Chapter I   THE LAND AND THE PEOPLE

1.1.     The Kingdom of Bhutan has an area of 46,500 sq. kms situated in the eastern Himalayas between 26.5 and 29 degrees north, latitude; and 88.5 and 92 degrees east, longitude. The country is relatively compact, with a maximum north-south distance of 170 kms as the crow flies, and a maximum east-west distance of 300 kms. It is landlocked, bordered east-west by the Indian state of Sikkim, West Bengal and Assam in the south, and Arunachal Pradesh in the east; and by the Tibetan Autonomous Region of China in the north and north-west. The nearest seaport is Calcutta 700 kms away by road from Phuntsholing, the main gateway town. Thimphu, the capital, is in Western Bhutan, about 180 kms by road to the north of Phuntsholing.

1.2.     Bhutan's borders are by and large natural ones. The border with Tibet is traditional, following the watershed of the Chumbi Valley in the north-west and the crest of the Himalayas in the north. The southern border with India was established by treaty with the British in the nineteenth century and by and large, follows the line made by the Himalayan foothills with the plains.

1.3.     As can be seen from the above description, Bhutan is almost entirely mountainous with flat land limited to the broader river valleys where population is more concentrated and in small sections of the Duars in the south. The mountainous terrain formed formidable barriers between Bhutan and its neighbours and also between the people living in the different river valleys. As a result, Bhutan remained till recently, in a state of almost complete isolation from the outside world.

1.4.     Geologically, Bhutan as part of the Himalayan range is relatively young as the Himalayas form the fold mountains resulting from the collision of the northward moving land mass of India with that of Eurasia about 30 million years ago. As a result, the terrain is among the most rugged in the    world with altitudes rising from 160 m to over 7,000 m within distances of less than 100 kms and with the intervening land rising and falling by as much as 1,000 m at a time. The country can be divided into three distinct geographical zones--the southern foothills, the 'inner' Himalayas and the higher Himalayas. The southern foothills rise from the plains to heights of about 1,500 m extending to the north by about 20 kms inside Bhutan; the middle part of the Kingdom consisting of the inner Himalayas rise somewhat more gradually to about 3,000 m. This region contains the broader river valleys: Paro, Thimphu, Punakha, Bumthang and Tashigang which comprise the economic and cultural heartland of the Kingdom. The northern region of the Kingdom comprises the main Himalayan range which although less higher than the western Himalayas, nevertheless. rise to heights of over 7,000 m. This area is very sparsely populated.

1.5.     Almost all valleys have a swiftly flowing river or stream fed either by perennial snows or the summer monsoons or both. These merge ultimately into four major river systems as they flow south the Ammochu, the Wong Chu, the Sankosh and the Manas with only the Ammochu having its primary source outside Bhutan. The two largest systems are the Manas which drains eastern Bhutan and the Sankosh which drains the area between Bhutan's highest peaks--the Chomo Lhari (7,314 m) in the north-west and the Kula Kangri (7,554 m) in the north. The flows in the rivers are the highest in the monsoon months (June to September) and lowest in winter (December to March).

1.6.     The country can be divided into three distinct climatic zones corresponding broadly to the

three main geographical divisions. The southern belt has a hot, humid climate with temperatures remaining fairly even throughout the year between 15°C and 30°C with rainfall ranging between 2,500 mm to 5,000 mm in some areas. The middle inner Himalayas has a cool, temperate climate with annual precipitation averaging about 1,000 mm with the western region receiving comparatively higher rainfall. The higher and more northern region has a severe alpine climate with annual precipitation around 400 mm. Much of the precipitation is concentrated in the summer months with the south-west monsoon accounting for 60-90% of the total precipitation. There is, however, substantial variations within these broad ranges and the climate and rainfall characteristics change dramatically from one valley to an adjacent one with consequent sharp changes in the composition of agricultural production.

NATURAL RESOURCES

1.7.     No comprehensive land use survey has so far been conducted in Bhutan. However, 63% of the country was covered by aerial surveys between 1974 and 1979 with assistance from the

Pre-investment Survey of the Government of India primarily to obtain a low density forest profile of the country. Although 37% of the area was omitted from the survey, these were largely un habited areas in the north and north-west. This survey, yielded valuable data on the land use pattern prevailing in Bhutan.

1.8.     As can be seen from Table 2, almost half of the area is under natural forest and about 5% is cultivated or inhabited, pasture or shrub account for a little over 4%. Forests constitute the major natural resource of the country with about two thirds of the forest cover comprising quick growing broad leaved varieties mainly in the southern tropical deciduous forests. The inner valleys consist of oak and other deciduous trees giving way to conifers with increasing altitude. Broad leaved tropical hard woods, dominate up to an altitude of 1,000 m and beyond these, up to 3,000 m, are found temperate forests of pine and oak; the latter is concentrated mainly on the southern slopes which receive most of the monsoon rains. Beyond 3,000 m and up to about 4,000 m which is the tree line, valuable reserves of pine, spruce and fir are found. The survey also indicated that the forest cover is relatively evenly spread with 63% of the surveyed area in the north-west under forests and 81% in the south. An examination of the dispersal of the two main categories of forests indicate that 54% of broad leaved species and 8% of conifers are found in the south while in the north, 50% of the forests constitute conifers and only 11% of broad leaved Varieties.

Table 2     SURVEY OF LAND USE

SquareKilometres              Percent of Area

Surveyed

Percentof Total Land Area*

Natural Forest                                                    21,593                                         74.0 46.4

Cultivated or Inhabited                                         2,492                                            8.5   5.4

to Alpine Pasture or Shrub

Barren Land  Under Snow Cover

Lakes and Water Sp Area under Cloud C

*Assuming total land area of 46,500 sq. kms.

1.9.     The exploitation of forests at present, however, is low mainly due to lack of accessibility. of the net allowable cut, only about 20% is currently being harvested, a large portion of it to meet household fuel needs. Exploitation is uneven: the relatively accessible forests of the south and those near roads, have been heavily worked while the rest of the cover is more or less intact and overage trees in these areas decay. The Government, however, realises the importance of scientific exploitationto preserve the fragile Himalayan environment which is vital to Bhutan.

1.10.  Bhutan also has rich and varied wildlife and is the main home of many rare species. In the south are found elephants, buffalo, tiger, deer and golden langur--a rare species of monkey. Above altitudes of 3,500 m is the home of the snow leopard, musk deer and the blue sheep.

1.11.Although agricultural land comprises about 5% of the total land area, the per capita availability of land is about two hectares. However, given the climate in most parts of the country and the terrain, agricultural productivity is low, but there is considerable potential for the development of horticulture in the inner valleys as well as increasing the productivity of cereals by increasing cropping intensity, specially in the southern regions with increased tapping of the large irrigation potential, coupled with modern inputs. The temperate climate and clear mountain air of the inner valleys is particularly conducive to the development of a significant foundation seed industry.

1.12.  Another major resource endowment in Bhutan is the enormous hydro power potential arising out of the steep southern watershed of the Himalayan range. Although no systematic survey has been carried out, the actual potential at the present stage of exploitation is largely academic. If appropriately exploited, power could become the predominant cheap energy source in and could over time, replace the present high dependance on firewood.

1.13.  The exploitation of Bhutan's mineral resources which are considerable, is still in its infancy and exploration is both expensive and time consuming due to the terrain and the tectonically disturbed geology of the area. Preliminary investigations carried out, with the assistance of the Geological Survey of India, indicate deposits of limestone, dolomite, coal, gypsum, graphite, copper, lead-zinc, marble, slate and talc. Limestone and dolomite are currently the main minerals being exploited and some quantities are being exported in various forms to India. Limestone is already being processed into cement in a 300 t.p.d. plant near Samchi in southern Bhutan. Bhutan's coal reserves are fairly limited and only of moderate quality. Small quantities are being exported to India.

POPULATION

1.14.  The estimated population of Bhutan is 1.165 million (official 1981 estimates). Of this, about 152,000, i.e., a little over 13% live in the urban areas with Thimphu and Phuntsholing accounting for about 40% of the urban population with over 30,000 persons each.

Table 3  POPULATION DISTRIBUTION BY AGE AND SEX

Includes urban and rural population.

Table 4  DZONGKHAG WISE POPULATION 1981

Table5  ESTIMATED POPULATION OF TOWNSHIP AREAS

Sl.No.                         Name of Town                           Population

There are eight other urban centres with populations below 5,000. Of the urban centres, the fastest growing are Thimphu, the capital, Phuntsholing, a major commercial centre and Gaylegphug, a burgeoning industrial and commercial centre. The population distribution by Dzongkhag indicates that Tashigang along with Samchi have the largest populations, accounting for about 16% of the population each followed by Chirang and Gaylegphug with about 10% each. Lhuntshi, Mongar, Samdrup Jongkhar, Paro, Shemgang, Thimphu and Wangdi Phodrang have populations ranging from 3.5% to 7% each. This population distribution is also indicative of the fact that the distribution broadly follows the river valleys with the southern and central portions of the main valleys having the largest populations.

This is not surprising as the predominant occupation of the populace is agriculture which is generally confined to the river valleys.

1.15.  In term of basic demographic parameters, an adult literacy rate of 12% had been achieved by 1980-81 which although low even in terms of prevailing rates of others Least Development Countries is indicative of the expansion of the modern educational system in recent years. Primary enrolment levels have reached 25% among school going age group of boys and 17% among girls. The crude birth rate stood in 1980-81 at 43 per 1,000 live-births in 1980-81.

1.16.  The official language is Dzongkha, which is the language of the dominant Drukpa community but this has not been made the national language as here are a number on vernacular schools where it is the medium of instruction.

SYSTEM OF GOVERNMENT

1.17.  His Majesty the King is the Head of State and also the Head of Government. He is assisted by the Cabinet which consists of His Majesty's Representatives in various Ministers, Ministers and some senior Civil Servants. The composition of the National Assembly as undergone some changes since its initial constitution and at present consists of 100 members representing the people, 10 representatives of the Monk Body and 40 senior officials of the Government. The Assumably meets twice a year and is the main legislative body. During its sessions, vigorous debates on policy issues and people's problems are carried out.

1.18.  The royal Advisory Council presently consists of 10 members. There are two members elected by the National Assembly from the Monk Body; six regional representatives also elected by the Assembly and two members appointed by His Majesty. The Chairman is nominated by His Majesty from among the members. The Council works as a watchdog body advising His Majesty on key issues of policy and oversees the functioning of Government.

1.19.  The Monk Body which currently has a strength of about 5,000 is financed by an annual subsidy from Government and is the sole arbiter on religious matters. The Jekhamp is the Head of the Body chosen from among high ranking Lamas. He is assisted by four high ranking Lamas of the Central Monk Body which consists of 1,000 Lamas. Each Dzongkhag except those in southern Bhutan has a Monk Body headed by a Head Lama (Lama Neten) who presides over all religious matters in the Dzongkhag.

1.20.  The administrative structure has evolved considerably over the past twenty years. Starting from only the Royal Secretariat, the Development Secretariat was later constituted to initiate the process of development in the country. With the expanding responsibilities of Government and increasing size of development programmes, a number of departments were created. These departments are now grouped into five Ministries, each Ministry is under the charge of a Representative of His Majesty or a Minister. The Ministries as presently constituted are: the Ministry of Development, the Ministry of Trade, Industries and Forests; the Ministry of Communications; the Foreign, Home and Finance Ministries. The Planning Commission is headed by His Majesty the King as Chairman with His Majesty's Representative in the Ministry of Development as Vice Chairman and the Deputy Minister for Planning as its full time head.

1.21.  Local administration has been strengthened recently to meet the requirements of decentralised administration and development. There are 18 dzongkhags or districts each under the charge of a Dzongda responsible for civil administration and development activities. Each Dzongda is assisted by a Dzongda Wangma responsible for planning and development and the Dzongrab responsible for civil administration. The larger dzongkhags are sub-divided into sub divisions headed by a Dungpa. Groups of villages have a headman: the Gup or Mandal. There is in each dzongkhag a Dzongkhag Yargay Tshogchung or the District Development Committee consisting of people's representatives which assists the Dzongda in his development functions.

1.22.  The High Court consists of six judges. Four of the judges are appointed by His Majesty, two public representatives elected by the National Assembly subject to ratification by His Majesty the King. There are district courts in each dzongkhag with a district judge (Thrimpon) but minor

disputes are settled by village headmen. The law of the land is derived from that laid down by the first Shabdung. However, it is recognized that the complexities of increasing development activity, call for expanding the legal framework. There is for example, at present no Companies Act although a need for one is felt and is presently being drafted. Companies or Corporations are set up by a  Royal Charter.

Chapter II   ECONOMIC CONDITIONS

INTRODUCTION

2.1.     In view of its natural and self-imposed isolation that existed till recently, patterns of economic activity in Bhutan have been simple. These have been dictated substantially by physiographic features: with communities settled in the river valleys and in the southern foothills, inter action with each other as well as the outside world had been limited; economic activity had, therefore, long been confined to subsistence agriculture supplemented by livestock rearing and cottage industries      based on traditional handicrafts. In the northern region, livestock rearing had been virtually the sole activity with migrating flocks of yak and sheep. Marketable surpluses in each community had been extremely limited and whatever little trade that was conducted between the communities and the outside world was by barter. Each community for most purposes, was traditionally self-sufficient. In such a situation, the needs of an administration were also minimal and the overall economy was more or less self-sufficient at a low level of economic activity with little capital formation confined to replacement or purchase of traditional tools and livestock.

2.2.     This economic structure was inherently stable for a long period as the ratio of land to labour was favourable. With the advent of planned development in 1961, certain structural changes in the economy were inevitable. Although capital formation was almost entirely the result of external assistance in the form of grants, the necessity to concentrate on infrastructure building at the initial stages resulted in little revenue generation and the necessary tasks of main training and operating the infrastructure had inevitably also to depend on external assistance leading to the loss of the traditional self-sufficiency of the overall economy. A second aspect of the process of development has been the self-generating need for expanding development activities due to rising expectations among the people. It is now widely recognized that a minimum acceptable level of growth and distributional equity has emerged which will call in future for significant increases in investment levels and re-orientation of development strategies.

2.3.     Both increasing investment levels and making major changes in the development strategy call for a larger body of socio economic data and its analysis over time. Much of this data both base line and time series, are still not adequately available. However, for the preparation of the Fifth Plan, an unprecedented volume of basic socio economic data collection has been undertaken. These include a population survey; livestock census; a nationwide agriculture survey; nutrition; consumption expenditure, education and health surveys as well as estimates of national income and balance of payments.

GROSS DOMESTIC PRODUCT

2.4.     The first efforts at estimating the Gross Domestic Product of Bhutan with sectoral break down was undertaken by the Planning Commission in 1981 for the year 1980/81. These estimate are presented in table 6. The estimated GDP amounts to Nu. 1020.5 millions and with a mid year population of 1.165 million, the per capita GDP comes to Nu. 876. This would indicate that Bhutan has one of the lowest per capita incomes in the world. With the estimated distribution of t population between rural and urban sectors it would seem that about 15% of the population account                for roughly one third of the GDP generated in the modern sector and the balance of 85' of the population account for two thirds of the GDP, a distribution pattern better than in man least developed countries. This, however, is a rough estimate. Despite the low per capita income nutritional levels in Bhutan are comparatively high, indicative of the self sufficiency of the rural household.

2.5.     While agriculture and allied activities contribute over 63% of the GDP, about 48% i accounted for by agriculture and animal husbandry alone. It can be assumed that the share c agriculture and animal husbandry have declined to some extent over time with the emergence c a small modern sector. Nevertheless, the still high contribution of these activities to the GDP i indicative of the high dependence of the majority of the population on traditional activities. Much of the contribution of these sectors to the GDP still comes from traditional subsistence agriculture. Forestry accounts for  an estimated 15% of GDP reflecting its importance as the main source of domestic energy, construction materials and of exports.

2.6.     A large portion of the contribution of forestry is in the modern sector. Besides this, manufacturing contributed 2.3% to the GDP with small and cottage industries and mining contribution at 0.9% and 0.8% respectively reflecting the nascent situation of industrial development and the lack of development of mineral resources. Tourism contributed a little over 1% although it is major hard currency earner.

2.7.     As may be expected, Government administration accounts for over 10% of GDP, health and education 3.4% and transport 2.7%. Government administration encompasses all development activities and has been increasing at a rapid rate in the past. The contribution of education an health indicate the large network of these services that has been built up and the cost of operating them. Trade, commerce, banking and communications are all small contributors reflecting the subsistence nature of the economy.

2.8.     Other national accounts data are not yet available. In the absence of production data, assessment of economic growth rates cannot be made accurately. Although this situation being rectified, some exercises have already been carried out to estimate GDP in past years by Planning Commission which indicate that the real GDP annual growth rate averaged about 6% between 1978/79 and 1981 /82. Although some trade data has been collected recently, it is still not adequate to determine trade and nonfactor service flows to arrive at proper estimates of overall investment and consumption levels. Public investments in 1980/81 was equivalent to 16% GDP (excluding that of the Chukha Hydel Project). Public investment so far has been financed entirely by external

assistance, private investment being confined generally to traditional investment like livestock, land and housing and much of the private investment in manufacturing has been with the assistance of public financial institutions.

Table 6  GROSS DOMESTIC PRODUCT AT MARKET PRICES 1980/81 (ESTIMATES)

Million Nu.

Sl.No.                                Sector                                   Contribution to GDP               %

1. Agriculture related activities                                                           645.2           63.2
   1. Agriculture                                                                                    409.4           40.1
      1. Animal Husbandry                                                                      76.5             7.5
   2. Forestry                                                                                        159.3           15.6
2. Manufacturing and Mining                                                              52.9             5.2
   1. Manufacturing                                                                                  23.7             2.3
      1. Small Cottage Industry                                                                  9.6             0.9
   2. Mining                                                                                             8.6             0.8
      1. Tourism                                                                                          11.0             1.2

3.          Services                                                                                            133.8           13.1

1. Power                                                                                               2.7             0.3
   1. Communications                                                                                 5.8             0.6
   2. Transport                                                                                        27.6             2.7
      1. Construction                                                                                    18.9             1.8
   3. Social Services e.g. health, education, etc.                                    34.8             3.4
   4. Financial Institutions                                                                     15.4             1.4

g. Trade                                                                                            28.6             2.9

1. Government Administration                                                           106.6           10.4
2. Net Rental Income                                                                           82.0             8.1

Total                              1020.5   100.00%

TRADE, TRANSIT AND BALANCE OF PAYMENTS

2.9.     Bhutan's trade, limited by low marketable surpluses of self-sufficient communities, was  mainly with Tibet and based on barter. Bhutan exchanged rice for salt, wool, tea and precious metals. Free trade between India and Bhutan has been traditional, but it was mainly the southern region which traded with India. With the closure of the border with Tibet in the early 60s, a complete re-orientation of trade ties towards India took place. In addition, with the inception of development activities imports from India, both of wage goods and capital equipment, expanded rapidly. Surplus production generated in Bhutan mainly agricultural and forest based, were exported to India.

