Introduction

India’s diplomatic engagements in South Asia have been shaped by the Neighbourhood-First Policy (NFP), which emphasizes regional partnerships based on trust, development cooperation, and shared security interests. The Union Budget 2025-26 reinforces this commitment, with ₹5,483 crore allocated for aid to foreign nations, of which Bhutan emerges as the largest beneficiary with ₹2,150 crore. This financial assistance is part of a broader strategy aimed at ensuring political stability, economic growth, and infrastructural development in Bhutan while countering China’s growing influence in the region.

• The recent visit of Bhutanese Prime Minister Tshering Tobgay and his participation in the School of Ultimate Leadership (SOUL) conclave 2025, where he referred to Prime Minister Narendra Modi as his “elder brother” and “mentor”, underscores the deep-rooted ties between the two nations. This article explores India’s financial assistance to Bhutan, the key areas of collaboration, and its broader strategic significance in South Asia.

Financial Assistance to Bhutan and Broader Regional Strategy

Among India’s neighbours, Bhutan stands out as the largest beneficiary of India’s foreign aid, receiving ₹2,150 crore. This significant allocation underscores India’s strategic commitment to Bhutan, particularly at a time when China is actively seeking to expand its influence in the region. Aid to the Maldives (₹600 crore), Myanmar (₹350 crore), and Sri Lanka (₹300 crore) has also increased, reflecting India’s broader regional focus, while aid to Bangladesh (₹120 crore) and Nepal (₹700 crore) remains stable. Afghanistan, despite its ongoing political uncertainties, has been allocated ₹100 crore, indicating India’s cautious yet sustained engagement in development projects.

Countering China’s Influence in the Himalayas

• India’s aid to Bhutan must be viewed in the context of China’s expanding presence in the Himalayas. China has been increasing pressure on Bhutan to resolve border disputes while offering economic incentives to strengthen bilateral ties. India’s continued financial and infrastructural support ensures Bhutan’s strategic autonomy, preventing it from falling into China’s economic orbit, as witnessed in Nepal and Sri Lanka.
• Furthermore, Bhutan’s proximity to India’s Siliguri Corridor—a narrow passage connecting Northeast India to the rest of the country—adds to its strategic significance. The 2017 Doklam standoff between India and China underscored Bhutan’s importance in India’s security calculus. By maintaining strong ties with Bhutan, India effectively prevents Chinese encroachment in this critical area.
• Bhutan’s unique geopolitical position makes it a pivotal ally for India. Unlike other South Asian nations that have oscillated between India and China’s competing interests, Bhutan has remained India’s most steadfast partner. The 2025 budget allocation is not merely a continuation of historical ties but a strategic move to reinforce India's influence in the Himalayas.
• Bhutan serves as a critical buffer between India and China, and India’s financial assistance aims to ensure its political stability, economic growth, and infrastructural development. At a time when China is expanding its presence in Nepal, acquiring ports in Sri Lanka, and making financial investments in the Maldives, India’s deepening engagement with Bhutan signals a clear commitment to maintaining regional primacy.
• Bhutan’s alignment with India in multilateral platforms such as SAARC (South Asian Association for Regional Cooperation), BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation), and BBIN (Bangladesh-Bhutan-India-Nepal) further demonstrates India’s success in fostering regional coalitions that counterbalance China’s Belt and Road Initiative (BRI).

Key Areas of India-Bhutan Collaboration

1. Economic and Trade Partnership

India and Bhutan share an interdependent economic relationship, governed by the India-Bhutan Trade, Commerce, and Transit Agreement (first signed in 1972 and last revised in 2016). This agreement facilitates a free trade regime, making India Bhutan’s largest economic partner.

• Bilateral trade has tripled in the past decade, increasing from $484 million (2014-15) to $1.6 billion (2022-23).
• India accounts for 73% of Bhutan’s total trade.

The ₹2,150 crore allocation in 2025-26 continues to reinforce these trade ties, ensuring Bhutan’s economic stability and its reliance on India for investment, trade, and infrastructure development.

2. Hydropower Cooperation: A Pillar of Economic Integration

Hydropower remains a cornerstone of India-Bhutan economic relations. Bhutan’s economy is heavily reliant on hydropower exports to India, which constitute:

• 40% of Bhutan’s national revenue
• 25% of its GDP

India has played a pivotal role in developing Bhutan’s major hydropower projects, including:

• Tala (1020 MW)
• Chukha (336 MW)
• Kurichhu (60 MW)
• Mangdechhu (720 MW)

Upcoming projects such as Punatsangchhu I & II (2,200 MW) and Kholongchhu (600 MW) will further expand Bhutan’s electricity exports to India, which were valued at ₹2,448 crore in 2022. This arrangement strengthens Bhutan’s economic resilience while securing low-cost renewable energy for India, aligning with its clean energy transition goals.

3. Infrastructure Development

India’s financial assistance extends to border infrastructure, road networks, and trade facilitation centers, ensuring seamless cross-border movement of goods and services. The 2025-26 budget includes provisions for:

• Modern checkpoints to improve trade connectivity
• Development of trade corridors under the BBIN (Bangladesh-Bhutan-India-Nepal) framework
• Expansion of rail and aviation connectivity between India and Bhutan

These initiatives are crucial for Bhutan’s economic diversification and for reducing its dependence on China-dominated trade routes.

4. Digital and Financial Connectivity

India is actively supporting Bhutan’s digital economy through:

• Introduction of RuPay Card and UPI payment systems
• Enhancement of fintech infrastructure
• Cross-border digital transactions for trade and tourism

This cooperation ensures Bhutan remains economically integrated with India, rather than seeking alternative trade routes via China.

5. Regional and Multilateral Engagements

Bhutan’s alignment with India in multilateral forums is critical for New Delhi’s regional diplomacy. Bhutan is an active participant in:

• SAARC (South Asian Association for Regional Cooperation)
• BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation)
• BBIN (Bangladesh-Bhutan-India-Nepal)

These regional frameworks enhance India’s ability to build coalitions that counterbalance China’s Belt and Road Initiative (BRI) in South Asia.

Potential Areas for Future Collaboration

1. Climate Resilience and Renewable Energy

Bhutan aims to become a global leader in clean energy. Future cooperation may focus on:

• Green hydrogen production
• Expansion of hydropower grids for regional energy security
• Joint initiatives on climate change adaptation

2. Digital Economy and Cybersecurity

With the increasing digitization of economies, India and Bhutan could explore:

• Cybersecurity frameworks to safeguard digital infrastructure
• Cross-border e-commerce facilitation
• Collaboration in digital governance and AI

3. Sustainable Tourism and Cultural Exchanges

Bhutan’s tourism policy, which focuses on high-value, low-impact tourism, aligns with India’s vision for sustainable economic development. Strengthening tourism infrastructure and connectivity will further enhance bilateral engagement.

Conclusion

India’s financial assistance to Bhutan in the Union Budget 2025-26 is not merely an economic measure but a strategic declaration. At a time when China is expanding its presence in South Asia, India’s continued support for Bhutan ensures:

• Political stability and economic growth in Bhutan
• A secure buffer against China’s territorial ambitions
• Stronger regional economic integration under India’s leadership

The India-Bhutan partnership serves as a model for regional cooperation, demonstrating how economic interdependence, strategic foresight, and mutual trust can shape the future of South Asia. If current trends persist, this relationship will not only prosper but will also reinforce India’s leadership in the region, ensuring a stable and cooperative South Asian order.