left a resource gap in the budget. Unless financing sources are identified, the resource gap will lead to cut in expenditures, which will negatively affect growth and development.

According to the World Bank team, if trade disruptions caused by India’s GST continue, and given the country’s vulnerability to natural disaster affecting domestic connectivity, they are likely to have a negative impact on the economy.

Even in the financial sector, data show that growth rates of lending remained high until May 2017. However, lending growth is different among the major sectors. For instance, lending to services and tourism kept accelerating while lending to trade and commerce turned negative in November 2016. This is attributed to the India’s demonetisation.

Tshering Dorji