2.10.  Bhutan's present dependence on trade is high as a result of the expansion that has taken place in the past 20 years of planned development. Estimated imports (table 7) amounted to about 40% of GDP while estimated exports formed 17% of GDP resulting in a large 23% trade deficit.

Table 7  ESTIMATED DIRECTION OF TRADE, 1981/82 (Nu. in million)

With India

Value             %

WithOther

Countries Value        %   Total Value

Exports                        178.0         96.5                   6.4                3.5           184.4

Imports                         404.5         93.1                  29.8               6.9           434.3

Trade Balance           (-)226.5                             (-)23.4                           (-) 249.9

2.11.  Bhutan's major trading partner is its southern neighbour India with which it forms a free trade area: 94% of Bhutan's trade is with India but due to an open frontier and inadequate customs administration there is no accurate account for flow of goods and services between the two countries.Bhutan exports potatoes, apple, orange, big brown cardamom, ginger,and vegetables from its agricultural surpluses. In addition, other exportable items are timber, tea chest plywood and battens, resins, minerals and wide range of handicrafts.of its agricultural surpluses. In addition,  other exportable items are timber, tea chest plywood and battens, resins, minerals and a wide range of handicrafts. Of manufactured products till recently, only some processed fruit products were being exported but of late cement is emerging no as a major exportable item. Agricultural products accounted for 27% of all exports followed by forestry products at 15%. In 1981/82 with a full year of functioning of the Pended Cement Plant, 71,000 MT of cement was exported to India accounting for 27% of total exports.

2.12.  Imports from India cover a wide range of consumer, intermediate and capital goods. The largest imports are of metal and metal products (18.6%), petroleum products (14.2%),food grains (5.5%), transport equipment (5.4%), and textiles and clothing (5.3%). Except for a few minor items which are not imported to protect domestic industries, there are no restriction on imports from India. Private individuals are permitted to imports from India but a considerable trade takes place on a Government to Government basis especially of imports of products under quota in India of which Bhutan is allocated a share such as steel, coal, fertilizers, industrial spirits, edible oils, rice, wheat, sugar and salt. Many of the imports especially of capital equipment and machinery, are financed by the development grants from the Government of India and, therefore, do not amount to a deficit balance of payments situation despite the adverse balance of trade.

2.13 Trade with Countries other than India accounted for less than 6% of total trade flows in 1981/82 but has been growing of late .Almost 85% of exports were accounted for by cardamom and almost the entire balance osins. Tourism is a major foreign exchange earner followed by sale of stamps abroad.

2.14.  Imports from overseas essentially comprises machinery and equipment financed by aid from international agencies and bilateral donors which have been substantially in the form of grants so far. The other major import is of automobiles much of which are financed from Bhutan's own hard currency accruals. A small quantity of imports of consumer items are also financed from Bhutan's own reserves. Imports which are entirely on official account, are duty free. Release of foreign exchange for imports is controlled by Government and all official overseas trade is handled by the State Trading Corporation of Bhutan.

2.15.  Owing to Bhutan's free access to the large nearby Indian market, India is likely to remain Bhutan's main trading partner. However, a growing need to expand exports to third country markets in order to earn foreign exchange, is emerging as Bhutan in future would have to spend more foreign exchange for import of spares etc. and to service external hard currency debts incurred as a result of increased international barrowings.

2.16.  Trade and transit arrangements with India play a critical role in developing foreign trade. A trade and transit agreement between India and Bhutan was signed in 1972 valid for a period of 10 years. With the changing trade scene, a number of the arrangements in the treaty were revised to simplify procedures in order to assist Bhutan to develop its third country trade. Negotiations were conducted in 1981/82 and a revised agreement with considerably more favourable terms has been worked out between the two countries.

2.17.  Bhutan and Bangladesh also signed a trade and transit agreement following the 1979 modification of the agreement between the Governments of Bhutan and India in which India agree in principle to the use of land and river transit routes to Bangladesh.

2.18.  Bhutan is a land locked country and its main access to the sea is through the port of Calcutta in India. However, transit and transportation for Bhutan's overseas trade have presented no major problems so far due to good relations with India. Procedures are highly simplified and have been modified from time to time as required.

2.19.  It would appear from table 8 that Bhutan's overall balance of payment has been sound. The country's hard currency balances represent a very healthy trend. Reserves at the beginning of 1981 were US $4 millions which increased to US $ 10 millions by end 1982. Besides, overall balance of payment surpluses with India have been run during three of the past four years. Both these situations result from the conservative currency management practices and the large sustained aid inflows. The balance of payments position indicated in table 8, has been worked out for the first time despite difficulties. A more reliable picture would become possible in due course with increasing data on  the flow of invisible (especially remittances from Bhutan by expatriates which may be quite large); and better data on changes in rupee circulation.

PUBLIC FINANCE

2.20.  Modern public finance practices in Bhutan can be said to have begun in the early '70s. Prior to this, most taxes were being collected in kind in the form of agricultural produce or as labour and the burden in either case was quite heavy. The levy on produce was on an average one fourth of production of each farming family and labour contribution amounted to about two months labour for every adult. With the introduction of cash taxes based on type of land holding and on live-stock,   the burden on the population decreased sharply. However, labour contribution continued and  formed a significant input in construction in the first two Five Year Plans. It is difficult to estimate quantitatively the labour contribution made to Government and its role in capital formation in the first two Plans. Thus, resources in cash generated internally in this period do not fully reflect the resource mobilization made by Government.

2.21.  While in the First Plan no estimates are available for internal resources mobilization (as almost all of it would in any case have been in kind), about Nu. 2.2 millions or 1% of the total outlay of the Second Plan came in cash from internal resources. The in kind contribution of labour, however. was also significant.

2.22 A modern taxation system began to emerge at the beginning of the Third Five Year Plan  period. Although the tax base was low, a total of Nu.41 millions was collected by Government in 1971/72 And by 1975/76 this rose to Nu.45.1 millions direct taxes in 1971/72 contributed the least at 7.8% of the total revenue, indirect taxes contributed 9.5% and the major contribution was from    non - tax revenue at 82.7%. The share of direct and indirect taxes increased some what by the end of the Third Plan period in 1975/76 with direct taxes accounting for over 10% and indirect taxes 19% of the overall mobilization. The share of non - tax revenue declined both in absolute (Nu.33.9 millions to Nu. 31.8 millions) and relative terms (82.7% to 68.8%). Nevertheless, for the Third Plan as a whole, the relative contribution of the three sources remained more or less the same as in 1971/72. The small structural changes in the relative proportions of the various sources of revenue was due to the widening of the tax base owing to increased monetization of the economy accounted for increase in sizes of Government and non - traditional employment and a larger commercial turnover. While most of the resources generated internally went to finance normal Government activity, 14% of the total mobilization, i.e.Nu. 32.8 millions was contributed to the Plan accounting for 7% of the overall plan outlay.

2.23.  The mobilization of domestic resources in the period 1976 to 1981 more than doubled that of the previous corresponding period. However, the relative proportions of the various sources changed only marginally. The total internal contribution to the Plan declined marginally to 12.75% at Nu 59.5 millions which amounted to 5% of the overall Fourth Plan outlay.

2.24.  In 1980/81, the overall receipts stood at Nu. 101.7 million which was 21.7% of the total resources mobilized during the entire Fourth Plan and the highest in any year so far. This amounted to 10% of the Gross Domestic Product. Over the third of these receipts were accounted for by the gross receipts of Government departments:Tourism, Bhutan Government transport Services,Government Workshops, and Store, Lotteries, Telephones, Wireless and Post

&Telegraphs. Only a few of such receipts, however, actually signified the net contribution to the budget and in most cases the operating expenses which formed part of the budget were higher than receipts and there was a net out go from resources. Once such cases are excluded, public revenues amounted to Nu.66.millions or 6.6% of the Gross Domestic Product in 1980/81.

2.25.  The contribution of direct taxes continue to be low although over time, it has risen in its relative contribution standing at 13% of total resources mobilization in 1980/81 as against half of that decade earlier.

Table 8  BHUTAN'S OVERALL BALANCE OF PAYMENTS (ESTIMATES) 1981/82 In

Million Nu.

Receipts                                                                     Payments

c)     

Stamps                                           0.8                     c) Other Government expenses (medical,travel,etc.)

d)     Expenses of

foreign Missions                           6.5

d)Remittances of

expenses to India                         9.0

1. Total current account                       226.1           3.  Total current account                      489.2
2. Interest earnings:                              23.0

II. Capital Account

a)     On foreign currency                    1.5

b)     On Rupees                                  21.5

1. Official transfers                              247.6           5.  Official transfers                            Nil

a)     Government of India                   190

b)     UN and Bilateral                         57.6

III. Overall Balance

1. Change in reserves

(+increase-decrease)                               7.5

Table 9  BALANCE OF PAYMENTS WITH COUNTRIES OTHER THAN INDIA 1981-82

ESTIMATES(Nu. in million)

Receipts                                                                     Payments

I.Current Account

Change in reserves

(+increase, -decrease)                      26.01

Note: (1) Receipts from the expenditure of foreign missions is assumed to be equal to the Royal Government's expenditure on its missions abroad.

(2)  33% of aid receipts are assumed to come in the form of equipment and other imports.

(3)  67% of aid receipts are assumed to be payments for foreign services, but 30% o this is further assumed to be spent within the country.

Table10  FOREIGN EXCHANGE RESERVES, 1977/78-1981/82 (a) (end-March)

1977/78        1978/79        1979/80        1980/81        1981/82

Indian Rupee Reserves(b)

(Rupees million)

Deposits with State Bank of India            86.7            131.2          129.2          169.7          199.5

Working Overdraft from State Bank of India

Net Rupee Holdings

(US 5 million equivalent)

Net Rupee Holdings                                 9.54            13.84          12.40          16.13          17.95

Other Reserves (c)

(a)  Excluding holdings of gold. Throughout the period, gold holdings amounted to 3,104 ounces.

(b)  Held by Bank of Bhutan.

(c)  Comprises hard currencies. Excludes holdings of Indian currency and bills to payable outside Bhutan.

(d)  Includes reserve position in the IMF of SDR 0.37 million.

(e)  Comprises foreign exchange held by the Royal Insurance Corporation of Bhutan and the Unit Trust of Bhutan.

Table 11  TAX AND NON-TAX REVENUES, 1971-81 (Nu. in million)

1971/72        1972/73        1973/74        1974/75        1975/76      Total Third

PlanValue

Percentage

Direct Taxes Indirect Taxes Non-Tax Revenue Total

Direct Taxes Indirect Taxes

Non-Tax Revenue Total

Although there are income tax as levied on Government employees upto a maximum rate of 5% of basic salary and a flat rate of 5% on all private rental income, the tax bases of both of these are low. The major contribution so far came in the form of turnover tax with exemptions at the lower end

and a maximum rate of 7/8% of business with annual sales value exceeding Nu. 1.2 millions. Other forms of direct taxes at present are licencing and registration fees on motor vehicles and commercial enterprises, land tax, rural house tax and miscellaneous municipal tax along with royalties, levied on timber and minerals. In 1982 a 30% corporate tax was levied on the profits of selected corporate bodies. This, along with royalties from forests and minerals and the tax on business turnover, have the maximum potential for the future.

2.26.  Indirect taxes constitute the major source of Government revenues at present with excise duties along with an Indian excise refund accounting for 57% of total tax revenues. Domestic excise duties are almost entirely from duties on locally manufactured liquor. Sales tax varying between 4%          to 8% is after excise, the most important source of revenue and one with the maximum potential. However, the present mechanics of sales tax collection on goods imported from India requires streamlining, depending as it is on sales tax exemptions obtained by traders from India. Although sales tax levels are lower than their Indian counterparts, this does not seem to have been sufficient incentive for obtaining sales tax exemptions on imports.

2.27.  Difficulties in domestic resources mobilization are reflective in the constantly growing deficit on current account in the budget. During the Fourth Plan, the gap between current receipts ind revenues increased from Nu. 26 millions to Nu.--67.8 millions reaching almost 7% of GDP h 1980/81. The overall budgetary deficit including capital expenditure has been well in excess f 20% of GDP. The gap has been closed by external assistance both project tied international assistance as well as the budgetary support from the Government of India which imparts a high degree of flexibility in public finance management. Such assistance has been of considerable help in maintaining a conservative overall budgetary policy and there has been hardly any need for deficit financing or to go in barrowings from internal financial institutions.

Table11a  CONSOLIDATED GOVERNMENT BUDGET, 1978/79-1982/83 (Nu. in million)

Note: For purposes of this table, Government finances have been consolidated even though actual consolidation did not occur until 1982/83. Other domestic financing includes currency issue, use of

cash balances, domestic barrowings from financial institutions. and other small grant receipts from India.

Table 11b  GOVERNMENT CURRENT EXPENDITURES, 1976/77-1981/82 (Nu. in

million)

Revised Estimates

(a)  Under Ministry of Development.

(b)  Includes information and publicity, and Government presses.

(c)  Includes His Majesty's Secretariat, Ministry of Finance, Ministry of Foreign Affairs, Ministry of Home Affairs.

2.28.  The institutionalization of public finance has also been of recent origin although a position of Finance Secretary was created within the Royal Secretariat in 1963. It was only in 1968 that the Ministry of Finance was formed and in 1971 that the first budget was prepared. This budget was the ''Civil Budget" as it catered only to the needs of non-developmental organisations-- the Royal Secretariat and Ministries of Finance, Home and Foreign Affairs. The development departments were served by a separate " Development Budget" which was outside the purview of the Finance Ministry and administered by the Development Secretariat. The primary function of this budget was to allocate the annual Government of India grants. This situation continued for a long time as there were practically no financial links between the two budgets. However, in 1980/81 the two budgets were integrated into streamline budgetary procedures and also in anticipation of the larger contribution internal resources were expected to make in the Fifth Plan.

MONEY AND BANKING

2.29.  Till the advent of planned development, the barter economy of Bhutan did not require a monetary system. A series of coins, however, were issued by the Government in the '50s but transactions more or less continued to be by barter and taxes continued to be collected in kind. With planned development and the inflow of external funds for capital formation, the process of monetization began as imports of equipment and machinery had to be paid for in cash and the payment of cash wages led to a demand for wage goods supplied mostly from imports.  Nevertheless, barter continued to play an important role and remains to some extent even today. The large inflow of development assistance from India much of it in cash, and the absence of controls on trade and payments inevitably led to the Indian rupee becoming a commonly accepted medium of exchange in the absence of a formal Bhutanese currency. It was only in 1974 that the first issue of ngultrums was carried out and although all accounts and prices are now expressed in ngultrums, there is free convertibility on a one for one basis between the rupee and the ngultrum and both currencies continue to circulate freely.

2.30.  The issue of ngultrums has been sporadic. Over the last 8 years since the ngultrum was first issued, a net of Nu. 6.2 millions worth of ngultrums has been introduced in the economy. This is about 8 to 10% of the total estimated currency circulation (M1) of Rs./Nu. 60 to 80 m (although in view of the free flow of rupees between the two countries, it is virtually impossible to arrive at an accurate estimate of currency in circulation at the present time).

2.31.  The financial sector in Bhutan at the end of the Fourth Plan comprised the only commercial bank--the Bank of Bhutan, the Unit Trust of Bhutan and the Royal Insurance Corporation of Bhutan which also administers the Government employees' provident fund. The Bank of Bhutan established in 1968 is jointly owned by the Government and the State Bank of India with an equity participation ratio between the two parties of 75:25. There are 14 branches across the country i.e. one branch for 83000 persons indicative of the under banked nature of the economy. Deposits at the end of 1981 amounted to Nu. 206.2 millions of which 60% were current deposits, 11.6% savings deposits, and balance of 28.3%, fixed deposits. The Bank is highly profitable and has an extremely high liquidity position. Although in absolute terms, advances grew by almost ' 200% between 1977 and 1980, the credit deposit ratio remained low: between 1977 and 1979, advances increased only from 32%-37% of deposits but there was a sudden jump to 55% in 1980, falling to 33% in 1981. The Bank has followed a relatively cautious lending policy. This along with the lack of demand and the paucity of investment opportunity accounted for almost 60% of the Bank's assets being liquid as of ending 1981.

Table12  MONETARY SURVEY,1977/80-1981/82 (a) (Nu. million, end-March)

Table 13  ASSETS AND LIABILITIES OF THE BANK OF BHUTAN, 1977-81 (Nu. million,

end-December)

(a)  Excluding holdingsof Indian rupees.

(b)  Excluding bad and doubtful debts.

(c)  Includes transactions with the State Bank of India pending adjustment and bills payable outside Bhutan.

(d)  Includes contingency and other accounts.

(e)  Special deposits are Government deposits intended to provide backing for the issue of Ngultrum currency.

Table 14  DISTRIBUTION OF BANK OF BHUTAN ADVANCES, 1977-82 (Nu. million, end-

December)

(a)  End-March.

(b)  Including public welfare loans.

2.32.  The combined assets of the three non-bank financial institutions amount to about 30% of those of the Bank of Bhutan. They are all managed by the RICB. The RICB was established in 1975 to offer life insurance and a range of general insurance policies. It was originally set up with Government holding 80% of the share capital and private parties the remaining 20%, but in 1981, the Government sold the equivalent of 19% of the total share capital from its holdings to private individuals. RICB has also proved to be a highly profitable institution and in only one of its seven years of operation have gross claims exceeded premiums. As of end 1980, total funds available to RICB amounted to Nu. 9.4 millions; following an increase in the capital base in 1981, accumulated funds stood at Nu. 18.6 millions by year end. The RICB has also had difficulty investing its funds profitably within Bhutan; at end 1981, cash and bank deposits accounted for 62% of total assets.  The main areas of investment were mortgages, buildings, and trucks, although in 1981, the RICB also invested 10% of the initial share capital of the United Trust of Bhutan.

