In India-Bhutan Borderlands, An Informal Exchange Rate System Thrives

In this edition of Sambandh Scholars Speak, Saneet Chakradeo interviews Ankur Sharma, PhD scholar in International Relations at South Asian University, on his article “Analysis of a Parallel Informal Exchange Rate System in Indo-Bhutanese Border Towns,” published in the Journal of Borderland Studies, 2019.   

According to the International Monetary Fund (IMF), nine countries currently maintain an exchange rate anchored to a single currency other than the US Dollar and the Euro. Five of these have conventional pegged arrangements: three with the South African Rand (SAR: Eswatini, Lesotho, and Namibia) and two with the Indian Rupee (INR: Bhutan and Nepal). 

While Bhutan and Nepal follow a fixed exchange rate system with India, multiple reports have pointed to the existence of an informal system, primarily based on market values, in the border towns of India and its two northern neighbours.  

In his article, Ankur Sharma studies this informal currency exchange rate system and the underlying dynamics of its coexistence with the official market rate in the borderland regions of India and Bhutan.  Through fieldwork in the towns of Jaigaon, India and Phuentsholing, Bhutan, he uses a unique “Narrative Analysis” methodology to understand the reasons for the existence of this parallel informal system.  

As per the author, the reasons to use this methodology were manifold. While quantitative analysis is a preferred research method in economics, it is restricted by the confidentiality of transactions in the parallel market and the absence of reliable data. Additionally, parallel currency markets generally involve several intermediaries who are physically present in the market on a daily basis, making the actual size of the market difficult to determine. Consequently, interviewing stakeholders – traders, merchants, and residents in the border towns – was the only means available for establishing causation, particularly due to the lack of reliable alternative sources. 

The article takes an important step towards a comparative analysis of border towns by studying the South Asian region in contrast to the previous studies on similar systems of coexisting currency markets in the border towns of South Africa and its neighbours. It proposes a replicable methodology to undertake similar studies that can enhance our understanding of informal exchange rate systems, especially in South Asia.

Saneet Chakradeo: In your article, you explain how the Indian Rupee and the South African Rand are used as currency pegs by the two countries’ respective neighbours. What explains the presence of parallel informal exchange rate systems in border-towns of India and its neighbours, but not in South Africa’s neighbourhood?  

Ankur Sharma: India has followed a bilateral format of currency arrangements with Bhutan and with Nepal, while the Southern African countries have engaged in a multilateral format. Eswatini, Lesotho, and Namibia have pegged their currency to the South African Rand and these four countries are also members of a Common Monetary Area (CMA). The policies of the CMA and their evolution over decades is what differentiates the situation in Southern Africa from the Indian neighbourhood. Research within the field of economics provides several causative factors which lead to parallel informal currency exchange markets. While these factors have been mitigated by the policies of the CMA in Southern Africa, they continue to prevail in the Indo-Bhutanese scenario. 

A transaction without a commission forms an inconsequential parallel currency exchange system with a 1:1 exchange rate. However, it is when a commission is taken that an informal parallel exchange rate is formed. The primary reason for its existence is the acceptance of the Bhutanese Ngultrum (BTN) by Indian traders and their inability to legally convert it into Indian Rupees within India. This allows for the space to be filled by unauthorised commission-based exchange agents as seen recently, when the Jaigaon Police seized around INR 9.10 Lakh (around USD 12,500) from just one local pan shop owner who was engaged in an INR-BTN exchange.  

 Official currency exchange counters have been a major demand of local traders especially in Jaigaon, a facility which is easily available in South African border regions. The South African neighbourhood is not marked by the complete absence of such activities, but it differs in its scale when contrasted with the Indian neighbourhood. Nonetheless, the Bhutanese government and India House (Indian Embassy in Bhutan) have been receptive to the grievances of borderland citizens, and the Bhutanese government, in particular, has been proactive in assisting Indian traders with their currency conversion needs.  

SC: The article mentions the idea of fronting, referred to in an interviewee to describe currency swap transactions of the Bhutanese Ngultrum and the Indian Rupee in the Indo-Bhutanese border towns. What exactly is fronting and what is its causal relationship with informal exchange rates in border towns? 

