Bhutan’s Rising Debt Crisis Tied to India-Funded Hydropower Projects

India-Backed Loans Now Make Up 60% of Bhutan’s External Debt Burden

By Dawa Gyelmo, in Thimphu, Bhutan

November 22, 2025

At the 70th birth anniversary of Bhutan’s Fourth King Jigme Singye Wangchuck, Indian Prime Minister Narendra Modi announced a Ngultrum 40-billion (roughly $450 million) line of credit for infrastructure and energy development. While the move signalled strong bilateral ties, an uncomfortable truth lies behind the public warmth. Bhutan’s dependence on Indian-funded hydropower has locked it into an escalating debt trap.

Hydropower loans from India now make up the largest share of Bhutan’s foreign debt, accounting for 60.9% of its total external borrowings. These loans are equivalent to more than half the country’s GDP—about 56.2%, according to the public debt situation report released in September 2025.

As of June 2025, Bhutan’s total public debt has climbed to Nu 303.9 billion, which is 100.5% of its GDP, a level economists often consider a warning sign for financial vulnerability as it shows that the debt is more than the country earns in a year. With 1 Ngultrum equal in value to 1 Indian rupee, this puts the country’s debt burden at around $3.45 billion. The Finance Ministry projects that this debt will rise even further to 113.9% of GDP by the 2025–2026 fiscal year.

Foreign debt forms 90% of Bhutan’s total public debt. This means the country is highly exposed to external financial pressures. Any shift in interest rates or foreign policy, especially from India, could have serious consequences for its economy. Of this, 39.1% consists of non-hydropower loans, largely taken from multilateral and bilateral agencies such as the World Bank, accounting for 36.1% of GDP. The remaining 60.9% of external debt, amounting to Nu 170 billion, comes mainly from hydropower loans extended by India.

This hydropower debt includes six major projects: Punatsangchhu-I, Punatsangchhu-II, Mangdechhu, Nikachhu, Dagachhu and Basochhu (upper stage). It also includes smaller hydropower development loans given to Druk Green Power Corporation by the State Bank of India.

Non-hydropower loans typically carry an average interest rate of 6.5%, but loans for hydropower projects have often been on more expensive terms.

On November 11, the same day Prime Minister Modi announced a fresh line of credit to Bhutan, he and Bhutan’s King Jigme Khesar Namgyel Wangchuck jointly inaugurated the 1,020 MW Punatsangchhu-II Hydroelectric Project (PHPA-II). According to the Asian Development Bank’s 2024 outlook, this project is expected to increase Bhutan’s GDP growth by nearly five percentage points in 2025.

But this long-delayed project comes at a steep price.

PHPA-II was first proposed in 2010 with a budget of Nu 37 billion, financed by India through a mix of 30% grant and 70% loan at 10% annual interest. It was meant to be completed by 2017. Instead, it took 15 years and cost Bhutan Nu 94.45 billion, more than two and a half times the original estimate.

This project was part of an ambitious 2010 plan to build 10,000 MW of hydropower capacity by 2020. That target itself was a revision of a 2006 plan for 5,000 MW, according to Bhutan News Network. But along with the changing targets came increasingly loan-heavy financing terms. Bhutan’s early hydropower projects, like Chukha completed in 1988, were funded with generous terms, 60% grants and 40% loans at 5% interest. But two decades later, when Punatsangchhu-I (PHPA-I) was launched in 2008, India’s financing model had changed: grants dropped to 40%, and loans rose to 60%, now at a steeper 10% interest. In 2010, for PHPA-II, the grant component dropped further to 30%.

Frustration over missed deadlines and runaway costs (expenses that keep rising far beyond the original budget, often uncontrollably) has now reached Bhutan’s upper house. The National Council has urged the government to stop extending project deadlines and re-evaluate the viability of such hydropower ventures.

The Punatsangchhu-I (PHPA-I) project is the most glaring example. With an estimated budget of Nu 35 billion, it was expected to be completed by 2016. Seventeen years later, the project remains unfinished, beset by geological and technical setbacks. Its revised cost has reached Nu 93 billion, nearly triple the original estimate, according to Bhutan Broadcasting Service.

In Bhutan’s eastern district of Trashi Yangtse, the 600 MW Kholongchhu project has seen similar delays. Initially budgeted at Nu 33 billion with a 2020 completion target, the project is now expected to finish only by 2029 or 2030, according to Druk Green.

Bhutan’s history with hydropower cost overruns runs deep. The 336 MW Chukha project saw its costs rise by 197% before it was completed in 1988. The Tala project experienced a 193% escalation. These overruns have become a consistent feature rather than an exception.

The Royal Audit Authority (RAA) has flagged the risks of over-reliance on hydropower for over a decade. In its 2008–2013 report on public debt management, it warned that Bhutan’s debt indicators had already breached the Maastricht criteria of 60% of GDP, a benchmark for fiscal prudence, as reported by The Bhutanese.

The RAA’s 2020–2021 annual report reiterated that Bhutan’s debt profile remains dangerously concentrated in the hydropower sector. It pointed to persistent governance failures, delays in execution, and implementation problems across the projects. Despite assurances that hydropower loans are “self-liquidating” because electricity exports would repay the debt, the RAA cautioned that these assumptions ignore real financial and operational risks.

The hydropower model that once fuelled Bhutan’s revenue hopes now threatens to drag it into a cycle of unsustainable borrowing. With every delay and every cost overrun, the country’s fiscal space shrinks, and its future becomes mortgaged to projects that take decades to deliver returns, if at all.

(Dawa Gyelmo is Newsreel Asia’s Bhutan correspondent.)

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