2.33.  The largest of the non-banking financial institutions is the Govt. Employees Provident Fund. As the civil service has been steadily growing and is still mostly young, contributions have far exceeded withdrawals, resulting in rapid growth of the GEPF. As of end 1981, the resource base amounted to Nu. 62.8 millions. The RICB, which manages the GEPF on behalf of the Government, undertakes to earn about a 12% return on contributions. The full 12% return accrues to the Government on its contributions, along with the members' contributions. As of end 1981, the net amount owed to Government from interest earnings was Nu. 8.6 millions. Although the GPF portfolio contains investments similar to the RICB: buildings, mortgage and trucks, it is also perceived as a development finance institution by the Government. As such, it has invested about 26% of its portfolio in development projects, mostly commercial undertakings. Again, however, a relatively high 20% of the portfolio is held in cash and bank deposits.

2.34.  The UTB was established by the RICB, which owned 10% of the initial capital, and the GEPF which owned the remaining 9%. It was established to encourage industrial development by purchasing shares in promising new industries. By end dune 1982, its resources had grown to Nu.

10.9 millions, spread among 450 holders. Two types of units are offered: fixed time units carrying 9% interest, slightly higher than fixed bank deposits of equivalent maturity, and ordinary units, which are dividend bearing shares in the Unit Trust. Fixed time units account for Nu. 7.0 millions of its available resources. Due to the lack of adequate industrial investment channels so far, most UTB funds are invested in loans and bank deposits.

2.35.  Towards the end of the Fourth Plan, the Government began to feel the need to institutionalise and regulate the monetary system. The economy had become more complex and dynamic, the demand for credit was increasing and a monetary policy was necessary to ensure that the financial sector made the maximum contribution to economic development. One of the first decisions in this, therefore, was to set up a monetary authority to carry out the functions of a central bank. As a result of this, the Royal Monetary Authority was established in mid 1982.

2.36.  The Central Statistical Organisation of the Planning Commission initiated the building up of a consumer price index in Bhutan from 1977/78 by collecting at periodic intervals retail prices prevailing in a number of towns all over Bhutan. Many difficulties were faced particularly, a lack of accurate reporting and the absence of information on consumption patterns which have led to a number of methodological problems especially in the weighing of various components. Nevertheless, a review of prices between 1977/78 to 1981/82 (Table 15) is now available. The annual average rate of increase of prices works out to 13.44%. Although prices in Bhutan could reasonably be expected to conform to the movements in India in view of the large proportion of imports from India of consumption goods, the average growth of consumer prices in India is somewhat less at 9%. Even accounting for transportation and other overheads, the gap is still large and is indicative of a strong increase in demand and changing consumption patterns arising out of increasing development. The highest average increase, 24.57%, is in fuel and light which is not surprising as it is mainly because of increase in prices of petroleum products. Other sharp increases has been in furniture and utensils, miscellaneous goods and services and food--vegetables, edible oils and cereals etc. indicative of increase in demand and changing in recent years of consumption patterns.

Table 15  CONSUMER PRICE INDEX, 1977/78-1981/82

ChapterIII   REVIEWOFDEVELOPMENT(1961-1981)

3.1.     The economic conditions prevailing in Bhutan at the end of the Fourth Five Year Plan have been described in the previous Chapter. This has been the result of a consciously planned development process initiated under the dynamic leadership of His Late Majesty, King Jigme Dorji Wangchuck starting with the First Five Year in 1961.In the past 20 years of planned development, major structural changes in the economic situation in Bhutan has taken place and the predominantly rural barter economy has been progressively transformed into modern one.

3.2.     This Chapter attempts an appraisal of the various development programmes in each sector in the past 20 years and explores strengths and weaknesses of past development experience. It is to be noted at the outset that each new Plan has not only been built upon the experience of the past has as

meant the introduction new elements and activities in which previous experience has been lacking. The approach of Government, however, has been generally cautious and the trend has been to explore new elements and activities on a small scale before replicating and expanding them in the light of experience gained.

OBJECTIVES OF NATIONAL DEVELOPMENT

3.3.     Although the specific priorities of each Five Year Plan have varied, the two fundamental postulates of national economic policy have been to improve living standards of the people and ultimately achieve overall economic self-reliance. These postulates have required the removal of some major constraints in the development process which are:--

1. lack of financial resources, particularly domestic resources;
   1. lack of skilled and technically qualified national manpower; and
   2. limited physical infrastructure and transportation difficulties.

The past Plans have, therefore, concentrated on major efforts to transform these structural characteristics. Accordingly, the specific objectives of the past Five Year Plans have been as follows:--

1. the creation of social, physical and administrative infrastructure;
2. undertaking investments to raise economic productivity especially in agriculture and animal husbandry--the occupation of the majority of the people so that productivity increases in these areas directly improve standards of living;
3. increasing domestic resource mobilization by exploiting the natural resources of the country and creating and expanding a fiscal system;
   1. developing skills and fully utilizing national manpower resources;
   2. improving the quality of life of the people by providing basic social amenities such as education, health services, drinking water and a public distribution system;
      1. following a path of growth and social justice in order to prevent socio economic disparities;
      2. preserving the traditions and rich cultural heritage of the country and ensuring that the development process does not disrupt these traditions or adversely affect the environment.

3.4.     In view of the constraints to economic development, it was inevitable that Bhutan would depend heavily on external assistance both financial and technical, including manpower. The First Plan was therefore, entirely financed from grants from the Government of India. In the Second Plan an amount of Nu. 2.2 millions or about 1% of the total outlay, was met from domestic resources and the balance from the Government of India. With the Third Plan, although Government of India assistance remained at a high 90%, almost 7% was financed from domestic resources and assistance from the UN system was received for the first time at 3% of the total outlay. In the Fourth Plan, Government of India remained the major contributor although its share declined to 77%. The UN system provided 17.5% of the total outlay while domestic resources contribution declined  marginally to about 5.5% as resources were diverted to meet non-plan commitments.

3.5.     Technical inputs and qualified manpower were initially drawn almost entirely from India and a number of Government of India organisations such as the Border Roads Organisation, the  Geological Survey of India etc. were involved in the building of infrastructure. Although the number of expatriates continue to be high, their proportion to total skilled manpower has been declining    and at the present time, almost all policy related positions in the Government are held by nationals.

EVOLUTION OF PLANNING

3.6.     Although the planning process was officially begun with the First Plan in 1961, both this and the Second Plan were mainly financial budgeting exercises rather than an attempt to work out a framework of priorities. To implement these Plans, a self-contained Development Secretariat was established and directorates of agriculture, animal husbandry, health, education, power and information were created while the existing directorate of forests and the Bhutan Engineering Services (which later became the Public Works Department), were strengthened. The Planning Commission was established in 1971 and was entrusted with the preparation of the Third Plan. However, the Third Plan formulation was also relatively simple as there was only a small staff with limited experience and almost a total absence of basic economic information.

3.7.     Major developments to consolidate the planning process took place in the Fourth Plan period by involving local bodies. The Dzongkhag Yargay Tshogchungs ( District Planning Committees) in each dzongkhag were asked to submit proposals in areas of their direct interest: agriculture, animal husbandry, social services etc., which were taken into account by operational departments concerned and the Planning Commission while formulating the Plan.

3.8.     In the first two Plans, evaluation was basically an ex-post audit of expenditures. In the Third Plan for the first time, physical and financial targets were specified and performance measured from time to time against them. This was further elaborated in the Fourth Plan period with physical inspection of the projects in the field and the Planning Commission was involved for the first time  in this process.

3.9.     The Planning Commission as it now stands consists of a Planning Division dealing with development policies co-ordination and overseeing Plan implementation. The Resources Division co-ordinates with the Ministry of Finance and Foreign Affairs on resources mobilization while the Central Statistical Organisation is responsible for developing the data base and undertaking special services.

3.10.  Although the planning process has evolved in complexity and sophistication over time, there are several areas in which further improvements are essential:

1. the statistical data base requires substantial improvements in order to produce reliable data both base line and time series, of the main macro economic variables, socio economic conditions, manpower and other resources;
2. there is need to induct and train specialized technical manpower in areas such as project and programme formulation, appraisal and cost benefit studies;
   1. there is need to develop expertise for policy making in the monetary, fiscal, commercial and

industrial fields;

1. a more comprehensive monitoring and evaluation system requires to be established so that timely corrective action can be taken in project implementation.

OUTLAYS AND PRIORITIES IN THE FIRST FOUR PLANS

3.11.  In the absence of adequate experience in the past and the lack of a data base, development priorities were subject to continual review and change. Thus, the overall volume as well as composition of actual expenditures varied substantially from the original plans that were prepared. A review of the actual expenditures and performance is perhaps the best way of evaluating the changes in development strategies over time. As can be seen from Table 16, in terms of total expenditure the Second Plan represents a 90% increase over the First; the Third Plan, a 139% increase over the Second; and the Fourth Plan, a 130% increase over the Third. Development expenditure has, therefore, shown a rapid rate of increase, more than doubling every five years.

3.12.  The highest priority in the First Plan was inevitably in ending Bhutan's state of isolation and building transportation links. Accordingly, 66% of the outlay went to the roads sector, and the main project was in the road link from Phuntsholing to Paro and Thimphu. A second major

Table 16  OUTLAYS AND FINANCING OF THE FIRST FOUR PLANS

FirstPlan(1961/62-1965/66)

SecondPlan(1966/67-1970/71)

Third Plan (1971/72-1975/76)

FourthPlan(1976/77-1980/81)

Nu.Million %            Nu.Million %           Nu.Million %            Nu.Million % Agriculture      1.9       1.8       21.6     10.7                            58.3            12.3        259.0          23.5

Animal

Husbandry              1.5              1.4          5.8              2.9         24.2            5.1          61.5            5.6

Forestry                 3.2              3.0          6.9              3.4         28.4            6.0          110.3          10.0

Power                  1.5              1.4          9.1              4.5         30.1            6.4          50.5            4.6

Industry and

Mines                    1.1              1.0          1.0              0.5         25.2            5.3          175.0          15.8

Public Works

Department             62.9            58.7        70.5            34.9       84.6            17.8        128.3          11.6

Road Transport   7.5              7.0          12.0            5.9         9.5              2.0          --                --

Post Telegraphs  0.5              0.5          5.9              2.9         11.4            2.4          16.9            1.5

Telecommunicat

ions                                                                                        14.8            3.1          37.3            3.3

Tourism                 --                --             --                 --            14.1            3.0          12.5            1.1

Education               9.4              8.8          35.7            17.7       90.0            19.0        134.6          12.1

Health                   3.2              2.9          16.7            8.3         38.1            8.0          54.6            4.9

Information

Publicity                0.1              0.1          1.4              0.7         4.0              0.8          11.0            1.0

Development

Headquarters           3.5              3.3          8.8              4.4         16.3            3.4          34.3            3.1

Ancient

Monuments Preservation

--                --            0.6              0.3         2.1              0.4          --                --

Other                     10.9            10.1        6.2              2.9         24.1            5.0          20.4            1.9

Total outlays   107.2          100.0      202.2          100.0     475.2          100.0      1,106.2       100.0

Financed by: Government of

India Grants        107.2          100.0      200.0          98.9       426.6          89.9        853.0          77.1

Assistance from UN and

other International Agencies Internal Resource Mobilization

--                --            --                --            15.8            3.3          193.7          17.5

--

Total Financing 107.2

Note: Development outlays include only those activities financed from domestic resources, overseas aid, and Government of India development grants. They, therefore, exclude development related expenditure financed directly by Government of India departments and agencies. This comprises mainly expenditure by the Border Roads Organization on transport and communications infrastructure. Outlays also exclude expenditure on the Chukha hydro-electric project, which is being undertaken and financed outside the Plans. Chukha-related expenditures amounted to Nu.

26.6 million during the Third Plan period and Nu. 603.0 million during the Fourth Plan period. Development outlays under the Fourth Plan do, however, include expenditure on the Penden  Cement Plant and the Gaylegphug Agricultural Project which was also financed separately by the Government of India and undertaken outside the Plan. Expenditures on these two projects amounted to Nu. 185.0 million. road in eastern Bhutan from Samdrup Jongkhar to Tashigang was also undertaken and work was initiated on the lateral road from Thimphu to Tashigang. With 9% of the total outlay being devoted to education, this emerged as a second important area in order to provide modern education to build up national manpower.

3.13.  The Second Plan represented a widening of priorities arising from a significant drop in the share of the road sector to 40% of the overall outlay. Nevertheless, roads continued to receive the highest priority and for the first time, agriculture became a priority area receiving 10% of the overall outlay.

3.14.  The Third Plan (1971/72-1975/76), was the first implemented under the Planning Commission although its preparation preceded it. The share of the roads sector further declined to 20%, however, most investments in roads took place outside purview of the Plan. Outlays for social services increased further in priority, with education at 19%, and health at 8%. Agriculture, especially extension activities, became more important with an allocation of 17% of overall outlay. Other sectors emerged for the first time in some significance with 5% to 8% of the overall outlay being allocated to forestry, power, mining and tourism. This was possible because the expansion of infrastructure for the first time, enabled the growth of economically viable activities.

3.15.  The Fourth Plan (1976/77-1980/81), reflected the first major shift from the earlier pattern of development expenditure. This was also the first Plan in which the distribution of outlay was more balanced. Several large scale investments, some outside the Plan, emerged such as the Chukha Hydel Project, the Penden Cement Plant and a major irrigation scheme in the Gaylegphug area. Agriculture and related activities were for the first time, the highest priority amounting for 29% of total outlay. Industries also for the first time and forests as well, became significant priority areas.

The share of roads, education and health declined somewhat indicating that a basic infrastructure was build up permitting investment in revenue generating activities although on a small scale. This forms the genesis of the Fifth Plan approach to increasing investments in revenue generating activities to a high level.

3.16.  Time series data relating to basic macro economic variables production levels etc., are not generally available till 1980. It is, therefore, not easy to estimate the quantitative effects of the programmes either on the growth of output in the various sectors or in accelerating the overall growth rate in national income. No data also exists whereby changes in the sectoral composition of output or investment/output ratios can be estimated. Therefore, an assessment of the changes achieved for the past 20 years has to be qualitative and can only be made by looking at the major developments in each sector of the economy.

AGRICULTURE

3.17.  About 90% of the population is primarily dependent on agriculture. The contribution of this sector (including animal husbandry), to GDP in 1980/81 was estimated at 47%. Most cultivated land is owner operated, although there is some absentee landlordism in the west and land holdings are fairly equitably distributed with a legal limit of ownership of about 10 hectares, (25 acres) and an average holding of 1.6 hectares.

3.18.  Bhutan has been traditionally self-sufficient in food grains exporting small surpluses but with population growth, the emergence of non-farming communities and some increase in per capital consumption, a deficit of 25,000 MT which is imported from India, supplements indigenous production of 125,000 MT of cereals. The main cereal crops are paddy, maize, wheat, barley and buck wheat. Paddy is the preferred crop and is grown mainly under irrigated conditions at altitudes upto 2500 meters; maize is the dominant crop in the dry areas and wheat and barley are taken as a second crop at higher elevations. Buck wheat and millet are subsistence crops in the northern region. Cultivation practices have changed little and remain largely labour intensive with labour being shared during periods of peak demand. Labour shortages have influenced farming practices. Cropping intensities range from 160% in the west to 135% in the east, reflecting population pressures.

Table 17  CROPPING INTENSITIES BY LAND TYPE (1981)

CroppingIntensity                                            FallowLand

Table 18  CROPPING PATTERNS BY LANDTYPE (1982) (000 ha)

WetLand

DryLand

Tsheri

Land          Total

3.19.  In the past, increases in production came mainly from increases in the area under cultivation and that brought under assured irrigation. The gross cropped area under cereal production increased from 81,000 hectares in 1973 to 113,000 hectares in 1982. However, the possibility of future production increases as a result of further extension in cultivated area is limited and increases in production will have to come from more intensive cultivation practices including the use of modern inputs, the consumption of which is still considerably low.

Table 19  AGRICULTURAL AREAS AND PRODUCTION (1982)

CEREALCROPS

Area'000hectares

ProductionGross

'000MT

Net

Paddy (rice)                                     28.0                     57.4                     36.0

Wheat and Barley                            12.3                     13.3                     10.7

Maize                                                56.8                     80.7                     69.5

Buckwheat and Millet                      15.5                     12.3                     8.9

Total 112.6                    163.7                   125.1

OTHER ANNUAL CROPS

3.20.  Programmes in the first four Plans can be divided into two categories--the first relating to the establishment of agricultural support services and institutions and the second covering land development and irrigation schemes. By the end of the Fourth Plan, extension centres had been established in all 18 districts along with a net work of agriculture farms engaged in seed production

and varietal trials which is about the limit of the capability of agricultural research at present. Although a number of new varieties have been introduced and have gained wide acceptance, the impact of the extension system on agricultural productivity cannot be accurately quantified. Never theless, there is no doubt that there has been a profound impact on the traditional system of agriculture and one of the most important achievements of agriculture development programmes has been to bring about a distinct and favourable change in farmers' attitudes towards modern scientific practices.

3.21.  An area in which there has been a massive impact has been in the production of cash crops such as potatoes, apples, oranges, cardamom etc., which speaks for the farmers' instinctive appreciation of comparative advantages. The varied agro-climatic conditions in Bhutan are particularly suitable for cash crop cultivation aimed at export to India as harvesting coincides with Indian lean periods.

3.22.  The widespread prevalence of Tsheri (shifting) cultivation which accounts for roughly 1/3rd of the cultivated area, has been a cause of concern. However, limited experiments in the permanent settlement of these communities have been highly successful and this is one area which will need to be actively pursued in future.

3.23.  Irrigation and land development programmes have accounted for a major share in budgetary allocations in the agriculture sector. The thrust has been in improving and remodelling existing small scale systems and constructing new systems based on traditional experience. Labour has been traditionally contributed by local farmers and Government has provided technical support, construction materials, and some direct subsidies, particularly in the area of terracing and contour Bunding. The experience with larger scale projects has been limited and mixed; these include a lift irrigation scheme covering 800 hectares in Gaylephug (Phase ll of this project and two new gravity schemes would irrigate about 4000 hectares in this area, the largest contiguous area suitable for irrigation in the country).

ANIMAL HUSBANDRY

3.24.  Animal Husbandry is an important component of the rural economy in Bhutan playing a vital subsistence role and in the northern alpine region is virtually the sole form of economic activity. The consumption of animal products is an important element of the Bhutanese diet. In settled area, cattle are kept for draught power and milking purposes with most milk being processed and consumed as cheese, curd or butter and keeping of chickens and pigs is fairly widespread.

