India and Bhutan maintain one of the most enduring and mutually beneficial bilateral trade relationships in South Asia. The two countries share a rich history of ties that have evolved through common strategic interests into a multi-faceted India-Bhutan Free Trade Agreement. This Free Trade Agreement creates an overall framework for comprehensive duty-free trade, economic cooperation, and sustainable development. Beyond a mere commercial relationship, the Free Trade Agreement reflects an enduring partnership based on mutual respect and common goals for long-term collaboration.
The foundation for India-Bhutan economic cooperation originated with the India-Bhutan Treaty of Friendship, which was negotiated in 1949 and subsequently revised in 2007 to align with contemporary circumstances and further enhance the principle of sovereign equality. Since then, additional trade agreements and protocols have been established to more formally provide for and support free movement of goods between India and Bhutan.
The Trade and Transit Agreement executed in 1972 was also an important step toward defining an operative framework for trade and transit through Indian territory and providing the much-needed access for Bhutan to Indian ports and other infrastructure due to its landlocked geography. India also provides transit services to facilitate Bhutan’s third-party trade through Indian territory, greatly reducing logistical challenges and facilitating Bhutan’s international trade.
Key Features of the Free Trade Framework
The India–Bhutan Free Trade Agreement has the following features:
- Duty-Free Access – Goods produced in Bhutan have No duties applied to them when exported to India (and vice versa), provided they meet rules of origin requirements. Because this eliminates any tariffs, goods from each country can be priced as competitively as possible.
- No Quantitative Restrictions – Trade between India and Bhutan generally has no quotas or quantitative restrictions on either side, thereby encouraging growth by increasing the volume of goods traded.
- Transit Rights – Transit facilities available from India to Bhutan exist for all imports from Bhutan and exports from Bhutan to any third country through designated ports of entry (Kolkata port and Haldia port). These facilities guarantee an uninterrupted arrival of goods to or from Bhutan and to international markets.
- The Indian Rupee is widely accepted throughout Bhutan so that international trade can be settled via a structured system of payment through authorized banks for ease of cross-border transactions.
- As the agreement will continually be reviewed and updated according to changes in economic circumstances, bilateral trade cooperation has demonstrated its flexibility and ability to react to changes in the economy.
Trade Volume and Economic Significance
The majority of Bhutan’s total import and export trade is accomplished with India, which furthermore makes India the largest trading partner of Bhutan. Bhutan’s trade balance typically runs in favor of Bhutan because of their hydropower-exporting activities to India. The electricity produced from hydropower by Bhutan is an important source of revenue for Bhutan’s economy. However, the majority of the energy that Bhutan generates through hydroelectric plants is sold to India at long-term contracts.
India views Bhutan as a great source of clean energy and also sees Bhutan as a stable partner in the region. Bhutan is frequently referred to as an example of sustainable bilateral development, as both countries gain the advantages of infrastructure financing, constructing the necessary infrastructure, and agreements to purchase electricity.
Major Sectors Benefiting from the Agreement
- Hydropower
Hydropower is the single most significant contributor to Bhutan’s GDP and export revenue. India has financed and assisted in the development of major hydropower projects, purchasing surplus electricity and thereby ensuring a steady revenue stream for Bhutan. - Agriculture and Agro-Products
Bhutan exports agricultural products such as cardamom, oranges, apples, and potatoes to India. Duty-free access enhances profitability for Bhutanese farmers and agribusinesses.
- Manufacturing and Small Industries
Bhutanese cement, ferro-silicon, and other mineral-based products find a strong market in India. The agreement enables industrial units in Bhutan to scale production for export without facing tariff barriers.
- Infrastructure and Construction
Indian companies play a major role in Bhutan’s infrastructure development, including roads, bridges, and hydropower plants. The open trade environment facilitates the smooth movement of construction materials and services.
Strategic and Geopolitical Dimensions
Beyond merely looking at the economic relationship, there is a degree of strategic significance regarding the position Bhutan has within the Himalayan region. A high level of economic integration with India enhances political stability and assists both countries in realizing mutual geographic security objectives.
India’s ongoing economic assistance to Bhutan in the form of grants or loans enhances the overall trust relationship between the two countries. In addition, the trade relations between both countries also align with Bhutan’s philosophy of Gross National Happiness (GNH), which focuses on promoting sustainable development rather than only pursuing profit-centred growth.
Legal and Regulatory Aspects
The framework of the trade agreement outlines a clear set of rules governing trade between India and Bhutan as a means to establish a regulatory framework for trade.
To allow for easier trade between India and Bhutan, the trade agreement provides for:
- A clear system for determining whether goods qualify under the Rules of Origin or whether they must be subjected to customs duties and taxes
- Standardised procedures for documenting the movement of goods and, where applicable, certifying their country of origin
- Methods for resolving disputes between the parties
- Designated points of entry and exit for Indian goods entering Bhutan and vice versa
The establishment of an easy-to-use system for documenting and the mutual recognition of documents has reduced the burden of compliance with the typical restrictions on trade between countries.
Future Projections
The future of the India–Bhutan Free Trade Agreement looks optimistic. The two nations are looking to develop their digital connectivity, upgrade their land borders’ infrastructure, and work collaboratively on renewable energies such as solar energy, in addition to hydropower.
Further opportunities for more extensive collaboration on emerging industries can be found in:
- Green Technologies
- Organic Agriculture
- Sustainable Tourism
- Education and Skills Development
- Digital Trade and Fintech
As the South Asian regional trade framework continues to develop, the way in which India and Bhutan work together will create an ideal model of cooperative economic integrative effort built on trust.
The India–Bhutan FTA is not just an agreement on tariffs, but also a manifestation of the long-standing relationship between India and Bhutan based on a common heritage, geography, and future aspirations. It provides Bhutan with duty-free access to Indian markets, enables seamless movement across borders, and allows for cooperation between their economies, which has helped to promote Bhutan’s development and further enhance India’s involvement in the region.
The India–Bhutan FTA serves as an example of how economic cooperation and stability between countries can be achieved through their respective trade agreements during times when trade agreements can become contentious. As the economies of both countries continue to modernize and diversify, there is no doubt that the India–Bhutan FTA will continue to serve as a foundational component of the bilateral relationship for many years.
Sweety Tuli is a legal content writer at Legallands.com, specializing in corporate advisory, legal research, and strategic business compliance. Her work focuses on simplifying complex legal concepts for entrepreneurs, investors, and professionals navigating multi-jurisdictional frameworks, particularly across India and the UAE.
With a keen understanding of corporate law, regulatory affairs, and policy reforms, Sweety contributes insightful analyses on topics such as company formation, CEPA-driven trade policies, taxation frameworks, intellectual property, and digital compliance.
She is passionate about bridging the gap between legal interpretation and business practicality—helping organizations align their operations with legal governance, ethical standards, and global best practices.
Through her articles at LEGALLANDS LLP, Sweety aims to make legal knowledge more accessible, strategic, and actionable for businesses operating in a rapidly evolving regulatory environment.
