India - Bhutan Customs Union :- A Possible Checkmate Move In Himalayas

India - Bhutan relations

Context -

South Asia is one of the most populated regions of the earth. The sub contiental region consists of countries like India, Pakistan, Bangladesh, Bhutan, Nepal, Myanmar, Sri Lanka, Maldives & even China to a geographical extent. The total population of this sub continental region, is around 2.2 billion, which is around 1/3rd of the world's population. Coming from this region, has also resulted in a lot of geopolitical competition between the countries, which has often resulted in tense millitary faceoffs between these nations. One of the 21st century sub regional geopolitical rivalry driving the South Asian Indian subcontinent is undoubtedly between India & China.

One of the tense battlegrounds in this rivalry is in Bhutan. Bhutan and North East India especially Arunachal Pradesh has been a tense battleground between the 2 Asian supergiants. Over the past years, tense faceoffs have occured in Doklam in 2017, the building of dams over Brahmaputra Mahabahu river by both millitary powers, Galwan faceoff of 2020, banning of Chinese apps in 2020 & claims over Indian state of Arunachal Pradesh by China. The one country, that has recieved a lot of attention, between this geopolitical tug of war is Bhutan. 

India - Bhutan Relations background :

Bhutan is a peculiar nation state and is the textbook definition of a country, which is sensitive to its own culture & does not involve itself massively into global affairs of the world. Bhutan enjoys the status as a protected state to India, under a treaty signed between the Kingdom of Bhutan & British India back in 1910, which has still continued today. This had happened after the Chinese expedition of Tibet in 1910 and post the 1962 India - China war which also occured due to the Tibetan issue, between the 2 countries, the ties between India and the Buddhist Himalayan kingdom have further deepened. In the past years, Bhutan's king has also visited many Indian states routinely.

However, since 1972 the countries had a massive change in relationship, including a review of the friendship treaty of 2007 which allowed Bhutan to decide on its own arms imports & Bhutan also ended up joining the UN in 1972 in this time. Prime Minister Narendra Modi was also honored with the Order of Druk Gyalpo in 2025, which shows that despite changes in bilateral relations, the relationship between the 2 countries, extends more than just economic & millitary benefits. The list of visits between different Indian delegations like that of president, prime minister, chief ministers etc.can be found here. 

Trade relations have prospered between the countries in this period from 1972 onwards. The India - Bhutan, Agreement on Trade & Commerce established a free trade framework that laid the institutional foundation for bilateral trade. The overall trade between these 2 countries, rose to around US$ 1,777.44 million which is more than triple since 2014.India due to its superior economic size, enjoys a trade surplus with Bhutan. Since, 2014, India - Bhutan has had a CAGR of around 13.9%. The biggest trade contributor between these countries, is undoubtedly hydropower & infrastructure funding, which has led to a solid economic growth in both these countries. For starters, Bhutan, also grew at 4% in FY 2024, which is impressive given the troubled geopolitical waters of the Indian subcontinent since the coronavirus pandemic.

Customs Union Idea - 

All of this coupled with India - Bhutan friendship treaty of 1949, where Bhutan has allowed India to "guide" its foreign policy creates an opening which many Indian diplomats & bureaucrats are not thinking about. This pertains to formalising the India - Bhutan relationship into a customs union, which will bring in massive economic & diplomatic benefits to both the countries. 

Now, for starters, customs union is a trade agreement between countries that eliminates internal tariffs on goods & establishes a common external tariff for imports from non member countries. The customs union promotes free trade between the members while adopting a uniform policy against external countries. Countries, usually adopt this policy  to improve their economic standing while teaming up with "like minded" parties to corner a bigger power. In a customs union, multiple things come under the agreement, like a common currency, common trade policy, harmonized indirect tax mechanisms amongst other features.

Now, maybe customs union can be seen as a hindrance to multilateral trading system, however, this system has been widely practiced by many countries. The best example of customs union is between Switzerland & Leichtenstein, which has a single currency (swiss franc) & has adopted a common trade policy since many decades now.

In fact, the economic relations between India & Bhutan, has been said to be a part of quasi customs union, as, Bhutan's 90% trade is with the Republic of India, Indian rupee is a legal tender in Bhutan, BHIM UPI is accepted in Bhutan, the only thing missing between the 2 countries is the presence of a unified trade policy & a harmonized VAT system which can be a big diplomatic success for India. Given, India has been on a spree of signing free trade agreements with different countries over the past 3 years with major examples being - Australia, New Zealand, the USA (tentatively), UK, EFTA, EU & UAE being the best mirror of the FTAs that India has signed.

Furthermore, given, the historical proximity  between India & Bhutan, along with the similar cultural proximity with respect to trans Himalayan Buddhism, a proper customs union arrangement will also be accepted sans hostility between the 2 countries. Additionally, geographically, Bhutan can act as a critical refuelling point for Indian armed forces, which can also pave way for additional infrastructure project in the Himalayan country, which can not only prove to be a startegic masterstroke for India but would also enhance connectivity between mainland India & Northeast India, while diversifying the startegic importance from the critical "Chicken Neck" coridoor. Given, that India guides Bhutan in its foreign policy decisions and trains the Royal Bhutan Army via the Indian Millitary Training Team, a customs union formalisation should not be a major challenge

Also, given, that, Bhutan has also recently introduced a single taxation system of VAT in 2022, while replacing Sales Tax & Customs Duty. Bhutan adopting the GST regime of India with some minor changes should also not be a major bottleneck, between the 2 neighbours. Furthermore, to incentivise & deepen  the bilateral relations, between both the countries, Bhutan must be advertised as a tourism spot, by the Indian government & content creators which can prove to be a massive gamechanger for beautiful Bhutan's economy, where tourism contributes to around 6% of the overall GDP.

Furthermore, in a customs union agreement, agricultural export tariffs from Bhutan can be completely slashed to zero, which will allow for controlled competition for products like rice, horticulture & wheat in certain states of Northeast India, which will allow for major productivity boost for India's agricultural sector. Finally, Bhutan's cricket team should be allowed to be a part of India's domestic system like Ranji Trophy, SMAT etc. which will improve the sporting relations between the countries, also as a goodwill gesture, the Faridabad cricket ground in Haryana which has been used for very few matches can be given to Bhutan under a revenue sharing agreement as a home ground, this will be seen as winning over critical optics for the country.

Formalising, a customs union agreement between India & Bhutan, can bring in multiple optical victories for India. India has long been seen as the king of tariffs and the upgrade from a quasi customs union to customs union, will allow India to negotiate more confidently in the plurilateral agreements at conferences such as the MC - 14, which will be a major gamechanger for multiple Indian sectors. A customs union agreement between India & Bhutan, will additionally allow the RBI to internationalise the rupee which is already a legal tender in Bhutan. Such an agreeent will also help, India to strengthen the rupee in today's super charged currency markets, while protecting the Ngulrum from further volatile changes in the currency markets. In fact, India can assist, Bhutan in developing as a financial tax heaven like how Leichtenstein is for Switzerland in today's day & time. India can in fact, even try to lure, international organisations from cities like Geneva, by using Bhutan & Northeast India as a front. Such a customs agreement will further cement India's Act East policy, which has been in existence since 1990s.

Overall, a customs union between the 2 countries is a win - win agreement for the both and the Indian establishment needs to look at this seriously, not only from a trade perspective but also from a perspective of national security, economic security & diplomacy, which is very crucial for the 21st century for the developmental journey of South Asia. This kind of customs union formalisation, will also checkmate the ambitions of an expansionist China & an unpredictable USA in the great long game of Himalayas.