3.25.  As in the case of agriculture, it is difficult to quantify in terms of productivity and overall production the impact of livestock development programmes. The thrust so far has been four fold-- the improvement of existing stock by introduction of exotic blood; expanding health coverage and execution activities; building up a net work of livestock farms and other support services and pasture development. A notable achievement of the veterinary programmes in the past has been the control of tapeworm cyst infection in yaks, leading to a remarkable fall in the mortality rates in this animal on which a large segment of the alpine population are solely dependent.

Table 20  LIVESTOCK OWNERSHIP ('000)

3.26.  Pasture in terms of area is considerable but of poor quality and traditional areas tend to bo over grazed. A significant increase in livestock population and quality would be dependent on improvement of pasture but success in this area has been somewhat limited especially due to lack of communications. There has been a gradual increase in the populations of cross breed cattle, pigs, poultry and sheep and especially, notable successes have been registered in the introduction of  exotic pigs and sheep. As in agriculture, extension activities so far have led to a distinct change in farmers' attitudes towards scientific reagin practices. It is, in this context that the development of pastures assumes importance as this is likely to emerge as a limiting factor for future livestock development.

AGRICULTURE MARKETING

3.27.  In view of the difficult terrain and the rural sector in Bhutan is still transition from barter to a monetized economy, the role of the market is still limited. Prices are, however, generally determined by open market forces although the Food Corporation of Bhutan operates a support price system  both for food grains and cash crops while at the same time operating a public distribution system. The FCB's domestic procurement of food grains has mounted of late to about 300 MT annually-- 10% of its normal imports from India. Procurement activities are localized in the absence of an adequate network of downs and procurement centres. The principal of market intervention in the limited areas in which the FCB has operated, has helped farmers to secure reasonable prices. The FCB's role in the procurement of cash crops has also been of help in keeping prices at remunerative levels, although this has at times led to the FCB having to undertake considerable losses.

FORESTRY

3.28.  Forests represent one of the most important potential sources of wealth in Bhutan and in the past, revenue from this source has been the largest single contributor to the national exchequer. Forestry directly contributed about 16% of GAP in 1980/81; in addition, about half of the industrial units are wood-based. Royalties and taxes have also accounted for 14% of (adjusted) Government revenues. However, both these contributions felt significantly between 1979 and 1981 because of restrictions on commercial logging.

Table 21  COMMERCIAL LOGGING VOLUMES AND FORESTRY REVENUE, 1976/77-1980/91

CommercialLogging

ForestryRevenues

(cubic meters)           (Nu. million)

3.29.  The Government recognized quite early that forests represents a valuable resource which had to be scientifically managed and one of the first directorates to be set up was that of forest established in 1959 which has since than expanded substantially. As indicated in Chapter 1, a pre investment survey of forest resources was carried out between 1974 and 1979 as the first step towards scientific management. Regulation of private activities in the forestry sector in order to prevent over exploitation and damage has been of major concern and a considerable body of legislation has been passed to regulate entry, exploitation, royalties and movement of forestry products. The 1969 Bhutan Forest Act defined a Government Reserve Forests and circumscribed individual rights on them. In 1974, a National Forest Policy Act was passed which further spelt out various aspects of forest utilization, development and conservation. Further changes were made in 1979 to control exploitation and all forest felling was nationalized which led to a temporary decline in commercial harvesting owing to the department's lack of adequate capabilities in this area.

3.30.  Apart from legislation and control, the first four Plans concentrated on the establishment of a physical, administrative and technical infrastructure to undertake forest management. Following the pre-investment survey, the preparation of management plans and demarcation and survey of forests has been undertaken. In the absence of the management plans, scientific forest exploitation was limited in 1980/81 accounting for only 0.2 million cubic meters as against the estimated net annual yield of 13.3 million cubic meters.

3.31.  Forest harvesting has also been severely constrained by lack of roads and logging equipment. To remedy the situation, 100 kms of forest roads have been constructed and three mechanized logging centres have been established. However, the constraints have resulted in the over exploi- tation (especially by private individuals) of the more accessible forest areas. In order to reverse this process, programmes of afforestation and social forestry have begun to emerge as important areas of forestry development.

TRANSPORT INFRASTRUCTURE

3.32.  The development of a motorable road network was taken up for the first time with the advent of planned development in 1961 when the Bhutan Engineering Services (now the Public Works Department, started construction of Bhutan's first motorable road from Phuntsholing to Paro and Thimphu. The absence of any kind of motorable road before this has led to the roads sector getting the highest priority in the first four Plans. In addition to the Public Works Department, the Indian Border Roads Organisation came to be involved in the construction of major roads and the plan allocations do not fully reflect the total investment in roads in the past as the Border Roads Organisation funded a large portion of construction of some of the main highways from its own budget and also the component of free voluntary labour in Public Works Department constructed roads have been high.

3.33.  Due to the difficult hilly terrain, the dispersed structure of habitation and severe and varied

climate, road construction costs are high, estimated at between Nu.500,000 to Nu. 750,000 per kilometer. Roads have been generally well designed following the Indian Roads Congress standards. Highway gradients seldom exceed 5% and districts roads have gradients upto 8%.Drainage and surface are good.

3.34.  By late 1982, there were 2,050 kilometres of roads in Bhutan of which about 1200 kilo meters are black topped and the rest, earthen. This gives a road density of .044 kilometer per sq. km of land area which is low. By 1982, all but two dzongkhag headquarters have been connected by roads along with most other important towns and industrial areas. At present there are three major north- south black topped highways in western, central and eastern Bhutan and one fair weather lateral  road running from Thimphu in the west to Tashigang in the east.

3.35.  There are apart from the terrain, other major constraints in road construction which include a paucity of graduate national engineers and labour. Labour has traditionally been provided by levies but owing to its interference with agriculture, gradually, contracted expatriate labour has been brought in. Mechanized road construction was introduced on a small scale for the first time in the Fourth Plan and presents a possible means of overcoming the labour constraints. This programme is proposed to be expanded substantially in the Fifth Plan.

3.36.  Foot and mule tracks have long provided the principal means of transportation for most of the population and can be expected to continue to play an important role for many years to come. The main problem in foot travel has been the swiftly flowing rivers which necessitate long detours. Recognizing this as a serious constraint, Government has undertaken the improvement of foot tracks and the construction of foot suspension bridges at strategic points. 80 such bridges have been constructed till the end of the Fourth Plan and as a programme, has been particularly successful in improving communications. The use of ropeways for carrying specific cargoes has so far been limited. Ropeways installed so far include a 6 KM ropeway at the Penden factory and a 500 meter ropeway at a slate mining site. A detailed feasibility study of a 60 KM ropeway from Chunzom to Phuntsholing in western Bhutan is being carried out for a capacity of 50,000 MT per annum.

3.37.  Table 22 indicates the number of registered vehicles in Bhutan as of 1982. The number of vehicle is still relatively low and except in the urban areas, traffic is generally light. A Bhutan Government Transport Service was formed in 1962 and currently has a monopoly only in passenger services. A syndicate for freight transportation was set up in 1976 had till quite recently, virtual monopoly on freight movement but has been dissolved leading to a free market situation. Although the growth of registration stands at 3 to 4% annually, total motor vehicle taxes in 1981 /82 cover only about one fourth of the total road maintenance cost.

COMMUNICATIONS

3.38.  Communications facilities, were virtually non-existent before 1962 but have been expanding very rapidly inspite of the difficult terrain and lack of trained personnel. The postal services which is the most common communications means, have become quite comprehensive. By the end of the Fourth Plan, there were 83 Post Offices, of which 30 were part time branch Post Offices and 25 Telegraph Offices. With the innovative use of 140 permanent runner lines, most of the population is within reasonable and timely reach of mail services. International mail is routed to | India. Philatelic

Stamps have now gained an international reputation for high quality.

Four-Wheel

Table 22  REGISTERED VEHICLES (as of October 1982)

Government        Private

Drive                                     438

Cars (Indian)                         239

Cars (Third

Country)                               181

Trucks                                   196

Buses                                    113

Motorcycles                            73

Scooters                                  45

TOTAL                  1,285

3.39.  The telephone system comprises three sub systems which are not inter-connected: Thimphu-- Phuntsholing, Tongsa--Gaylegphug and Tongsa Samdrup Jongkhar. There are 14 telephone exchanges, 13 of them automatic with a total of 1900 connections. International calls presents considerable difficulties and are routed through the Indian telephone system. However, a micro- wave communications link between Thimphu and Hasimara in North Bengal, with a 30 channel capacity is scheduled to be commissioned by ending 1983. A civil wireless network more comprehensive than the telephone system now exists with 28 transmitting and receiving stations throughout the country and services are available to the public.

Table 23  PER CAPITA ENERGY CONSUMPTION, 1981/82

Gross Consumption       Useful Energy (a)

(a) Following end-use efficiencies assumed: Fuelwood-15%, Coal-55%, Petroleum-45%,Electricity- 90%.

ENERGY

3.40.  Bhutan's immense forest resources provide an abundant source of firewood and per capita energy consumption amounts to a high 0.76 tonnes of oil equivalent (TOE). Since most of it is firewood, discounting for the low and use efficiency of most firewood burning technology, per capita consumption amounts to 0.13 (TOE). Firewood alone accounts for almost 84% of the useful energy consumed at an average national consumption of 3 cubic meters per capita. However, although at present there are no restrictions on the use of firewood for household energy, the Government is concerned at the rapid rate of forest depletions and proposes to adopt a long term strategy of replacing firewood consumption by electricity.

3.41.  Commercial energy consumption accounts for only 15% of the useful energy consumed--low by most standards--and is accounted for by coal (66%), petroleum (289/o) and electricity (5%). Coal is used exclusively in industry and petroleum products for road transport and lighting ( Kerosene)

3.42.  In spite of the enormous hydro-electric potential of Bhutan' rivers, electricity consumption is among the lowest in the world. The first hydro-electric plant went on stream in 1967 and there are at present six small units all over the country which are supplemented by diesel generating sets. The total installed capacity is 12.07 MW of which only 3.45 MW is hydro power. Power generation is supplemented by imports from India which feeds southern, Bhutan. The transmission network at present consists of small capacity 11 KV and 33 KV lines. So far 21 townships and 97 villages have been electrified resulting in a change in the consumption pattern which from a level of 80%  domestic consumption at the end of the Third Plan had reached by 1981/82 to 45% industrial and commercial, 45% domestic and 10% agriculture.

3.43.  The situation in western Bhutan will undergo a sea change by 1984 when power from the Chukha hydel project becomes available. This project by far the largest single investment ever taken up in Bhutan, is a run of the river scheme on the Wanghcu river with a total capacity of 336 MW consisting of four 84 MW turbines. Annual energy is expected to be about 1970 GWH with about 900 GWH in firm power. A Project Authority, an autonomous body with representatives of the Royal Government and the Government of India executes the project. The entire cost which is at present estimated to be close to Nu. 2,000 million, is being mt by India of which 60% would be a grant and 40% an 18 year loan carrying an interest of 5%. With the commissioning of the project, Bhutan will emerge as a net exporter of power.

Table 24  DOMESTIC ELECTRICITY GENERATION AND PURCHASES FROM INDIA,1977/78 -1981/82 (in GWh)

n.a.--Not available.

Table 25  ELECTRICITY CONSUMPTION PATTERNS IN SELECTED

SUB-SYSTEMS(in percent)

n.a.--Not available

Table 26 POWER GENERATING CAPACITY

GeneratingStation                              Installed Capacity

HYDRO STATIONS

Thimphu                                                  4 x 90 KW

Gidakom                                                  5 x 250 KW

Wangdiphodrang                                       3 x 100 KW

Tashigang                                                3 x 250 KW

Mongar                                                   3 x 130 KW

Paro                                                      4x 100 KW

Sub-total                           3.450 MW

DIESEL GENERATING STATIONS 2 x 128 KW

Phuntsholing                                            2 x 248 KW

Samchi                                                    1 x 135 KW

Paro                                                      1 x 90 KW

1 x 60 KW

Thimphu                                                  2 x 248 KW

1  x 500 KW

2  x 250 KW

2 x 150 KW

Damphu                                                   1 x 70 KW

Tongsa                                                    1 x 60 KW

Chukha Hydel Project                           10 x 248 KW 4 x 128 KW

6 x 44 KW

Penden Cement                                     3x 830 KW

Sub-total                           8.621 KW

TOTAL                           12.071 MW

purposes.

Note: Excludes some other small captive generating sets used mainly for stand-by

3.44.  Manufacturing industry accounts for a little over 3% of GDP, below the average for least developed countries. Cottage industries account for 25% of this contribution. The total employ ment

in the organized sector is only about 2,000 with 75% being expatriate. One food processing unit, three distilleries and a 300 tonnes per day cement plant which has recently gone on stream at Penden, accounts for two thirds of current industrial production and also two thirds of industrial employment of which the Penden Cement Plant alone accounts for one half of employment. Apart from the food processing unit which is in the joint sector, the other are in the public sector.

3.45.  Apart from these, over 60 units have come up over the past 10 years most of them in the small scale sector located in the main industrial estates at Phuntsholing, Samdrup Jongkhar and Gaylegphug. These produce basic consumer goods including soap, candies, wooden and steel furniture, and simple processed food stuffs. Almost half of them are wood based producing gum resin, matches, tea chests, packing cases and sawn timber. Apart from traditional handicrafts, there are some 300 rural agro industries comprising rice, wheat, maize and oil mills.

Table 27  INDUSTRIAL PRODUCTION BY SECTOR, 1980/81

3.46.Industrialization is severely constrained due to lack of power and other basic infrastructure, trained manpower and entrepreneural skills. With the commissioning of the Chukha hydel project, power would become abundantly available and the development of a entrepreneural class and provision of trained manpower would become the critical factors in promotion of private sector industrial investment. Past experience in this area has been mixed and costly but with a number of lumpy investments being made in the Fifth Plan, viable investment opportunities in ancillaries would become available for the induction of an entrepreneural class.

3.47.  Excluding the limestone mining operations of the Penden Cement Plant, other mining activities accounted for only 8% of GDP despite the country's good mineral endowment. Mining is constrained by lack of accessibility, high operational costs and lack of power. Mining activities consists of slate, marble, coal, dolomite and limestone. At present, mines are auctioned to private operators for fixed periods of time.

TOURISM

3.48.  In the potential to earn foreign exchange, Bhutan's tourism industry ranks very high. The country, located in the Himalayan ranges, with its unique cultural heritage and exotic flora and fauna, has considerable tourism potential. While recognizing these facts, Government has followed  a strategy of regulating the number of tourists coming into Bhutan and have allowed foreign tourists to come only in package tours. Consequently, although the country has been open to tourists since 1 974, only 7800 tourists visited Bhutan by 1981 /82 and peak tourist arrivals were recorded at 1621

in 1979/80. Receipts from tourism amounted to US $ 1.4 millions in 1981 /82.

3.49.  Almost the entire tourism infrastructure is owned by Government which has invested Nu. 15.2 millions in tourism facilities including Nu. 12.2 millions in hotels. Although good quality hotels in the private sector are now coming up, especially in Phuntsholing and Thimphu, most bed capacity.is still in the public sector: the daily bed capacity in the four hotels owned by the Government is about 200 in three locations, but the overall occupancy rate has been around 17% in view of the low level at which tourist arrivals are regulated.

3.50.  A review of the financial performance of the tourism sector was conducted as part from the 1982 operations for streamlining Government owned commercial activities. The main findings are given in the following table :

Table 28  TOURISM INCOME AND EXPENDITURE, 1975/76-1981/82 (Nu.

million)

3.51.  The survey indicated that tourism earned an average rate of return of 15% on the fixed investment. As part of the steps taken to remove commercial operations from the budget, the Tourism Commercial Corporation consisting of hotels, transportation services, and tour operations was established in 1982 and it is proposed to restructure the capital base on a 1: 1 debt equity ratio.

3.52.  The strategy followed so far has proved to be sound although returns have been modest. Tourism has not created in Bhutan the cultural and environmental problems of many other tourism oriented economies. On the other hand, tourism infrastructure at present has an excess capacity and it is therefore targeted to increase the number of tourists visiting Bhutan from 1406 in 1980/81 to 4700 by 1986/87 increasing gross foreign exchange receipts from US $ 1.4 millions to about US $ 4 millions over the same period. Although numbers and earnings will increase, the basic strategy will continue to remain the same.

HUMAN RESOURCES

3.53.  One of the main constraints to planned development and expanding the size of the economy has ben the lack of manpower, especially trained manpower. This arises from the small population as well as the absence of training and educational facilities till recently. In one important sense, population is not an issue in Bhutan unlike most other countries in Asia nor does it have the related

problem of urbanisation. In fact, Government has been conscious of the need to seek a movement of labour from the rural to the modern sector while improving the productivity of rural labour. Table  29 gives labour force and employment estimates which indicates that 94% of the labour is still engaged in agriculture. It is also estimated that there are 46000 persons engaged in wage employment and as given in Table 30, three quarters were expatriates. As of end 1980, the supply of trained national manpower was only about 2500 of which 230 were graduates (including only 35 engineers and doctors) less than half the teachers and 20% doctors were nationals. In this light, the importance of education in producing trained manpower has been one of the highest priorities in planned development. Since 1961 starting from scratch, not only has a modern general education system been established but a number of specialized institutions in agriculture, animal husbandry, forest, engineering, health and education to trained skilled manpower, especially at the technician/operational levels, has been established. The present enrolment in such institutions is about 500 and these institutions have helped in substantially increasing the nationals at these levels.

3.54.  There were by the end of the Fourth Plan, 143 primary and secondary schools and 6 central high (integrated) schools with a total of about 36000 students. There is also a junior college with an enrolment of about 200 students and there are 500 students studying at various levels outside the country.

3.55.  The policy followed in general education so far is to have a five year primary education succeeding a two year pre-school eduction, ultimately to extend to all children in the concerned ag group in order to promote universal literacy as early as possible. Apart from basic literacy skills, the purpose of primary education is to orient students in activities of direct vocational impact,especially in farming techniques, which will benefit the majority of the school going population which are expected to return to the farms.

