Economic Stimulus Plan (ESP) constituted a central element of the poll manifesto of the people’s Democratic Party (PDP), which formed the government after winning the 4th general election to the national assembly. Nu 15 billion plan aims to foster economic growth and support sectors affected by the pandemic. ESP aims to strengthen macroeconomic foundation, promote domestic production, generate employment, improve trade balance, and augment foreign exchange reserves. I think that growth of tourism is a strategy rather than a goal itself. It is quite evident that ESP has a populist agenda infused with the economic transformation strategy, which also makes it an overambitious plan. 

 What are the major fault lines? This is an important question.   

One of the noticeable feature of ESP, which is also its strength, is its predominant supply side orientation. The economic stimulus plan has two major components. One is countercyclical in nature, to provide financial support to the businesses affected by pandemic. The other is pro-cyclical, that aims to tap the growth linkages created by the expanding sectors during 13th plan.  Size of ESP is BTN15 billion, amounting to about 20% of the public expenditure in 2022-23 and about 6.7% of the GDP in 2023.  Strategic framework of the ESP is almost similar to its predecessor, ESP 1.  ESP primarily contains credit support to the priority sectors and provisions of loan deferment and interest subsidy. CSI, export oriented industries, downstream value chains in hydroelectric sector, and agriculture are identified as the priority sectors.  

Priority sector within manufacturing lack a clear focus, its current structure is almost all inclusive containing –Cottage and Small Industries (CSI), Export Oriented Industries (EOIs), import substitution industries, and domestic manufacturing. The priority sector needs to be very specific, to be effective and avoid unnecessary overlaps. It can be more specific such as – export oriented cottage and small industries. Lack of focus will lead to thin spread of resource across a wider range of activities in which comparative advantages do not exists and this will only diminish its impact.  It seems more like an extension of an old strategy of one gewog one product (diluted avatar of one gewog three products), which failed to take off.  It needs to be seen that what lessons are learnt from them.  A large volume of research establishes that MSMEs growth is driven by productivity and innovations. Thin spread of resources will not permit productivity growth and innovations.  Despite steeply rising costs, the fixed investment thresholds criteria for categorising cottage, small and medium enterprises has not changed in the last  one and half decades and  needs upward revision. The current criteria (up to BTN 1 million for cottage, and BTN 1-10 million for small industries) is not sufficient to make investment in more advanced/ appropriate technology, including the green technology. Use of obsolete technology contributes to low productivity and low competiveness. For a quick comparison, the minimum fixed investment for micro and small industries is only one tenths of what is used in India. Lower fixed investment ceiling in Bhutan is a major hurdle to the CSI growth. There is strong case for revising fixed investment criteria for CSI sectors in order to provide adequate credit support to the CSIs in Bhutan. Success of ESP in stimulating growth of CSI sector and generate productive employment opportunities is critically linked to this.   

CSI has always remained a central element of the development agenda in Bhutan, including the ESP 2013. However, its healthy growth still remains a challenge. Indiscriminate allocation of subsidised funds, combined with poor loan assessment practices, reduces the risk perception of a loan and promotes imprudent financial practices by the borrowers and consequent repayment defaults. High NPL in the CSI sector, about 24% in 2022, and losses by the CSI bank led to the closure of the CSI bank. Improved loan assessment practices and strengthened monitoring mechanisms will be critical to ESP success. There is a strong need to learn from past experience. Credit Support to CSIs should be linked to the prospects of productivity growth, competitiveness and regional balance. If the business supported through ESP are constantly monitored during their project cycle and assistance is not given in a single tranche but in instalments on achieving interim milestones, it will ensure that resources are efficiently used.

Creation of craft bazaar and night market formulates an important strategy to promote the sale of domestic products, especially to the tourists. This strategy does not seem much different from handicraft market and CSI market that have been created in the past. If they have not been successful in achieving their goals, how the new establishments would be the game changers? Resources should be used to prudently to avoid repeating past mistakes. 

There are some lessons to be learnt from the big push strategy of industrialisation. To stimulate CSI growth, the pattern of investment is as much important as the size of investment is. Support to CSI sectors should be made on the basis of the analysis of linkage effects. Those CSIs which have the largest backward and forward linkages with other domestic activities should be accorded highest priority in the allocation of subsidised credit support. Simultaneous investment in all those linked CSI units will ensure that these units create adequate demand for each other’s product and grow in an interdependent manner.  This shall be the key to the success of ESP in stimulating industrial growth.   

Like its predecessor, the current version of ESP accords a higher priority to the agriculture sector. Agriculture production has been consistently falling since 2018, and the share of agriculture in total credit is below 5%. Given the current pathetic state of agriculture, ESP can be a game changer if it is well designed and executed. ESP should aim to remove critical supply bottlenecks to agriculture growth- labour shortage, irrigation, climate change and marketing. Linking agriculture growth to CSI growth using upstream supply chains will be key to its success. 

The newer version of ESP has one unique feature, which I believe its core strength, is its pro-cyclical component- to tap linkage effects of the fastest growing sectors, like hydroelectricity. ESP intends to promote CSIs linked to downstream value chains of the hydroelectric sector.  However, their viability will be aligned to the growth performance of the hydroelectric sector.    

ESP tend to harness growth opportunities from tourism. It aims to achieve tourist arrivals rate of 300,000, and also shift from 70:30 ratio of Indian and other foreign tourist in 2024 to 50:50 ratio in 2026. Almost 16% of the NU 15 billion ESP support has been assigned to the development of the tourism sector. Tourism policy liberalisation is expected to continue to attract tourists, however the system still struggling to synchronise with fast moving changes in the sector (‘Tour operators raise concern over SDF refunds, discounts and tour licensing’ Kuensel, May 29, 2024). This sector has been greatly affected by the policy uncertainty, and investors will be more cautious this time. There is a need to positively influence the investors’ sentiments before the tourism stimulus package comes into operation.  

It would be also pertinent to review the first version of ESP (2013) which was implemented by the PDP government. During 2014-19, when the ESP was operative, the GDP growth rate accelerated from 2.1% in 2013 to 8% in 2016 before declining to 5.8% in 2019. During this period, five yearly average agricultural growth also accelerated from 2.21% in 2009-13 to 3.6% in 2014-19. It is clear that growth rate accelerated, however all of it cannot be ascribed to ESP, but it deserved a due credit.  However during this period the trade deficit increased from Nu 21 billion in 2013 to Nu 30 billion in 2018. The ESP failed to adequately accelerate growth rate of exports (30%), while imports grew by 50%. ESP supported credit infusion had led to high spill over effect in terms of excessive demand growth, which led to higher trade deficit, bigger saving investment gap and higher budget deficit. Rather than strengthening macroeconomic fundamentals, it had an adverse effect. Lessons learnt from it can help to make current ESP more effective.  

Finally, ESP aims to strengthen macroeconomic foundations of the Bhutanese economy. All the efforts directed towards promoting domestic production, employment generation, and export promotion will contribute towards strengthening macroeconomic foundation. As the ESP is fully financed by Indian support, it will not burden the fiscal system but how it helps to promote growth of public revenue and employment generation will also determine its success. 

Contributed by

Sanjeev Mehta, 

Professor of Economics, Royal Thimphu College