What a price tag of Doklam standoff

          Mr. Yuji Kuronuma, staff writer of Nikkei Asian Review, derives his argument from his headline “China woos Bhutan with 10 billion in standoff with India”. He quoted no credible sources of such a courtship, and reported that China was offering Bhutan $10 billion(b) in economic assistance to soften its stance and since then Bhutan toned down its allegations that China was violating its territorial claims.

From beginning till end of Doklam standoff, the world knows that Bhutan toned neither up nor down. And it is not fair to put presumed $10 b Chinese economic assistance as price tag on us to an event in which arm forces of two Asian giants were standing face-to-face with guns on their shoulders but pointed downward to the ground. And also $10 b is too arbitrary a figure for serious contemplation (see below). Therefore let us leave aside this as vested message conduit through, or spiced-up rhetoric from Mr. Kuronuma of Nikkei Asian Review, a fairly credible news media. The figure aside the words 'Chinese economic assistance' should ring our bell hard.

It may be innately insane to assume that the Chinese economic assistance will never ever flow into the country and the northern border will remain sealed for all time to come. The issue for us is and will be -- what exactly will be the significance of  the Chinese economic assistance? Even though the tense Doklam standoff has ended for now with "necessary adjustments and deployments according to the changes", the better option for us would be to understand fully the significance of such an economic assistance from north without being carried away and attaching neither too much hyperbole nor dry sarcasm. So let us take a look through following perspectives that, I think, are of very vital effect, the significance then ought to enter into the Bhutanese minds in one form or other (with regard to both unanticipated and current development assistance). 

What comprises Chinese economic assistance?

The Chinese development finance to Africa provides a fair insights into China’s strategic approach to outward investment and economic diplomacy, even if exact figures and in-depth strategies are difficult to ascertain. While  the modern association between China and Africa stretches back to the 1950s, the past decade has witnessed dramatic growth in Sino-African trade. Then it became clear that financial flows do not constitute normal official development aid (ODA) as defined by OECD.[1]

 The Chinese financial architecture is made up of two distinct types of financial flow: ODA and Other Official Flows (OOF). The Chinese ODA comprises three instruments: grants, zero-interest loans and concessional (fixed-rate, low-interest) loans. Under these instruments they finance Chinese government scholarships for students; Chinese medical teams; ‘turn-key’ construction of stadiums, government buildings, telecommunications networks and other infrastructure; technical assistance teams in agriculture and other sectors; short-term training programs; youth volunteers; and material aid (normally Chinese goods). The concessional loans were introduced in 1995. Only large projects with a value of at least US$2.4 million, and that make a minimum 50% use of Chinese goods and services, are funded with concessional loans.

The government-provided finance to Africa falls primarily into the OOF category. China’s OOF in Africa consists of export buyers’ credits, official loans at commercial rates and strategic lines of credit and suppliers’ credits.

So, the $10 b or any package from Chinese purse will not be exactly what you thought it to be. You will know much more about Chinese Development Aid in Africa if you go through the details in Prof. Deborah Brautigam's Report, my source for above summary.

Do we have absorptive capacity?

Any bilateral assistance may initially sound like a good spread of wealth. But it also comes with the spread of influence depending on how effective are the ability to negotiate aid and capacity to absorb assistance by the recipient country. The development assistance is not "one-shot pot-luck lunch". It is a program spread over a number of years and continuation thereafter. We know these well but tend to forget often.

Let us take  Kuronuma's $10 b as example. The Chinese economic assistance, roughly about Nu 650 b, will have to have a spread of at least 10-15 years. The $1 b (Nu 65 b) per year or in project size terms about 2 hydropower projects (of about 600 MW, slightly smaller than Mangdechu Hydropower Project) every year for 10 years will choke us. Or on a loose schedule of 15 years, one Mangdechu[2] equivalent per year for next 15 years will also spill over our brim, to be honest. It makes no sense given our ability in dealing with international issues and capacity to implement projects, and the Chinese probably know it looking at cost and time overruns of our ongoing mega projects.

The economic finances -- grants, zero-interest and/or concessional loans -- need strong in-house capacity for beneficial use of the resources, including for (i) project design and feasibility study, (ii) project execution, management and administration, (iii) financial management and control, and (iv) project operation and maintenance. Strong internal ability to deal with issues and capacity to implement and absorb external funds productively over the period spread across several priority sectors is pre-requisite to improve the country's competitiveness.

If undermined by the ability and capacity shortcomings, the projects will be dependent on deals made at high political levels, our leverage at such levels for all purposes will be insignificant considering our overall standing vis-à-vis theirs. As in Africa the projects will then lack competitive and transparent bidding processes, and most of the work force employed at those ventures will be Chinese. It is difficult to foresee how successful would be the promises of job creation, local employment and technology transfer. Under such configuration it may turn out to be a recipe for degeneration of national interests. As the old saying goes you will only get choked if you try swallow too big a chicken-bone. A size that can be chewed, swallowed and digested is a better healthy option.