Table 29  LABOUR FORCE AND EMPLOYMENT ESTIMATES

Table 30  STRUCTURE OF MODERN SECTOR LABOUR FORCE (As of

March1982)

Non-Nationalas

Table 31  SCHOOL ENROLMENT BY LEVEL OF EDUCATION AND GOVERNMENT CEILINGS (1982)

Levelof Education         Actual Enrolment     Government Ceiling Pre-School Education

Lower Kindergarten                         9,691                         Unlimited

Upper Kindergarten                         7,675

Primary Education

Class I                                             16,446

Class II                                            4,995

Class III                                           3,805

Class IV                                           2,745

Class V                                            2,047

Sub-total Pre-School

and Primary Education                    37,404

Secondary Education

Sub-total Secondary

Education                                            2,660                            5,700

Junior College

3.56.  Beyond the primary stage, entry into the educational system is to be selective, based on merit and ceilings have been prescribed for enrolment in higher institutions and only a selected few would be eligible for graduate level education for which Government undertakes to bear all expenses. This has been conceived both to ensure that scarce manpower is effectively utilised in accordance with manpower requirements, as well as to avoid the building up of a pool of unemployed educated. The following Table 31 indicates ceilings prescribed in actual enrolment levels at various stages; as can be seen, as of April 1982 actual enrolment has been less than half of the ceilings prescribed at various stages. Consequently, no meaningful conclusions regarding the strategy can be drawn at this stage.

HEALTH AND NUTRITION

3.57.  The average health expectancy in Bhutan is about 46 years with an infant mortality rate estimated to be 117 for every 1000 births. Morbidity statistics are not generally available but most common diseases are gastro intestinal infections from water borne parasites. In addition, the incidence of respiratory ailments, tuberculosis, malaria and goitre are high. The expansion of basic health facilities has been impressive since the advent of planned development in 1961 but as can be seen from the following Table, the situation is still not satisfactory. The major constraints have been the available of trained medical personnel and a health school has been established with a capacity of training 12 persons in each category of para medical discipline. There were at the end of the

Fourth Plan, 92 nurses, 39 basic assistants, 6 auxiliary nurse midwives, and 36 basic health workers. Of 64 doctors only 14 were nationals.

3.58.  The basic health structure consists of primary health coverage through 42 Basic Health Units, 40 dispensaries, 13 district hospitals and 3 referral hospitals at Thimphu, Gaylegphug, and Tashigang. There is one hospital bed for every 2000 population. Referral hospitals which are generally well equipped, treat cases referred to by district hospitals and district hospitals having about 20 beds each. The BHU's constitute the core of the public health system and headed by a Health Assistant, these provide simple curative services and from these emanate basic preventive and disease control programmes. These also record vital statistics. Dispensaries staffed by a compounder provide only rudimentary facilities.

3.59.  A number of special preventive and curative measures have been developed catering to mother and child care, an extended immunization programme, control of tuberculosis, malaria, goitre and leprosy.

3.60.  Environmental health conditions are unsatisfactory and only about 8% have access to safe drinking water. Urban water supply programmes were initiated in the early sixties and although piped water is available in all but four urban centres, only half of the urban population is effectively covered. Rural piped water supply schemes were started in the Third Plan and till the end of the Fourth Plan 250 schemes were completed which have had a significant effect in controlling water borne disease in these areas. This programme is to be substantially expanded in the Fifth Plan.

Table 32  HEALTH INDICATORS (a)

Bhutan                  Averagefor

lowincomeCountries

(a)  Selected years, 1977-80.

Chapter IV   APPROACH TO THE FIFTH PLAN

4.1.     The Fifth Plan represents a watershed in Bhutan's socio-economic development. The first four Plans had similar priorities in the sense that starting from scratch, a substantial infrastructure had to

be built up. Investment had to be fairly widespread as the simultaneous development of a large number of interdependent sectors was necessary. Development priorities were largely circumscribed by the lack of trained personnel and the absence of communications and cheap energy. However, initial capital formation resulted in shifting the delicate balance of the self sufficient economy by increasing Government commitments to maintain the assets created without a matching expansion   of the taxation base and internal resources fell progressively short of Government commitments.

Resources for development were, however, not a constraint as absorptive capacity was low and both budgetary support as well as project tied assistance was available from external sources.

4.2.     With the infrastructure created as a result of the past development effort although still not adequate, it has become possible to step up substantially the investment required to exploit the country's natural resources particularly, hydro power, forests and minerals. On the other hand, past development effort has given rise to rising expectations and a situation has arisen in which a minimum acceptable rate of growth has now emerged, in addition to the issue of greater distributional equity. The increased absorptive capacity and the desired scale of development requires an investment level unprecedented in the past. The availability of resources both internal and external, and the desired scale of capital formation places on the Government difficult choices of priority for the first time in as much a real financial constraint has now emerged.

OBJECTIVES & STRATEGIES

4.3.     Although the basic objectives of past planned development in Bhutan continue to be valid, the experience of economic development over the past 20 years has brought about the need to further elaborate these objectives in the Fifth Plan. The rising expectations of the people as mentioned above, has had to be taken into account. A second major concern has been that Bhutan's traditional self-reliance society has been in some ways disturbed over time by the development process itself and has led to progressively increasing dependence on external aid. his concern was voiced by His Majesty the King in his coronation address of 2nd June, 1974.

From year to year, Bhutan is receiving increasing financial and technical assistance from our good friend India. Although the process of socio-economic development was initiated in our country only a few years ago, we have achieved tremendous progress within a short span of time. In spite of this progress, our present internal revenue cannot even meet a fraction of our Government expenditure. Therefore, the most important task before us at present is to achieve economic self-reliance to  ensure the continued progress of our country in the future. Bhutan has a small population, abundant land, and rich natural resources, and sound planning on our part will enable us to realize our aim of economic self-reliance in the near future".

In addition, His Majesty also felt that the development process of which Government has been the prime mover, has made the people more heavily dependent on Government and that the people themselves were not directly involved adequately in the development process.

4.4.     Stemming from these concerns, the specific objectives for the Fifth Plan arrived at after considerable debate initiated by His Majesty, are as follows:

a)     to achieve an acceptable and sustainable rate of growth of the economy.

b)     to attain over time, economic self-reliance and specifically in the Fifth Plan, to attain a level of internal resources generation adequate to cover the normal maintenance expenditure of Government.

c)     to achieve greater distributional equity among various sections and regions.

d)     to involve the people directly in the planning and execution of development programmes.

4.5.     In the light of these objectives, His Majesty has enunciated five major strategies that need to be followed in the formulation and implementation of the Fifth Plan. These strategies are:--

1. dzongkhag self-reliance
2. decentralization of development administration
3. people's participation
4. control of maintenance expenditure
5. mobilization of internal resources

POLICIES

(A)DECENTRALIZATION

4.6.     Major policy changes have been necessitated both because of the size of the Fifth Plan as well as the framework of objectives and strategies. The first major policy change is in respect of decentralization of the formulation and implementation of the Plan. It is expected that as a result of the decentralization process, people's participation in the development effort would be substantially expanded and plans formulated at the dzongkhag level would reflect the specific priorities of the individual dzongkhag and would ultimately cause an orientation of the entire development effort towards making each dzongkhag self-reliant. It has been long felt by His Majesty that the development process so far has progressively given the feeling to the people that it would be the Government alone which would bring about major improvements in their living conditions. As a result, rising expectations has been increasingly translated into demands on Government. It is recognized that no development effort can succeed without the people's co-operation and commitment and effective development cannot be only a top down process. While Government would give the lead in the overall direction of development and provide for resources and technical inputs which are beyond the capacity of the people, plans would have to be formulated in consultation with the people in order that these plans reflect felt needs and execution is within the capabilities of the people. It is the Government's conviction that only when these conditions are satisfied and effectively pursued that the benefits of development would actually reach all sections of the population leading to increased distributional equity.

4.7.     The mobilization and participation of the people in development activities also implies that they have a primary responsibility for their own progress. Accordingly, the Dzongkhag Yargye Tshokchungs (District Planning Committee) which were set up in the Fourth Plan in each dzongkhag have been given a more effective role. The DYT is headed by the Dzongda and the members are the representatives of the people members of the National Assembly, village gups and mandals and elders. The primary responsibility of the DYT is to form a bridge between Government and the people and the DYT's have actually carried out the formulation of each dzongkhag Plan within the overall framework provided by Government. In addition, the DYT has been made responsible for supervising the implementation and on the basis of regular reviews, to formulate each annual Plan. It is also the responsibility of the DYT to ensure that the Plans prepared are in keeping with the capability of the people to provide voluntary labour which will form a major input both for execution of Plan projects and maintaining them on completion.

4.8.     Accordingly, all activities which have a bearing on rural development and which are self-

contained within a dzongkhag have been decentralised to the dzongkhag level. Those activities which cannot be effectively decentralised viz. those activities requiring sophisticated technical inputs and efforts; activities which have an impact in more than one dzongkhag or the country as a      whole and activities in which economies of scale operate beyond the dzongkhag level, have been kept out of the decentralised system. All other activities form part of the dzongkhag Plan. The individual dzongkhag's Fifth Plans have been prepared accordingly, and each plan reflects the needs and specific priorities of the dzongkhag concerned within the overall national framework of priorities. Plan formulation has been left largely to the DYT's. The central departments have only given technical guidance and final approval of the dzongkhag Plans have been given for each dzongkhag by His Majesty himself.

4.9.     In order that the dzongkhag level capability for planning and implementation is enhanced, the administration at the dzongkhag level has been considerably strengthened. A Dzongda Wongma has been posted for each dzongkhag to function directly under the Dzongda and made responsible for  the entire development effort. In addition, technical staff of all operational departments--agriculture, animal husbandry etc. have been placed directly under the Dzongda. Accounting staff has also been posted and new administrative and financial powers have been delegated to the dzongkhag level. The role of the central departments, the Dzongdas and the DYT's have been more clearly defined resulting in more co-ordinated and closer relationships between the three.

(B)  COMMERCIAL ACTIVITIES

4.10.  The promotion of self-reliance, the other major important aim of the Fifth Plan involves a three pronged policy framework consisting of increasing investments in revenue generating activities which is one of the two fundamental elements of the Fifth Plan structure; the streamlining of commercial operations and the reduction of maintenance expenditure by a reorganisation of the Government machinery and streamlining the budgetary system. This will be supplemented by a thorough review of the tax structure and the public finance system in order to increase the revenue yields from the current and expanded tax base in future.

4.11.  The investment in revenue generating activities would be in the areas of industries, forests, tourism and power the total investment in these projects in the Fifth Plan is about Nu.159.6 million constituting 37% of the total Fifth Plan outlay. This involves the shift referred to earlier from basic infrastructure towards directly productive investments. The Government recognises that many of these investments would be considerably large and with little experience of undertaking such large investments in the past, the costs and benefits of such investments must be evaluated completely before taking an investment decision. Such evaluation exercises as may be required in the form of pre-feasibility and feasibility studies have already been initiated. In some cases this may mean that the time frame of investment would be longer and many of these projects may only be taken up in the last years of the Plan and may also spill over into the next Plan period.

4.12.  The streamlining of existing commercial operations in order to make them viable and contribute to revenues of Government is a major policy area in the Fifth Plan. Over time, in the absence of a private entrepreneurial class, Government has undertaken a number of activities of a commercial nature in addition to development of public utilities. Prior to 1981 all these activities were supported by the budget. Gross receipts were incorporated in the budget and taken as part of revenue while operating expenses were budgeted on the expenditure side. As a result, the actual

performance of many of these undertakings lay hidden under a maze of budgetary figures and in many cases there was a net outflow from the exchequer representing operational losses. In all other cases barring the rare exception, although net operating cash surpluses were recorded, these did not reflect the true profitability as no cost of capital nor depreciation was provided for. In order to streamline the operations of these undertakings Government has undertaken a detailed review of the systems and procedures as well as the structure of these undertakings. With the help of management consultants, corporate structure, valuation of assets, accounting and management information systems are being installed. It is Government's intention that, to the extent possible, the  undertakings should function auto nomously and in pursuance of that aim, from the 1981/82 budget onwards, gross receipts and operating expenses are no longer reflected in the budget and has been substituted by targeted magnitudes of operating surpluses and losses. Once the functioning of the undertakings is streamlined, most would be expected to show commercial profits and contribute to Government revenues. It is, however, recognized that some of these undertakings, especially of the public utility type, cannot be expected to generate profits without pursuing unrealistic pricing policies which could be detrimental to the public interest. Nevertheless, in order to promote operational efficiency, real costs must be reflected. Government in such cases would guide pricing policies and subvent losses on a pre-determined basis and such undertakings would be expected to function within the norms of efficiency determined by Government subvention. Closely connected with the streamlining of commercial operations and the undertakings of new investment is the question of efficient management. It is the Government's intention that a management ethic should be nurtured in such undertakings and the selection training and placement of suitable managerial personnel and the building up of sound management cadres would be of the highest importance.

There is also the delicate matter of the degree of autonomy which, such undertakings should enjoy and the kind of control that the various elements of Government should exercise as these are critical to efficient operations. Government has initiated studies to build up detailed guidelines and procedures relating to autonomy, Government control, the building up of a sound management ethic. As the public sector is expected to grow substantially atleast in the medium term, the building up of sound conventions at this point of Bhutan's development is considered crucial.

Table 33  LIST OF COMMERCIAL UNITS/DEPARTMENTS

1. Travel Agency and Hotels under Tourism
2. Workshops and Central Stores
3. Bhutan Government Transport Services
4. Government Presses
5. Agriculture Production Farms
6. Agriculture Machinery Hiring Services
7. Livestock Production Farms
8. Pork Processing Plant
9. Dairy Marketing
   1. Generation and Sale of Electricity
   2. Handicrafts Emporium and Production Centres
   3. Industrial Estates
   4. Saw Mills and Logging Operations
   5. All Public Sector Undertakings.

(C)  FISCAL AND BUDGETARY REFORMS

4.13.  One of the important aims of the principle of self-reliance enunciated by His Majesty the King is to attempt to meet the recurring cost of Government, atleast of all essential services, by domestic resources mobilization. This calls for not only raising internal resources, but also curtailing

excessive growth of recurring expenditure through effective budgetary practices and optimization of organisation strength.

Although major contributions to domestic resources in the Fifth Plan are expected to come from the revenue generating investments and the streamlining of existing commercial activities, there is no doubt that fiscal policies, especially taxation measures, could yield significant revenues from the expanding tax base that will emerge out of the growth of economic activity in the Fifth Plan and the streamlining of tax administration. It is recognized that the taxation system would have to be carefully expanded in order to protect fledgling activities and the more vulnerable sections of the population and it is necessary to devise taxation measures that are simple and effective. The Government has, therefore, initiated a comprehensive study with the help of the Indian Institute of Public Finance and Policy and the International Monetary Fund to devise comprehensive taxation proposals, legislation and suitable administrative measures. A Revenue Cell in the Ministry of Finance is already functioning and a decision has already been taken to constitute a regular Revenue Service for tax administration. While the studies referred to above would be of great help in  devising taxation policy and measures, a number of new measures have already been put into effect by 1982/83. These, along with projections of domestic resource mobilization in the Fifth Plan are discussed in detail in the following Chapter.

4.14.  Budgetary procedures are expected to play a significant role in cutting costs and in making more efficient use of available resources. Especially with the re-organization of Government and decentralization, modifications of control procedures have become necessary. It is Government's feeling that many elements of the budgetary control mechanism devised earlier have become obsolete: procedures originally formulated when the size of Government was small and compact are no longer effective with the increasing size and dispersed nature of Government. Reforms have been initiated in the Fifth Plan in three major areas--in the consolidation of the dual budgetary system, in the definition of financial powers and in disbursement and revenue collection procedures. Beginning with 1981/82, the civil and development budgets were consolidated into a single entity and the Budget Bureau to formulate and administer the overall budget, was created under the Ministry of Finance. The Bureau now formulates and oversees the budget of the entire Government. Supplementing this, the roles of the Ministries of Finance and Foreign Affairs and the Planning Commission have been rationalized. The Ministry of Finance, apart from responsibility for the   entire budget, also has overall responsibility for domestic resource mobilization. In assessing resource requirements and expenditure, the Ministry of Finance closely co-ordinates with the Planning Commission, the latter ensuring that expenditure proposals are consistent with plan priorities. The mobilization of foreign aid is conducted through the Ministry of Foreign Affairs.

4.15.  The other major reform initiated in 1982/83 is in disbursement and revenue collection. Prior to this, each department had its own accounts into which Government transferred funds against the budgetary requirement on a quarterly basis. Besides, each department also had a separate account into which revenues earned were deposited for subsequent remittance to the Ministry of Finance. It was realized that this system had a major draw back arising out of the time lag between collection of revenues and subsequent remittance to the Ministry of Finance and the existence of a large number of disparate accounts. Funds accumulated in some accounts whereas in other accounts, there was       not enough funds to meet expenditure requirements. The Ministry of Finance as a result, could never have a true picture of the state of finances and progress of expenditure. In order to streamline the cash flow of Government, from the 1982/83 budget, all Government revenue accounts were consolidated into a.single account and similarly all expenditure were routed through a separate  single budget account. raping and disbursing officers were set drawing limits for every quarter under a letter of credit system. Matching this, a Central Accounts Cell and an Accounts Service were created to streamline accounting.

4.16.  The third major area of budgetary reform has been in a complete overhaul in the powers of officers to re-allocate funds between different heads of expenditure. This became a necessity with the initiation of the processes of decentralization which called for a redefinition of the powers of central departments and the dzongkhags The revised structure of powers delegated is given in Table

34. The intention is that in the early stages of decentralization the powers should reflect the objectives of decentralization by providing adequate flexibility to meet local needs while maintaining a reasonably tight control on expenditure to keep these in line with plan priorities.

Table 34  DELEGATION OF POWERS ON RE-APPROPRIATION OF FUNDS

Sl.No.Re-

appropriation                 Dzondag

1. One head to

Head of

Department                        Ministry

FinanceMinistry

another

in the same scheme

1. One scheme to another

in the same sector

Nu. 0.005 m          Nu. 0.010 m          Upto Nu. 0.030 m                Full powers

Upto Nu. 0.010 m Upto Nu. 0.020 m Upto Nu. 0.050 m                Full powers

1. From one sector to

No powers            No powers             Dzonkhag shall forward

another

sectorthe proposal to Home Ministry

which in turn shall forward

Full powers

with comments to the Ministry

controlling the sector from which

re-appropriation is to be made.

The Ministry after consulting the head of the department, can approve

upto Nu. 0.050 m.

