The economy, one of the world's smallest and least developed, is based on agriculture, forestry and the sale of hydro-electric power to India (which is reported to supply 75% of Government revenue). Agriculture, which provides the main livelihood for more than 90% of the population, consists largely of subsistence farming and animal husbandry. Rugged mountains dominate the terrain and make the building of roads and other infrastructure difficult and expensive. Incomes of over Nu100,000 per annum are taxed, but very few wage and salary earners qualify.

Bhutan's main economic partner is India as its border with Tibet is closed. Bhutan's currency, the ngultrum, is interchangeable with the Indian rupee. The industrial sector is minimal, with any production being of the cottage industry type. Most development projects, such as road construction, rely on Indian contract labour. Bhutan's hydropower potential and its attraction for tourists are key resources.

Model education, social, and environment programmes in Bhutan are underway with support from multilateral development organisations, always taking Bhutan's wish for preservation of its traditions into account. The government has made some progress in expanding the nation's productive base and improving social welfare, though detailed controls and uncertain policies in many areas continue to hamper foreign investment. Major hydroelectric projects will lead expansion of the economy.