And the influence

Compared with China's $3,200 b foreign exchange reserve, $10 b may look like a pocket-change for them.  But in terms of an aid it is a huge amount for any country. For China, aid in Africa has primarily been a diplomatic tool. As a consequence, Beijing offers development assistance to most African countries with which it maintains relations including South Africa, which has a higher per capita GDP than China. Aid is part of a historical and diplomatic narrative, not simply a device for snapping up resources of Africa. And large part of the narrative is influence, which mostly is true for any country that gives economic assistance bilaterally. No bilateral donor is a saint. Who will know it better than the Bhutanese? Or I say to myself, steady man!

The arbitrary figure of $10 b economic aid may even have been coined to instigate a purpose. The purpose could be anything from showing an alternative source of development finance to influencing 2018 election results. The figure may be arbitrary and standoff may have ended but the purpose looks neither arbitrary nor at an end. For all we know the initial purpose of instilling in the minds of people the need for diplomatic relation and development finance alternative may have been achieved, however small.  It is not how much that matters now but mere thought of the needs may prove utilitarian eventually.

The display of strength, power, money and even commonality in religion, language, culture to influence thinking of common people will likely continue Doklam or no Doklam. The stand-off may have been disengaged but the message that the Chinese would like to keep their interest in, and engagement with Bhutan (consequently influence obviously) alive is loud and clear. We better understand it well and think hard how best to deal with the future situations.

Is it all about water?

Water is the most important resource in the world. The Tibetan Plateau holds more ice than any place on Earth that isn't a pole. The glaciers from the Plateau supply most of Asia's rivers and, by extension, some 2 billion, out of total 7.3 billion people of the world.  The region's mountain ice is so great that it's often called the "third pole" or the "water tower of Asia."

As the two giants may figure out how to live together, we need to know how to smartly live knowing well what is at stake.  Bhutan sits on the southern slope of the Tibetan Plateau. As per FAO Bhutan’s total annual internal renewable surface water resources are estimated 78 km³ (78,000 million m³) without accounting groundwater resources (ground water mostly gets drained by the surface water network because of hilly terrain). The internal renewable water resources (IRWR) comprises both ground and surface water. As per the World Bank Bhutan's IRWR of 101,960 m³/per capita is one of the highest in the world.[3] In 2008, total water withdrawal by entire country was estimated at 338 million m³, representing a mere 0.35% of the annual IRWR.

According to the World Resources Institute 33 countries will face extremely high water stress by 2040 (see map below). The water resources management requires years of study, research, data analysis and implementation capacity. The need for a strong institution to take stock of and manage the country’s water resources and watersheds cannot be overlooked at any cost.

Yes, Bhutan's natural resources are important in the region. And our trade balance with Chinese will be one-sided from day one. The inflow of Chinese tourists will not off-set the anticipated import from China. The only substantial potential export I can think of is hydropower subject to overcoming the conditions, restrictions and shortcomings. The current investments in our water resources through hydropower comprise run-off-the-river projects. But should Chinese investments flow into hydropower somehow, the justifications will be more for reservoir projects, that I can tell you, for the reasons of strategic play and their lead on it. Everyone knows Chinese are far ahead on reservoir power generation. The three gorges dam, the world's biggest, with installed capacity of 20,500 MW is a vivid attestation. The question for us would be -- what a difference of perspectives on same issue?

            The United Nations says fight for and control over water resources will get more and more intense in future. Who will know better than the Chinese and Indians because Tibet reportedly provide fresh water for half of the Earth's population through ten watersheds and China keeps it under direct control. And Prime Minister Narendra Modi says northeast is India's "Laxmi" (Goddess of Wealth).

Can we work to make comfortable living in our country that sits on southern slope of Tibetan Plateau and north-east of Indian subcontinent? What concerns me most, as always, is the intellectual development backlog, more than the debt buildup, inhibiting home capabilities to come out small but smart!

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"Half of being smart is knowing what you are dumb about." - Solomon Short

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[1]    The concessionary funding given to developing countries and multilateral institutions primarily for the purpose of promoting welfare and economic development in the recipient country. Funding must be ‘concessional in character’ (i.e. involving government subsidies) and loans must have a grant element of at least 25 per cent, using a 10 per cent discount rate.

[2]      Installed capacity of 720 MW at a cost of $670 million or Nu 43.50 b.

[3]   Asian IRWR average: 3,300 m³/per capita, Bangladesh: 660 m³/per capita, China: 2,062 m³/per capita, India: 1,116 m³/per capita, Nepal: 7,034 m³/per capita and Pakistan: 297m³/per capita.  

GST : Zero-rated Supply?

       The recent introduction of Goods and Services Tax (GST) by Government of India (GOI) makes the whole country unified common market. GST is a single tax on supply of goods and services, from manufacturer to consumer. The input taxes paid (e.g. on raw materials) at each stage are reimbursed in the subsequent stage of value addition. Therefore final consumer bears only the GST charged by the last dealer in the supply chain, with set-off benefits of previous stages. The GST details are at CBEC Website.