1. Dzongdags/Departments/Ministries shall not re-appropriate funds from maintenance to development and vice versa without the prior approval of the Ministry of Finance
2. Dzongdags/Departments/Ministries shall not re-appropriate funds from budgeted heads/ schemes to unbudgeted heads/schemes without the prior approval of the Ministry of Finance.
3. The Ministry of Finance shall obtain views/comments of the Planning Commission before giving the final approval wher-re-appropriation involves the following:

a)     Surrendering of full annual provision of a scheme.

b)     Inter-sectoral diversion of funds.

c)     Takin up of a new scheme during the course of the financial year not included in the annual budget.

1. A copy of the sanction order on re-appropriation of funds shall invariably be endorsed to the Budget Bureau, Ministry of Finance, and to the Royal Audit Department.

4.17.  While the above measures have already been put into effect, it is felt that a complete overhaul of budgetary procedures is required. This will have to be proceeded with caution, as a completely new budgetary system will encounter operational difficulties at the initial stages. Nevertheless, in keeping with emerging needs, a substantially new Budget Manual is to be prepared. This will also contain for the first time, commercial accounting procedures.

(D)  MONETARY POLICY IN THE FIFTH PLAN

4.18.  The large size of the Fifth Plan, the need for large investment in industrial ventures and the need to mobilise resources and expand credit calls for major institutional efforts. It is recognized that it will not be easy to further raise public savings as the planned funding projections already/  assumes a significant improvement in this area; in fact revenue projections depend to a considerable extent on putting on stream revenue generating projects. The investment in such projects would also call for a degree of domestic resources mobilization and three alternatives presents themselves. The first is to engage in expansionary finance through the issue of currency, the second to utilize the resources of the financial institutions and the third to raise a public debt. In addition, demands on foreign exchange both for imports and debt servicing calls for effective foreign exchange management and the growing demand for rural and commercial credit would need the formulation and implementation of sound credit policies.

4.19.  It has, therefore, became inevitable that a central banking institution is set up as all these operational and developmental measures cannot be effectively guided by existing institutions. The Royal Monetary Authority was set up accordingly, in late 1982 with the help of the Inter national Monetary Fund. The development of the role and functions of the Royal Monetary Authority will take place in several phases. In the first phase, the RMA will concern itself with traditional operational functions of a central bank, some of the developmental functions consonant with the needs of growth of the economy, and functions relating to monetary and statistical research. It will provide the operational framework and also equip the officers with expertise and experience to take over RMA's role in the second phase. In this phase, the RMA will be involved with the control and regulation of money supply to meet the twin objectives of growth and reason able stability of prices. This would resolve itself into control over expansion of currency and credit, regulation of credit to priority sectors and eventually to credit planning. This phase will also witness the RMA's more active role in maintaining the external value of the currency, careful husbanding of the country's external reserves which may lead to implementation of a regime of exchange control. In the third or final phase, the RMA will come into its own as a true central bank of the country when it will supervise and regulate the functioning of the other financial institutions of the country.

4.20.  One of the main functions of the RMA would be the issue of currency. Some degree of expansionary finance is possible as the level of ngultrums in circulation is low and monetization is increasing. Although it is Government's intention that ultimately the ngultrum should become the sole medium of exchange in Bhutan, it recognises the great importance for the exercise of caution in this process. The volume of trade between Bhutan and India which is likely to increase in future and the open border between the two countries makes it imperative that a free one for one convertibility of the ngultrum and rupee is maintained as long as is necessary. It is, however, recognized that a judicious release of ngultrums within the above constraint and that of price stability could contribute to closing the resources gap.

4.21.  A simple regime of exchange control mainly with currencies other than the rupees, is proposed to be implemented in the Fifth Plan. This will serve the twin purpose of regulation of the use of foreign exchange and imparting strength to the internal and external value of the ngultrum. Exchange control will also cover capital inflows and would imply import control over capital and   consumption goods, movement of ngultrum, foreign currency, security and bullion.

4.22.  The third aspect of the function of the RMA would involve the management of public debts.  In course of time this would involve the provisions of a safe investment outlet for the financial institutions which enjoy highly liquidity at present and also the creation of a securities market. The RMA will have an advisory role on the amount of loan to be floated from time to time, the timing of the floatation and the terms of the loans. The RMA will be the agent of Government with regard to the management of the public debts involving floating servicing and repayment.

4.23.  Finally, the RMA would be responsible for credit control and planning and co-ordination of the financial institutions. Apart from the existing financial institutions, it is proposed to set up a Industrial Development Bank which will be both a promotional organisation for industrial develop ment as well as a development banking institution. The rural credit system is also to expand substantially in the Fifth Plan and the RMA would, therefore, have to play an active role in credit planning and control in order to channelise the resources of these institutions into priority area and make the most effective use of such resources. The RMA will also monitor and maintain the health of the financial institutions through standard measures as control and specification of the Statutory Liquidity Ratios and Credit Reserve Ratios of the financial institutions.

(E)  INVESTMENT POLICY

4.24.  The industrial development policies for the Fifth Plan have been formulated in the context of the potentials and comparative advantage that the country possesses while at the same time keeping in mind the constraints to industrialisation that exist. Government, however, recognises that in view of its lack of experiences in promoting and regulating major industrial ventures in the past, industrial policy would have to be flexible and subject to modification as experience developed. The       present policy, therefore, reflects both Government's apprehensive in regard to outside control and concern to speed up industrial development.

4.25.  Bhutan's rich natural resource potential has been described earlier. The nearness and free access to the vast Indian market has also been discussed. The development of industry in the past however, has been constrained by the lack of power and infrastructural facilities, the lack of financial resources, the limited availability of trained manpower and entrepreneurial ability and the relative lack of support and service organizations. While major improvements have been made in the area of infrastructural facilities over the past four Plans and power will be plentifully available from 1984/85 onwards, the other constraints mentioned are still operative.

4.26.  Apart from the above factors, two major objectives of the Government relating to the indus trial sector, namely the need to strengthen the resource base of the economy and generate new revenues, and the importance of increasing the value-added component of exports, have influenced the content of the industrial policy so far developed. There is, therefore, a specific strategy relating  to the establishment and development of public sector industries and the same time parallel promotional policies relating to the private sector. The public sector would be basically large scale natural resource based investments which would be beyond the capability of private entrepreneurs and a whole measure of control of the exploitation of natural resources is desirable. While in all cases it is intended to ensure the use of the most appropriate technology, nevertheless, in view of the overall labour shortage, more capital intensive methods of production will be encouraged.

4.27.  It is recognised that given the fledgling status of industrial development in the country and the major constraints specified above, in order to meet the national objectives for this sector, the Government will have to play an important role through direct public sector investments, atleast in the medium term. This role is again promotional and pragmatic in nature and is designed to fill a gap. The internal conditions for large-scale private investments are presently, relatively un- favourable and entrepreneurial abilities limited. Private investment is therefore, not forthcoming.

4.28.  The two pronged thrust in industrialisation calls for different promotional strategies. In the  case of the Public Sector, the entire preparatory and implementation stage will be looked after by   the concerned Government agency. Forest based industries will be the responsibility of the Forest Department; mineral and other natural resource based industries by the Department of Industries  and Mines and agro based industries by the Food Corporation of Bhutan. The agency concerned will be responsible for preparation of feasibility reports and project documents collaboration arrangements (where industries will be set up in the joint sector) and financing arrangements. For  the promotion of private investment, a number of industrial estates will be set up, some of them close to the location of the major public sector investments to facilitate the growth of ancillaries.

4.29.  To regulate and promote industrial development, the National Commission for Development  of Trade and Industries was established in 1980. This Commission meets under the Chairmanship of His Majesty. It is served by a working committee which comprises representatives of the various institutions. The National Commission, not only reviews industrial proposals for economic and technical feasibility but also ensure that the projects are in line with national priorities. Before the submission of projects for discussion in the National Commission for Development of Trade and Industries, they are appraised for development by the Department of Industries and the Planning Commission.

4.30.  In view of the fact that different supportive policies have to be adopted depending on the size, technology and marketing needs of industries, these have been classified into three categories-small, medium and large. All medium and large industries come under the purview of the National Commission for Industries and have to be scrutinised and approved by this body before being taken up. Small industries are further divided into two categories--cottage industries which have a total capital of less than Nu. 0.1 million, and other small industries with investment ranging between Nu.

0.1 million to Nu. 1.5 million. This category is primarily reserved for the private sector. The industries are expected to be based on local raw materials and skills, and cater for localised internal markets, although it is understood that at the larger end of the scale more modern techniques of production will be used. The objective is to encourage the practice of traditional craft skills with improved technology, and promote the processing of agricultural and livestock products thereby increasing value added and rural incomes. Local entrepreneurs and groups of craftsmen will be encouraged to set up such industries. Confessional loans will be provided on a case-by-case basis. In the case of larger units, the Department of Industries will also provide the required technical and marketing support.

4.31.  Industries with total capital ranging from Nu. 1.5 million to Nu. 10 million are in the category of medium scale industries. These industries can also be wholly owned by private individuals and groups. However, as they will require greater technological and entrepreneurial skills, they will be directly supported and supervised by the Department of Industries. Support would be in the form of the training of entrepreneurs and skilled manpower, marketing assistance, etc. It is expected that most medium scale industries will be natural resource based and export oriented.

4.32.  Large scale industries are those involving an investment of over Nu. 10 million. Such industries are expected to be natural resource based and highly capital intensive. Due to the constraints mentioned earlier and the need for the Government to maintain a commanding role in the exploitation of non-renewable resources such as minerals, forests etc. to ensure their efficient utilisation, it is envisaged that all such industries, atleast initially, are likely to be in the public sector. Through the establishment of such industries the early exploitation of the natural resource potential can be begun and also, a major contribution to internal budgetary resources can be made quickly.

4.33.  The Government is committed to the development of the private sector. Its involvement in large industries is at present a matter of necessity as the private sector is still very weak. Where the capability exists, the private sector may own fully or partly an industry of any size for which it can mobilize its own resources without Government assistance. While no sector is reserved exclusively for the public sector, the Government reserves the right to fully or partly own any new industry for various socio-economic reasons. In large industries for which the private sector does not have adequate resources, the Government stands ready to enter into joint-sector agreements with interested private parties and provide not only technical and marketing assistance but also financial investment upto the extent of 80% of the project costs. Where private entrepreneurs possess adequate management skills, they will also be allowed to manage such joint-sector indus tries. In such cases, while Government would not be involved in the day to day management through the control of company boards it would ensure that such units operated in accordance with the declared policies and fulfil the specified objectives. In general, the Government's policy in the area of ownership is that it is filling a temporary gap. The intention is that as the entrepreneurial and management abilities in the country increase, the private sector will be given a more expanded role. Furthermore, as public awareness increases and there is a willingness to hold industrial shares, the Government in the course of time may disinvest its holdings through public issueses.

4.34.  Government control of large scale enterprises is also necessary at this early stage of indus trial development as such investments invariably involve foreign collaborations in the area of management, technology and marketing. Therefore, to ensure that such industries use a technology appropriate to the economic realities of the country; and one which will not put unnecessary burdens or distort future industrial development; that their employment and training programmes result in the maximum manpower and skills development of nationals and that they do not waste resources       but make the desired contribution to internal budgetary resources, it is necessary for the   Government to closely monitor and regulate their operations.

4.35.  In the area of foreign collaborations, no major role is at present visualised for direct foreign investment and equity participation. This is primarily because there are no statutes, rules or regulations for the effective control and regulation of such investment. However, any proposals that may be forthcoming will be dealt with on a case by case basis. At the same time foreign colla borations will be welcome by Government in the area of management, technology and marketing. In fact there are already a number of units with such participation.

4.36.  In order to promote private sector industrial development, the Government has undertaken a number of programmes. To foster entrepreneurial development, several training programmes have been instituted whereby potential entrepreneurs can get training in basic management and accounting practices. So far such training has been given through a fellowship programme in institutions outside the country. However, during the Fifth Plan it is proposed to establish a

Management Institute in the country which will hold courses in relevant areas. In the area of marketing support since most medium and large industries will be export-oriented, for the Fifth Plan period the Depart ment of Trade and Commerce has instituted a programme of marketing assistance. This will consist of setting up a trade information system and establishing a trade promotion cell to assist exporters both in Indian and third country markets. In addition, support will be given for participation in trade fairs. The Department has drawn up a programme to obtain expert assistance for marketing studies, product adaptation, export marketing techniques, etc. Where required, the State Trading Corporation of Bhutan (Export Division) will also provide major support.

4.37.  While major progress has been made in developing the overall infrastructure of the country the absence of adequate local infrastructure has been an important factor in inhibiting the growth of private industry. To remedy this situation and support the establishment of small and medium scale industries, a programme of developing industrial estates in different parts of the country has been taken up. The programme involves the development of land, construction of roads, and provision of electricity and water supply.

4.38.  Until recently there was no corporate taxation in Bhutan. However, as a result of some industrial growth and in view of the new policy to commercialise all Government industrial and commercial undertakings, a 6% corporate tax on gross profits has been introduced. At present this is only applicable to large units, however, it is likely to be extended to medium and small units as   well, with appropriate exemptions where required. In spite of this tax, Bhutan's corporate tax level remains one of the lowest in the world. In the past a number of fiscal incentives in the form of confessional loans and bank guarantees were given to small scale units by the Department of Industries and Mines. These incentives have been recently discontinued in view of the new proposal to establish an Industrial Development Bank. It is now proposed to draw up a comprehensive scheme of financial incentives and support measures as soon as finance become available for the establishment of the Industrial Development Bank. The financial package is expected to include assistance in project identification and preparation, confessional lending for industrial investment, equity participation, underwriting, providing guarantees, negotiating and channelising external loans, etc.

4.39.  For the regulation and control of industrial and commercial undertakings a Companies Act has been prepared and is under consideration by the Government at the moment. The Act, which has a simplified structure appropriate to the needs of the country, will provide the legal framework for dealing with project approval and licensing, capital structure, maintenance and audit of accounts and the preparation of balance sheets, etc. On the basis of this new legal instrument, the Government will be in a position to monitor investment and direct the use of scarce resources, monitor and         control the operations of industrial and commercial enterprises and levy appropriate taxes.  Currently, the Department of Industries and Mines fulfils both a promotional as well as a regulatory role, although there is no proper organisation or comprehensive status for industrial regulation.   Once the new Companies Act is adopted, it is also proposed to establish a small body which would perform all the functions of industrial regulation such as the registration and licensing of units companies, control of capital issues, and the interpretation of company law.

(F)  ADMINISTRATION AND MANPOWER POLICY

4.40.  The growth of the administrative structure over the past four plan periods has been outlined

earlier. Although the basic framework for the formulation and implementation of the overall developmental activities now exists, the expanded programme envisaged under the Fifth Plan will require a substantially greater input of manpower resources, both skilled and un-skilled. In order to meet these requirements the Government has adopted two basic strategies. The first relates to the decentralisation of administrative responsibility, particularly relating to the implementation of local schemes which has already been described in this Chapter. Through the strengthening of the district administrations and through popular participation, the implementation of the dzongkhag element of the Plan is to be facilitated and the pressure on overall manpower resources to be eased. The second basic strategy is the conception of a manpower development policy and related programmes.

4.41.  The main objective of the manpower development policy is to institute a programme whereby the needs of the country can be met at the earliest. The quantitative expansion of higher education is, therefore, to be linked to the manpower requirements during the Plan period. However, at the      same time it is intended to control any unrealistic manpower demands and to select, recruit and allocate personnel to the different sectors in a rational manner. As a first step, a detailed   examination of the strength of various Government organisations was carried out in 1982 simultaneous to the strengthening of the dzongkhag administration. As a result, a saving of 5% in the strength of the administration was effected. During the interim period when adequate numbers of nationals will not be available, interim arrangements through the recruitment of non-nationals particularly in the highly skilled and professional categories will be undertaken. In order to translate all these objectives into concrete realities the Government has undertaken a number of steps, the primary of which is the establishment of the Royal Civil Service Commission, to oversee this sphere of activity.

4.42.  In view of the long gestation periods required for the acquisition of education, skills and experience, manpower projections covering the period of 1981--1990 have been made indicating the yearly requirement of personnel at various levels in each overall category. The educational planning and programmes for the Fifth Plan have been based on these projections.

4.43.  In overall terms, the Fifth Plan envisages a moderate degree of expansion in the educational system. The emphasis is on an improvement and consolidation of the existing facilities. However, in the area of higher education the required degree of expansion is being planned. The National  Institute of Education is to be expanded and upgraded so that both primary and secondary school teachers can be trained. The existing Junior College is to be expanded and specific vocational courses depending on the manpower requirements at this level will be introduced. A new Degree College which will provide three year degree courses in humanities, sciences and commerce is to be established. The existing technical training institutions are also to be strengthened and new courses added. While some international assistance is already committed towards the programmes mentioned above, further assistance will be required to support and expand the various technical and   vocational training establishments in the country to enable them to turn out the trained man power which will be required for the various projects and programmes during the Fifth and Sixth           Plan period.

4.44.  Table 35 shows the manpower development programme for the Fifth Plan period and the  target levels for 1986/87. By the final year of the Plan it is expected that the turnout of matriculates will be about 500 per annum. While this may be adequate to meet the need during the Fifth Plan period, the annual requirement of highly educated manpower including post-matriculate, technically trained personnel from 1986 onwards past 1990 is estimated to be around 700 per annum. The

necessary further expansion of the educational and training system during the Sixth Plan, particularly at the higher levels, to meet the manpower gap and the requirements of the country, is evident from this.

4.45.  As adequate facilities for higher level and specialised training are not available within the country, in order to develop the necessary skills, training institutions abroad, will continue to be used. During the Plan period about 600 students will have to be sent outside for higher education, the annual numbers gradually increasing to reach about 180-200 during the last year of the Plan.     Given the limited financial resources, particularly foreign exchange, a large measure of bilateral and multi-lateral and internal assistance is called for to support the scholarship programme of the Government.

4.46.  In the area of specialised technical expertise, Bhutan will be dependent on external assistance for some time to come. With the emphasis on a large number of directly productive and commercial projects and programmes in the different sectors during the Plan, the overall requirements of such expertise are going to increase substantially as compared to the past. The assistance required will be much more effective if it is forthcoming as a package of financial assistance and know-how for the commercial and industrial projects being envisaged. This is true both for public sector projects and the private sector proposals (of which there is likely to be major expansion for the first time) which are being considered during the Fifth Plan. In the past, most of the assistance in the area of training has been either multi-lateral in nature or from India. With the expected increase in the number of donor agencies and countries over this period, efforts to establish new bilateral pro grammes are to be made.