AS: I personally became aware of ‘fronting’ during the initial research work for this article and it was the interaction with the borderland population during my fieldwork that helped me understand its role in borderland towns and their currency exchange markets. The interviewee had defined fronting as a process, whereby, a Bhutanese who has a license to operate a business in Bhutan and an Indian who seeks to invest and/or operate a business in Bhutan, collude by having the license holder illegally lease the license to the investor for a commission, thereby acting as their “front”.  Fronting as an illegal activity generates earnings mainly in BTN, which is then routed through informal markets located in the border towns and exchanged into INR. The commission of the agents and this cross flow of currency forms a parallel exchange rate system in which the value of INR is mostly appreciated over BTN.  

However, after the article was published in 2019, there have been a few developments. The Bhutanese parliament has now included fronting within the penal code, whereby if it takes place between a Bhutanese and a non-Bhutanese individual, it will be graded as a felony of fourth-degree. This was in response to recommendations from The National Council’s Legislative Committee in Bhutan, who were alarmed by the widespread nature of fronting in the border towns and its spread to other parts of Bhutan. Fronting became further evident during the Covid-19 pandemic when the border between India and Bhutan was closed. This caused most of the shops and businesses in Phuentsholing that were illegally operated by Indians to remain closed while Bhutanese operated shops remained open. 

The Jaigaon-Phuentsholing border market area. Credit: Ankur Sharma

SC: You begin your introduction to the parallel informal exchange rate system citing the case of the India-Nepal border as well but go on to focus on the Indo-Bhutan borderlands. Can the inferences from your study be applied to India-Nepal and other border areas?   

AS: The Indian Rupee and the Nepali Rupee are pegged at 1:1.60 since 1993. There are numerous newspaper reports that confirm the existence of informal variations in the exchange rate occurring within the Indo-Nepal borderlands.  

I believe further studies are required to engage with this topic, which would either substantiate or contradict the causal inferences I have asserted in the article. Each causal inference is specific to the Indo-Bhutan borderlands, and once the inferences are corroborated through similar cases, the inferences could be considered as causal mechanisms that are representative of other borderlands. 

I do recommend South Asian policy makers and scholars to reflect on the study and engage in comparative research with works from Southern and Western African borderland regions. As I also mention in the article, a comparative study of Indian and South African borderlands and their currency markets is a potential step forward. 

SC: Based on your fieldwork in the India-Bhutan borderlands, is there anything in particular, that struck you as interesting and warranted further research? 

The Jaigaon-Phuentsholing route was considered not to have much commercial importance, yet that same route today is seen as the gateway to Bhutan and handles the bulk of the trade between the two countries. 

AS: Archival research about the Indo-Bhutanese borderland is definitely something that can add value to scholarship on the topic. Current literature on Indo-Bhutanese border that utilises archival sources is primarily focused on two aspects – tracing the historical cartographic processes undertaken by the British while finalising the border and analysing security related issues post the Doklam crisis. However, it is the people’s history, a ‘spatial turn’ that centers the borderland population, which requires a deep dive into the archives. It is an under-researched topic, especially when compared to similar work on India’s borders with Pakistan, Bangladesh, and Myanmar. 

A declassified document from the Ministry of External Affairs’ historical division disclosed that Bhutan requested India to cede some areas in Jaigaon in the early 1970s, as it considered the “shanty town which has mushroomed in neighbouring Jaigaon as an eyesore and a risk from the point of view of law and order”. India, however, politely declined the request. As per earlier government sources, the Jaigaon-Phuentsholing route was considered not to have much commercial importance, yet that same route today is seen as the gateway to Bhutan and handles the bulk of the trade between the two countries. Substantial credit for this is owed to the small but robust Marwari business community in Jaigaon. This unique history of the Indo-Bhutanese borderland that utilises Indian and Bhutanese archives and engages with contemporary narratives will be compelling to study in the future.    

 (Photo credits for all images: Ankur Sharma)

About the Expert

Ankur Sharma is pursuing his Doctorate from the Department of International Relations, South Asian University, New Delhi. He is undertaking research on the interaction and the future trajectories among South Asian border towns. He is currently a researcher with the Border Studies in South Asia initiative. He is a co-recipient of the Dr. Ambedkar Award from the Ministry of Social Justice & Empowerment. He can be reached at ace292@gmail.com and at @SincerelyAnkur on twitter.