       The GST is an all India indirect tax. Indirect taxes are either origin-based or destination-based. Origin-based tax (also known as production tax) is levied where goods or services are produced. Destination-based tax (consumption tax) are levied where goods and services are consumed. In longer-term destination-based taxation benefits less developed states who consume more (so more tax revenue) than what they produce. The disadvantage being that the goods producing states are likely to try to put restrictions on interstate sales to avoid flow of revenue outside their states. This may sometimes hamper the progress of inter-sate trade within the country and affect overall growth.

       Since GST is the destination-based tax, Indian exports are considered as zero-rated supply (meaning no GST charged on export) but Indian imports are levied the same taxes as domestic goods and services adhering to the destination principle in addition to customs duty which is not subsumed in GST. So all exports of goods and services from India to Bhutan from 1 July 2017 are GST-free.

       With my short experience of importing goods from India under GST, I have briefly reviewed here only one aspect, the import of goods (service import and goods and services export aside). The GST for goods is charged at 0%, 0.25%, 3%, 5%, 12%, 18% or 28%. The GST Rate Finder app for both goods and services is available to help find GST rates for all the items.    

       For GST-free export, procedure in GOI Circular No. 26/2017-Customs dated 1 July 2017 gives following two options:

(a)    supplier may supply goods or services or both under bond or Letter of Undertaking (LOU), subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit; or

(b)   supplier may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 (Refunds) of the Central Goods and Services Tax Act, 2017.

       In short, suppliers either provide bond or LOU to GOI with bank guarantees (so GST could be charged by GOI to suppliers later should the suppliers not export or divert goods for consumption within India) for GST-free export to Bhutan or pay full GST prior to export and claim refund following appropriate provisions and procedures. In either case Bhutanese importers will need to provide Exemption Certificate for every import from the Department of Revenue and Customs for submission to Indian tax authorities by suppliers to liquidate outstanding GSTs against their names. Once the Exemption Certificate is given for an import, Bhutanese buyer MUST get GST-free goods or GST refund. There are Indian retailers going around trying to take GST advantage on their side. For instance, they offer 10% or 15% discount on maximum retail price (MRP) (which  already includes GST) for items with 28% GST, and also want Exemption Certificates (but do not talk of GST refund because their bills/invoices do not show GST separately). So when Exemption Certificate is given, they profit (28-10)18% or (28-15)13% from GST alone on Bhutanese buyers account.

       Therefore for export, Indian suppliers need to (i) register and obtain GST registration no., (ii) provide bond or LOU to GOI for GST-free supply or export GST-paid goods and claim refund, and (iii) supply goods under Export Tax Invoice, where GST forgone or charged has to be clearly indicated. The GOI Land Customs Stations at Indo-Bhutan borders rigorously check these documents. 

       Only manufacturers and major dealers/suppliers will take the pain to go through the process (also involves in many cases their own operational system modification) for GST-free export to Bhutan. In some cases Bhutanese buyers may need to push the sellers for GST-free export or GST refund claim. It is difficult for normal retailers to go through the GST-free export or refund claim processes. They would rather treat small purchases by Bhutanese as over-the-counter local sales and charge GST which will eventually be passed onto the Bhutanese consumers. So bulk of the personal and consumer items is likely to be subjected to double taxation, GST in India plus Bhutan Sales Tax (BST). The Bhutanese are too used to local procurement of personal and consumer items from places like Jaigaon, which will mostly be  GST-paid and BST-evaded (most likely) purchases. The reports that all purchases in India will be cheaper because of GST-free provision is misleading.

       The GST is not only an Excise Duty. So the rationale for GOI charging Excise Duty for export to Bhutan and reimbursing the Excise amounts at regular intervals to Royal Government of Bhutan (RGOB) earlier is different. Let us take a look:

        The GST is indirect tax that subsumes Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs (at central level); and (ii) State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the centre and collected by the states), Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling (at the state level). 

       A tax is a mandatory finance charge or levy imposed by the state following the due process to fund public expenditures. Non-payment or evasion of taxes is dealt with in accordance with the law. 

       The Excise Duty is an origin-based tax levied on manufactured goods and is levied on some types of goods (such as alcohol, cigarettes, or petrol) that are deemed harmful to society in one way or other. The excise duty is eventually passed on to the final consumer. So the Excise Duty refund earlier for import from India was mainly because the imported goods that had excise duty tags were consumed in Bhutan and RGOB had to incur expenditures to counter those harmful effects. But the option of levying GST by GOI to Bhutanese consumers and reimbursing it to RGOB is an issue that, in my view, has serious implications. I am neither a lawyer nor constitutional expert. Let them examine if the option is within the purview of our law(s).

       In addition RGOB looking into levy of GST on limited items that are GST-free looks against GOI's zero-rated supply principle, and not farsighted considering cost/benefit pattern of our overall import from India. The Bhutanese consumers will benefit from GST-free import of high GST rated (12%, 18% or 28%) items but that will be offset by the double tax jeopardy mentioned above. The RGOB and the Bhutanese private sector may rather focus on how best to take advantage of Indian zero-rated exports to our best advantage without too much inflationary pressures and on ensuring that the item-specific GST-free advantages get passed onto the final consumers!