PLANNING, MONITORING AND EVALUATION

4.47.  With the introduction of the decentralised system and the large size of the Fifth Plan, it has been necessary to have a fresh look at the planning process and to device new procedures for monitoring and evaluation. The manner in which the Fifth Plan was prepared has been described in the next section. However, the planning process does not end with the formulation of the Fifth Plan and it is a continuous process of review and modification. To take into account the availability of resources at various points of time, cost overruns, performance excesses and shortfalls etc. it is necessary to breakup the Fifth Plan into a series of Annual Plans. Each Annual Plan is to be formulated on the basis of a review of past performance, special problems encountered and the availability of resources for the year. Wherever necessary, annual targets and allocations are modified in the above light and keeping in mind the overall Fifth Plan framework.

4.48.  The Annual Plan exercise starts with an assessment of resources available by the Ministry of Finance in consultation with the Planning Commission and the Ministry of Foreign Affairs. The apportionment of these resources on a tentative basis is made for the various sectors and dzong- khags and the individual units prepare their draft plan proposals. The DYT's are responsible for the preparation of the individual dzongkhag Plans and the departments, the individual sectoral Plans. The dzongkhag Plans are then vetted by the various departments and the Annual Plans are finalised in an annual conference usually under the Chairmanship of His Majesty, in which past performance is also reviewed and decisions are taken regarding changes in procedures etc.

4.49.  The responsibility for central monitoring is that of the Royal Secretariat which is done on the basis of returns at regular intervals from the dzongkhags and departments. The various Ministries are also expected to monitor the performance of the various departments under them. The Planning Commission has been given the responsibility of monitoring and evaluation of pro-grammes from time to time. Areas for evaluation are usually identified on the basis of annual reviews

FORMULATION OF THE FIFTH PLAN

4.50.  The formulation of the Fifth Plan has been the longest and most elaborate planning exercise undertaken in bhutan so far in view of the major changes of development strategy and policies that were required and this had much to do with the six year time span unlike the five year time spans of the earlier plans. The process could be said to have begun with a full scale review of existing policies taken up in 1979 on His Majesty's directive. As a result, the specific objectives, strategies and policies for the Fifth Plan was evolved by the last year of the Fourth Plan i.e., 1980/81. The broad financial parameters emerged by late 1980 as also the overall structure on the basis of which the overall size was tentatively determined. Based on these, detailed discussions were held with various departments and it was possible for Bhutan to make a presentation of the draft Plan for negotiations of funding with the Government of India, the United Nations system (particularly the UNDP) and other donors.

4.51.  Once the draft Plan was finalised and major commitments of external assistance were reviewed, it was possible to refine the content of programmes and projects further. This involved detailed discussions with various departments and all the DYT's. The discussions of the dzongkhag Plans were conducted under the Chairmanship of His Majesty who personally toured most of the dzongkhags.

4.52.  In addition, the industrial component of the Plan, which was initially indicative, was revised. The initial content was based on profiles made in 1975/76 and cost escalations had to be accounted for. Besides, it was decided to be more selective in the choice of industries to be taken up in view of the limited capability of the Government to take up very large investments. As a result of these exercises, the Fifth Plan underwent some changes relating to the size as well as structure and content. The funding picture had also undergone a change and a further reassessment had to be  made in 1982.

4.53.  The Fifth Plan has not been conceived as a rigid structure but as a dynamic and flexible one. Within the framework of the broad objectives of the Fifth Plan, modifications to programme content and size would have to be made in the light of experience gained in implementation, progress and the availability of funds.

Chapter V   THE STRUCTURE OF THE FIFTH PLAN

5.1 The Fifth Plan is the most ambitious development Plan undertaken by the Royal Government of Bhutan so far. However, for reasons explained in Chapter IV, the size and complexity of the Plan was inescapable. The size of the Plan in terms of outlay now stands at Nu.4338.1 millions, almost three times the size of the Fourth Plan. In terms of per capita average annual investment, the Fifth Plan visualises a level of about Nu. 600 and in terms of percentage to Gross Domestic Project, the investment works out to an average of 29% of GDP annually (Table 36).

5.2.  The overall dzongkhag effort is expected to be Nu.1111.3 millions or about 26% of the overall Plan size whereas the commercial and revenue generating investment is Nu.1 596.7 millions or 37% of the overall outlay. Reflecting the Government's efforts to contain non-essential and recurring expenditures, the outlay for such activities stands at 30% of the annual out lay while development expenditure will triple. Public investment is expected to go up from a level of 18% of GDP in 1980/81 to an average of about 29% peaking in 1984/85 to over 49% of GDP. The following table illustrates the rise in public investment from 1977/78 to 1982/83. It should be noted that these figures exclude the investment on the Chukha Hydel Project. If one were to include this, the resulting public investment would cross 40% of GDP (touching 50% by 1983/84 before declining) In addition to this, the total gross investment figure Nu.3213 millions includes Nu. 200 millions in civil administration expenditure. Although this is not strictly investment, it will, nevertheless, increase the capital stock of the country.

5.3.  Table 37 gives the sectoral outlays for the Fifth Plan along with the sector wise development (or investment) expenditure for the Fifth Plan. These estimates are not strictly comparable to the outlays in previous Plans owing to certain changes in classification. However, the increase emphasis to the revenue generating sectors and the predominance of the power sector (eve excluding Chukha) and industries is evident. Industries command the highest proportion of the outlay with 17.4% (22.7% of the investment) followed by power--16.5% (22% of the investment, These are followed by Public Works at 12.4% (roads, bridges and water supply) and agriculture 11.5%. Forests, another area of emphasis, accounts for 6.5% (7.5% of the investment). The relative outlays on the social sectors, however, particularly education, shows a decline. The share of these in investment is particularly  low as a greater proportion of their outlays is devote to maintenance. This is consistent with the overall Fifth Plan approach to consolidate and improve on the systems developed before going in   for a major expansion.

Table 36  RATIO OF GROSS INVESTMENT TO GDP (ESTIMATES) Nu. in

millions

Gross investment (excluding Chukha) GDP GDP

Ratio (%)

Sl.

Table37  PROPOSED OUTLAYS FOR THE FIFTH PLAN (1981-87) Nu. in millions

Overall Fifth Plan                   Development

No.                        Sectors

1. Agriculture
2. Animal Husbandry

*Excluding the Chukha Project.

STRUCTURE OF THE FIFTH PLAN

5.4.     The investment or development component of the Plan has been divided into two components--one consisting of the normal development expenditure of the dzongkhags and departments and the other that of investments in revenue generating activities. The latter with an outlay of Nu.1596 million is about half the total investment (or 37% of the overall outlay). Investments out of this component would be in power, industries, forest based industries, mineral development and tourism. The main rationale for such a division arises out of the resource gap discussed later in this Chapter. In view of the existence of a real resource gap in the Fifth Plan, it was felt that a substantial borrowing effort, both internal and external, would have to be resorted to unlike in the past when borrowings were negligible. The existing committed budgetary resources (internal and untied assistance from the Government of India) and project tied aid, do not cover the total Plan size. The Government's understanding of the further availability of grants indicates that the resource gap would still be significant. In order to avail of borrowings, and to be able to service debts effectively, it was decided to separate the total investment in bankable projects as a distinct component of the Plan. However, Government realises that these projects cannot be financed by a 100% recourse to borrowings, which will defeat the very purpose of their inclusion in the Plan i.e.,generation of revenue. Accordingly, Nu.571 million has been allocated from budgetary resources to provide the margin (or equity) for this component. This amounts to about 36% of the total outlay in this component which is adequate to meet fairly stringent debt equity ratios.

5.05 As a result of the allocation of Nu. 571 million from budgetary support, a small gap has also been created in the normal development Plan. This amounts to Nu. 310 million or about 20% of the balance of the investment component. It is Government's expectation that this would be easily covered by external grant like assistance currently under negotiation with a number of donors.

5.6.     As in the past, the Plan has the traditional distinction between maintenance and development

expenditure. Maintenance expenditure would be met entirely from budgetary resources while the development expenditure from various forms of assistance (part budgetary support, project tied grants, and loans). Excluding the investment in revenue generating projects, the development expenditure on the normal side comes to Nu. 1580.1 million or about half of the total investment.   Of this, 70% would be in the dzongkhag sector while only 30% in the central sector. These figures bring out vividly the importance given to revenue generating investments and the decentralisation of development programmes.

FINANCING OF THE PLAN

5.7.     Although there has been a major increase in internal revenue as compared to the Fifth Plan,  due to its much larger size internal resources will only provide 22% of the total requirement.The resource availability and deficits are given in Table 38. Taking into account internal resources, the grant available from the Government of India and the already committed external assistance, the overall resource deficit for the Fifth Plan now stands at Nu.1335 million. This deficit has been divided into the two components of the Plan mentioned earlier. The gap for the industrial and commercial component of the Plan is Nu. 1025 million or about 68% of the total outlay in this component of Nu. 1596 million. The resource gap for the rest of the Plan is very small, being Nu.in million or about 11% of the envisaged expenditure of Nu. 2742.4 million. However, in view of the fact that internal resources and the Government of India grant can be used to finance any segment of the Plan, these deficits should be considered flexible and can change depending on the response and interest of the international donor community. This differentiation is therefore for internal purposes, with the overall gap remaining at around 30% of the Plan. A large internal borrowing programme,  of approximately Nu. 200 million, has already been accounted for before arriving at the deficit.

Table 38  RESOURCE POSITION IN THE FIFTH

PLANNu. in million

1. The Regular Plan include maintenance and development outlays of all Development Deptts.and Non-Plan Expenditure. Assistance from WEP and Commercialised Deptts. are excluded.

1. The Investment Plan based on preliminary cost estimates of projects included in the Plan.
2. Only committed resources, expected assistance have not been included.

In addition, a sum of Nu. 510 million has already been committed from external sources towards the financing of some of the revenue generating projects, and negotiations for further funding are in progress.

5.8.     The annual deficits, after taking into account the envisaged expenditure and the resources available at present from internal and external sources, are given in Table 39. The deficits are highest during the 3rd and 4th years of the Plan when total expenditures also peak. The importance             of receiving substantial and timely external assistance to meet these deficits and ensure the success f the Plan is highlighted by this.

5.9.     In considering the overall Plan size and the financing of a number of industrial and commercial projects, the possible role of private enterprise and private finance has not been taken into account. Although a certain contribution can be expected from the private sector, and an expansion of private enterprise is envisaged during the Fifth Plan period, due to the financial and entre preneurial weakness of this class in the country, private investment has not been programmed within the Plan. Therefore, any participation by private entrepreneurs in productive enterprises may help to reduce the resource gap during the Plan but on the other hand, may also contribute to increasing its overall size.

5.10.  The Fifth Plan differs from the earlier Plans in one other important respect. In the past Plans, since the contribution of external assistance other than that from India was low both in absolute as well as in relative terms, the Plans were essentially formulated on the basis of budgetary support (both internal resources and assistance from India). As and when assistance from other external resources were finalized these were added on to the original Plan which did not amount to any significant disruption of the Plan's structure. In view of the larger role that assistance from the UN system, other multilateral agencies and bilateral donors other than India is expected to play in the Fifth Plan, the earlier approach to Plan formulation is no longer tenable. For the first time, therefore, the Fifth Plan presents an integrated picture of the entire planned efforts and all programmes and projects being included along with the resource mix in each case.

DOMESTIC RESOURCES

5.11.  The overall contribution from the domestic resource mobilization has been projected at Nu.

942.44 million which is 21.7% of the overall Fifth Plan outlay and amounts to a substantial step up of the overall Plan that is being funded from internal resources. Historically in absolute terms, internal resources have more or less doubled in every Plan period and the trend is evident in the Fifth Plan also. However, more important, the contribution of various sources of revenue in the Fifth Plan is expected to undergo major structural changes. As against a contribution of 12% to domestic revenues from direct taxes in the Fourth Plan, the share of direct taxes to domestic resources in the Fifth Plan is expected to rise to 35%. A decline is expected in the contribution of indirect taxes from 43% in the Fourth Plan to 35% in the Fifth Plan. A similar decline in non tax revenues from 43% to 30% has also been projected.

5.12.  Exercises on domestic resource mobilization for the Fifth Plan have been carried out in great detail. The broad assumptions made are:

(a))Most revenue bases would grow between 3% to 5% in real terms;

(b)The effect of price escalations which would increase revenue in real terms has not been taken into account.

(c)In a number of cases the tax potential from existing measures is much larger than current yields owing to the inadequate collection of machinery. Improvements in collection machinery are being effected and would lead to increase in tax yields by 1983/84 or 1984/85. It is recognized, however, that inspite of these improvements, some shortfalls would take place and the full potential would not be tapped. Projections have accordingly being discounted.

Table 39  ANNUAL PHASING f EXPENDITURE AND DEFICITS 1981-87 (ESTIMATES)

1981/82 1982/83  1983/84  1984/85     1985/86  1986/87    Total

(A)  DIRECT TAXES

5.13.  Direct taxes would be the fastest growing element in domestic resources mobilization Although existing taxes would also grow--rising by 114% between 1981/82 and 1986/87--new taxation measures would contribute almost 40% to the total revenues from direct taxes. The major areas of increase would be in royalties especially from forest which is expected to go up almost by 900% in view of the likely increase in logging to feed the proposed forest-based industries The second major jump would be in the area of corporate taxes introduced from 1982/83 which :overs at present only a selected few ventures but will be gradually expanded to cover most undertakings in the Fifth Plan period. The turnover tax is also expected to rise rapidly with the crease in the rate of tax proposed and expansion of commercial activity. I lost of the taxation measures introduced in 1982/83 would increase yields in future years especially as new investments me on stream.

(B)  INDIRECT TAXES

5.14.  The contribution of indirect taxes is expected to amount to 35% of total revenues. Now w measures are proposed and the yields from existing taxes are expected to go up by 29% tween 1981/82 and 1986/87. A sharp jump is expected between 1981/82 and 1982/83 owing to increase in the collection of excise of distillery products which will stabilise in future years.

NON TAX REVENUES

5.15  A major change in the structure of non tax revenue is expected in the Fifth Plan. 88% e total contribution of the non tax revenue would be from dividends from Government owned commercial and Industrial dertakings. The earnings of service departments a proportion I non tax receipts is expected to decline progressively and would amount to 20% of the total non tax revenue in the Fifth Plan. One reason for this is the change over from the gross budgetary system followed in the case of these undertakings in the past to the net budgeting system in which net surpluses or deficits are recorded. The other and more important cause will be because of the revenue generated from the investments being carried out in commercial and industrial ventures in the Fifth Plan. Although the share of the contribution of these new ventures would be 30% of the total dividends contribution for the Fifth Plan as a whole, the contributions are expected to rise rapidly as these new ventures come on stream. From no contribution at all in 1981/82, these new undertakings are expected to contribute Nu. 42.071 million by 1986/87 viz. 55% of the total dividends. It must be kept in mind,        however, that the fundamental assumption in this projection is that external assistance for such investments would be forthcoming.

Table 40  REVENUE ESTIMATES FOR THE PERIOD 1981/82 TO 1986/87

Source of

Revenue                  1981/82     1982/83      1983/84     1984/85      1985/86  1986/87    Total FifthPlan

A.  TAX REVENUE

1. NON-TAX REVENUE

Earning of

Total Non-Tax

Revenue                        31.654       28.739      34.506     36.893      67.315     85.971      285.078

GRAND TOTAL 101.172   121.372    140.882    150.963   196.403   231.648         942.440

5.16.  A separate provision had been made for borrowings from internal financial institutions to the tune of Nu. 200 million. This is a major departure from the past when borrowings from domestic financial institutions was negligible. These borrowings, however, have been accounted for outside the framework of domestic resource mobilization so as not to disrupt the picture of the contribution of Government revenues to the Plan.

INDIAN ASSISTANCE

5.17.  Indian assistance, most of it in the form of a direct budgetary grant, has been traditionally the main source of external assistance and has generally doubled in each Plan period. In the Fourth Plan the total Government of India grant for development was Nu. 853 million (excluding the assistance for the Chukha Hydel Project) amounting to over 81% of the total external assistance. In the Fifth Plan, the Government of India assistance committed is Nu. 1340 millions, a step up of 57%. Of this Nu. 1220 million i.e. 91% would be in the form of budgetary support and the rest, project tied. In relative terms, however, the share of Indian assistance to total external assistance (including the resource gap) would decline to about 42%. This is to be expected as more and more international donors would be likely to contribute to Bhutan's development efforts beside, increase in its own internal revenue.

5.18.  The figure for Government of India assistance refers only to the development grant and excludes the assistance to the Chukha Hydel Project which is in the form of part loan, part grant. In the Fourth Plan, Government of India also contributed, outside the Plan, to the Penden Cement Plant and the Area Development Project, Gaylegphug. Apart from such contributions there are other non plan contributions such as the excise duty refund, the 1949 treaty payment, police subsidy etc.         In addition, a number of Government of India Agencies fund, there own activities in Bhutan directly out of their own budget. These flows are however, unrecorded.

5.19.  The untied nature of the India assistance permits a great deal of flexibility in overall budgeting. Taken together with the contribution from internal resources, this forms the budgetary support element of the Plan.

INTERNATIONAL ASSISTANCE

5.20.  International Assistance began to be of significance from the Third Five Year Plan. The total assistance received in the Third Plan mainly from the UN system and under the Colombo Plan, amounted to US $ 1.98 million or Nu. 15.8 million. There were only four Agencies in involved. In the Fourth Plan, nine Agencies contributed US $ 24.21 million or Nu. 193.7 million which was  more than a twelve fold jump from the assistance received from International Agencies in the Third Plan. Starting from a low 3% contribution to the total Plan effort in the Third Plan period, International Agencies contributed 19% of the total Fourth Plan resources. In the Fifth Plan the international assistance committed so far stands at Nu. 521 millions a two and half times jump from that of the Fourth Plan. This however, amounts to 12% of the overall Plan outlay and involves so far 14 Multilateral Agencies, 6 Bilateral donors and 2 non-governmental organizations. In addition, negotiations are in an advanced stage for additional assistance of Nu. 357.381 millions.

The resources gap of Nu. 1335 millions is also expected to be met by international assistance including borrowings. Assuming that this entire deficit is covered, almost 43% of the overall outlay will be from International sources.

Table 41  INTERNATIONAL ASSISTANCE (EXCLUDING FROM INDIA) COMMITTED UNDER NEGOTIATION FOR THE FIFTH PLAN (.1981-87)

Nu. million

Total Multi-Bilateral               52.917         476.253          6.900            62.100

B.BilateralAgencies

5.21.  Another important feature of the Fifth Plan is the role that borrowings from International Institutions is expected to play in the financing. A loan of Nu. 62.10 millions has already been contracted from IFAD for agriculture development. Loans from the Asian Development Bank and the World Bank are in an advanced stage of negotiation and are likely to exceed together Nu. 500 millions in the Fifth Plan period.

AID MODALITIES

5.22.  International assistance has so far been project tied and before the Fifth Plan, entirely  consisted of grants. This presented no repayment problems and has been extremely useful in meeting foreign exchange requirements. With the Fifth Plan for the first time, assistance by way of loans is expected to become significant. Besides, budgetary support which has been the most substantial part of Plan financing in the past will now be only about half of the total outlay and after meeting the maintenance expenditure which perforce has to come from budgetary support, only about Nu. 1119 millions will be available from budgetary sources for investment i.e. 35% of the total investment component. The question of aid modalities therefore has become one of paramount importance for the Government as the implementation of the Fifth Plan is integrally linked to the smooth flow and administration of external assistance.

5.23.  The country's external debt at the beginning of the Fifth Plan was limited to 40% of the

expenditure so far incurred on the Chukha Hydel Project and the expenditure so far incurred from the U.S. 7.2 million IFAD loan. Repayment on account of Chukha is linked to the sale of power to India on completion of the project itself. The IFAD loan for Small Farm Development is on highly confessional terms, with a long repayment period. There are also minor loans that have been borrowed from financial institutions within the country. However, these are small and related to specific projects and will soon be repaid in full.

5.24.  For the implementation of major investment projects in the Fifth Plan, the Government  accepts the fact that a substantial portion of the assistance required may come in the form of loans. However, the Government would prefer such loan assistance on confessional and extremely favourable terms. This is dictated by the fact that the Government would like to avoid having a debt servicing and repayment problem, particularly in foreign exchange, as the export sector is relatively undeveloped and foreign exchange earnings limited. Moreover, the objective of maximising the generation of the internal resources in the country is linked closely to the generation of revenues from the major investments envisaged in the Plan.

5.25.  Anticipating the problems of debt servicing and repayment, the Government has carried out an exercise to determine the long term foreign exchange position of the country, in particular relating  to hard currency. Bhutan currently has a reserve of about- US $ 10 million and India rupees 200 million. Assuming that the assistance for the bulk of the investment projects in the Fifth Plan is received as loans, and is on confessional terms, it is estimated that Bhutan's debt servicing and repayment liabilities by 1986/87 will be in the region of US $ 0.15 million annual. This figure takes into account the long gestation period of most major projects and the fact that the grace periods on almost all loans will still be in effect. By the middle of the Sixth Plan, however, the debt servicing and repayment liabilities are likely to grow rapidly. Therefore, special attention is being given to the accumulation of hard currency reserves and to enhancing the hard currency earning capability of the economy.

5.26.  Over the past few years, the Government has been trying to concentrate the efforts of donors  in particular fields or sectors where their experience or technology has been preferred within the context of Bhutan's development. Efforts will be continued to concentrate the assistance of specific donor countries within a particular sector and the coverage of other sectors and projects by the same donor will be considered only if the resources available are in excess of the requirements of projects already being supported.

5.27.  In terms of the modalities of assistance, the flexibility provided by the Indian aid has been greater than that of the assistance from other sources, as it could be utilized to cover the local costs and the recurring costs of development programmes. Given the present low level of contribution made by internal resources to the developmental expenditure, the importance of external assistance in meeting local costs, in particular the recurring costs of developmental activities, cannot be over emphasised. As the investment expenditure of the Government is going to increase sharply in the Fifth Plan, the local cost implications of these activities will continue to be an area of concern. The Government, therefore, feels the need to request donor countries and agencies to provide financing covering all the elements of the cost of a project or programme, including maximum coverage of local costs.

5.28.  Most major multilateral donors and particularly the UN system, have so far focused the

attention of their programmes on technical assistance. While technical assistance programmes are important for development, it is now necessary to give capital assistance greater importance.

Technical assistance and consultancy services should form only a small part of the total programme package, with the major share being devoted to the financing of equipment and operations. i This should also include the maximum coverage of expenditure to be incurred locally.

5.29.  As the successful implementation of the Fifth Plan is linked closely to the full mobilization of international assistance, the question of the predictability of assistance flows is of utmost importance. In this context the procedure followed by India which commits assistance at the beginning of each Plan, and in UNDP Country Programmes which have annual Indicative Planning Figures for a 5 year period is important and useful, as these programmes can then be dovetailed with the overall plan of the country, and in addition this gives a certain level of predictability in resource forecasting. Assistance programmes covering the full period of the Plan or atleast a period of a few years, should be developed by all major donors.

5.30.  In addition, the question of appropriate technology will also need to be studied taking into account all the necessary factors so that the country can avoid the technological pit falls which have afflicted many other developing countries. In this context, the Government has already embarked on an equipment standardisation programme to facilitate proper operating and maintenance activities within the country. In the first instance, this would cover general equipment, and then slowly be expanded to cover more sophisticated equipment. This is a factor which donors will have to  consider in particular, as the need to receive united assistance will arise in many cases.

5.31.  The gestation period between the initial request and the final disbursement of the project and programme assistance should be as short as possible, and not involve a long drawn out process involving various stages of investigation and approval. During the Fourth Plan period for instance, some of the assistance for which there was an initial approval could not be used and had to be carried over into the Fifth Plan period because of the lengthy procedures adopted by some donor agencies and countries, which in some cases took upto 3 years. Such delays are particularly harmful in the case of Bhutan where the number of projects and programmes in a particular sector are limited and, therefore, a delay in even one causes significant setbacks. Moreover, delays inevitably lead to cost escalations which add to further drains upon the already limited budgetary resources.

GROWTH AND DISTRIBUTION IN THE FIFTH PLAN

5.32.  Table 42 gives the estimated GDP for 1986/87, i.e., at the end of the Fifth Plan. This is based on the physical targets arrived at for the various sectors. The estimated GDP for 1986/87 works out to Nu.1673 million--an average annual rate of growth of 8.5%. Taking the estimated rate of growth of population at 2%, the per capita rate of growth works out to 6.5%. With an estimated population of 1.31 million by 1986/87, the per capita income in 1986/87 at real prices would stand at Nu. 1277.

Table 42  COMPOSITION AND GROWTH OF GDP, 1980/81--1986/87 (Nu. in

million,constant 1980/81 marked prices)

Average Annual Growth Rate

7.7

5.33.  The rate of growth projected in the Fifth Plan is by no means high in terms of the absorbtive capacity already created in the economy. The thrust of investment in increasing the value added component of natural resources in the Plan has itself an inbuilt high growth rate since the overall base of manufacturing is low. As may be expected, this sector is likely to have the highest growth rate of around 22%. Services, in keeping with the growth of other sectors, is expected to have the second largest rate of growth at 12.5%. The main component of this would be the completion of the Chukha Hydel Project and the resulting phenomenal jump in power generation. While the overall rate of growth of agriculture and allied activities is estimated at 7.5%, there are two elements in this which require comment. The first is the rate of growth for agriculture alone, is 11.7% and is due to the emphasis in the Plan in achieving self sufficiency in foodgrain production as also the likely large increase in cash crop production much of which will come from orchards already planted. The second point is the negative rate of growth in forestry. This is due to the fact that sale of timber is likely to decline in absolute terms with the setting up of forest based industries. Although an  increase in harvesting is visualised in the Plan, much of its will be the stock for these industries and  a part of the original contribution will be registered in the manufacturing sector. As no major expansion of the government machinery is planned and in fact, Government policy is now to stringently control recurring cost, the rate of increase in these activities is very small and their share in GDP is expected to decline. The following table gives the growth rate and changes in the contribution of the major sectors during the Fifth Plan period.

Table 43

5.34.  At the end of the Fifth Plan period, the population is estimated to reach 1.31 million. Although no estimates are available on the rate of growth of population in the urban sector, in recent years urban growth may be expected to have been of the order of about 15%. This, however, is likely to decline somewhat with increasing prosperity in the rural areas and the high escalation in the rents

prevailing in the towns. A conservative estimate of the average annual rate of growth of urban areas can be taken at about 10%. Urban population in Bhutan is, therefore, likely to touch 270,000 at the end of the Fifth Plan period. A quick exercise carried out by the Planning Commission indicates that by 1986-87 about 25% of the total population would be engaged in the modern sector and the balance of 75% in traditional rural activities. Although the terms of trade of those engaged in the modern sector would be superior to that in the traditional sector, this is conscious decision of Government so that there is an appropriate movement of labour to the modernector. Nevertheless, the ratio of GDP accruing to those engaged and the traditional sector and those in the modern sector would remain more or less at the ratio of 2 :1 prevailing at the beginning of the Fifth Plan. Since the population in the modern sector would be substantially smaller, per capita income would be almost twice that of the traditional sector. However, rural incomes are expected to go up by over 66% during the Plan period.

5.35.  The total investment expenditure (at 1980/81 prices) and therefore, also the increase in capital stock of the country during the Fifth Plan period, is around Nu. 3,200 million. If this is related to the increase in GDP between 1980/81 and 1986/87 of about Nu.653 million, and estimated average capital output ratio of about 5 :1 emerges for the Plan as a whole (both investment expenditure and net income exclude the figures for Chukha Project which by its enormous size relative to the Plan and high capital intensity would distort the figures). Although this ratio seems to be on the high  side, it is quite consistent with the approach taken in the various programmes and projects for increasing the capital intensity of production techniques in the light of the labour constraints.

Chapter Vl   SECTORAL PROGRAMMES IN THE FIFTH PLAN

INTRODUCTION

6.1.     Table 44 below shows the sectoral allocation of expenditures under the Fifth Plan distributed between central departments and dzongkhags. The most notable changes over the Fourth Plan are  the increase in the shares of industry and power, and the relative decline in agriculture. As can be seen, almost 26% of the Plan is to be implemented through the districts. These decentralize expenditures comprise about 36% of the recurrent expenditures, accounted for mainly by the expanded dzongkhag administrations and the decentralization of services like primary education and health, but about 22% of the capital expenditures. The comparatively small share of capital expenditures reflect the relatively simple nature of most of the schemes being undertaken under the dzongkhag plans--minor irrigation, livestock breeding services, primary school buildings, basic health centres, feeder roads, suspension bridges, etc. as well as the fact that costs exclude the   manual labour input to the schemes. It also reflects the decision to retain all projects important in the national context under central supervision. Thus, the involvement of the dzongkhag is low in      areas like industries and main roads, but relatively high, in areas like education and health. In general, apart from the large-scale industrial projects, the types of projects proposed in the Plan are relatively simple and appropriate to Bhutan's needs and current level of development.

AGRICULTURE

6.2.     The past two decades of planned development leading up to the Fifth Plan have resulted in the creation of comprehensive infrastructure in the agriculture sector and the opportunity for a vigorous thrust in agricultural development during the Plan. As a result, for the first time, it has become possible to specify quantitative targets of production and very clearly spell out objectives. The objectives of agriculture development in the Fifth Plan, are as follows:

1. Achieving self-sufficiency in foodgrains production;
2. Increasing steadily the incomes of the farming community through the diversification of production, primarily cash crops;
   1. Improving the overall nutritional status of the population;
   2. Increasing improved seeds, production, and achieving self-sufficiency to the extent possible.

Table 44  FIFTH PLAN SECTORAL ALLOCATION OF EXPENDITURES

1) Including Irrigation and Food Corporation 2)Excluding Chukha 3) Including Trade and Commerce 4) Including Urban development 5) Including Non-Development Sectors.

6.3.     The major agricultural production targets for the Fifth Plan period are specified in Table 45. The rise in production is mainly expected from an increase in yields, with only a small expansion of about 20,000 acres in the cropped area, being envisaged. Total cereal production is expected to increase from the present level of 163,700 MT to about 204,800 MT in 1986-87 (gross). The major increases are in the production of paddy and wheat (including barley) which are targeted to reach 84,500 MT and 22,500 MT respectively by the end of the Plan. The relatively low increases in maize (5%) reflect the more limited opportunities in dry land farming, as well as the conversion of 8,500 hectares of dry land to wet land. In cash crops, the major increases expected are to be in those already extensively developed--potatoes from 25,000 MT to 50,000 MT, oranges from 25,000 MT to 53,000 MT, apples from 3,300 MT to 8,800 MT and for Cardamom from 2,800 MT to 4100 MT.

6.4.     The total outlay for agricultural development is the Fifth Plan is Nu. 211 million. The major programmes are those for farm mechanisation, plant protection, integrated area development in the Western region, and soil conservation and land development in the Southern region.

Table 45  OUTLAY: AGRICULTURE SECTOR (1981-87) Nu. in million

Fifth Plan Outlay

6.5.     As mentioned earlier, previous increases in production were largely due to increases in land brought under cultivation. The limits of this have now been reached, given the labour shortages and limited land, and, a major shift in strategy involving the increasing intensity of cultivation is to be introduced in the Fifth Plan. Future production increases will therefore, come from increased Iabour productivity arising out of better quality inputs--improved seeds, fertilizers, plant protection measures, more intensive cultivation through the mechanisation of farming operations, and through improved cultivation techniques. Programmes have been proposed in the Fifth Plan to meet these needs. To meet the increased demand, the agricultural support infrastructure through already comprehensive, will have to be not only aimed at enhancing the delivery system, but increasing the production of seed and plant material in departmental farms and a more sophisticated approach to extension.

IMPROVED SEEDS/PLANTS PROGRAMME

6.6.     The programme for multiplication and supply of improved seeds and plants is being under- taken in all dzongkhags to meet the expected requirement of seeds in the country. It is hoped to achieve self-sufficiency in quality seed and plant material through this programme, and also to produce surpluses to support the establishment of a seed export industry in the near future. Each dzongkhag will register progressive farmers as seed growers. farmers' participation and cooperation will be brought about extending incentives in the from of remunerative procurement rates for multiplied seed and the recovery of the costs of nucleus seed only at the time of procurement Technical know-how will be provided to the seed growers by the agricultural extension personnel. The nucleus seed will be produced in the departmental agricultural farms. In the Fifth Plan period, it is expected that 5,200 MT of improved seed and 4.1 million fruit plants and rhizomes will be distributed.

SOIL FERTILITY

6.7.     The use of improved seed does not by itself increase productivity unless adequate nutrients are applied. Soil fertility will be improved by increasing the use of chemical fertilizers and by promoting the use of farm yard manure. For the latter the construction of compost pits will be            encouraged through subsidies. All extension centres will be used to supply fertilizers and give guidance on appropriate types of fertilizer, dosages, etc. for different crops and soils. The transport costs of supplying fertilizers to the districts will be subsidised by the Government. At the local   level, the procurement of green manure seed, binomial and trace elements, their distribution and sales (including chemical fertilizers) will be done by the dzongkhag authorities. The Department of Agriculture will procure fertilizer on the basis of Dzongkhag requirements and manage the storage and distribution. It will also be responsible for recommending new/improved types of fertilizers, their application and other related matters, and the overall progress and monitoring of the pro gramme. The Fifth Plan target for distribution of chemical fertilizers and micronutrients is 2,810  MT while the target for construction of compost sheds would be 127,000 nos.

FARM MECHANIZATION

6.8.     One of the main impediments to increasing cropping intensity is the labour shortage which takes on critical proportions during the major operation of transplanting/sowing and harvesting of cereal crops. In older to overcome these shortage, simple tools and manual/power-operated equipment is to be introduced. The programme will mainly consist of the sale of tools and equip ment at reasonable prices. To meet the shortage of trained manpower required to operate  agricultural machinery, a training component has been provided. A hire service scheme will also be operated at the dzongkhag level on commercial basis. The training to be given to farmers about the utilization of machinery will be organised every year based on the equipment in use in a given area. To support the propagation and utilization of farm machinery, this programme will be supported by the setting up of Agriculture Machinery Centres on a regional basis where hire, repair and maintenance services, and the production of some tools will be undertaken. Small repair and maintenance unit will also be set up in some of the dzongkhags. The physical targets for the plan include the procurement for sale or hire of 35 tractors, 112 power tillers, 1,261 manual and powered machinery items and other improved tools. 612 farmers will be trained as machine operators and 21 field workshops will be established.

PLANT PROTECTION

6.9.     It has been estimated that 15% of cereal production, 20% of cash crops (50% in the case of apples and oranges), is lost due to inadequate plant protection. This programme therefore, aims at  the reduction of these losses which are due to crop diseases, pests and weeds. Preventive and curative plant protection measures will be carried out free of cost through the extension personnel in the dzongkhags. Each dzongkhag will be allocated funds to purchase equipment and chemicals  based on the area to be covered. One plant protection supervisor who will control the programme  has already been provided in each area. The Department of Agriculture will standardize items regarding equipment and chemicals, introduce new products and co-ordinate plant protection activity in the event of epidemics or emergencies. It is estimated that during the Fifth Plan an area of 688,000 hectares under field crops and 24,000 hectares under orchards will be covered.

RURAL CREDIT

6.10.  Most of the direct subsidies to farmers that were extended during the past Plan periods for major inputs like seeds, fertilizers and machinery, as well as for cash crop expansion, have been reduced or eliminated. The impact of this has been reflected in a lower take off of inputs, with even the well-to-do farms households reducing their purchases of inputs, due to the increased prices. In order to help the poorest of the farming community to buy seasonal inputs like seeds tools, and fertilizers, credit in the form of short-term loans at low interest rates is to be extended. At the national level a committee has been set up to supervise the implementation of this scheme. Based on need and repayment capability of farmers, short, medium and long term loans amounting to Nu. 1,000/-, Nu. 3,000/- and Nu. 5,000/-; at interest rates of 6, 8 and 12% respectively, will be given. In order to ensure that loans are not misused, they will be given against purchase of inputs rather than in cash. A credit committee at the dzongkhag level will take the responsibility of screening applications, disbursing loans and monitoring the utilization. The task of obtaining repayment of the loan within the stipulated period will rest with the dzongkhag authorities. The dzongkhag will also ensure that adequate stocks of all inputs required for effective loan utilization is maintained. A disbursement of Nu. 10 million is planned in the Fifth Plan period.