Bhutan. Land of the dragon

Sherabla Lhundup is a young farmer living in Ngalangkang, a tiny village high in the Himalayas in the heartland of Bhutan, the third poorest nation on earth. Like most other Bhutanese, Sherabla is living in a medieval time warp, the result of a centuries-long, self-imposed isolation that was the only defense available to this small kingdom wedged between India and China. Sherabla still tills his rugged land with an animal-drawn hand plow and donates a large portion of his annual harvest to the village lama as a kind of feudal tithe.

Although there are no telephones, roads, or electricity connecting Sherabla to the outside world, or even to Thimphu, his nation's capital, more than a hundred miles away, he has gotten wind of his country's efforts to catch up to the 20th century. And he is eager to join in.

But one of the dilemmas facing the development Bhutan cautiously embarked on 20 years ago is that the ideas have spread faster than the country's infrastructure.

More than three-quarters of Bhutan's people are illiterate. Sherabla is very concerned about his children's education. ''I want to send my children to school , but who will take them every morning and evening across 18 kilometers of mule track?'' he asks sadly.

Last year Sherabla jumped at a visiting agricultural expert's suggestion about growing cash crops, but by the time he had hauled potatoes from Ngalangkang to the Indian border for sale, the transport costs had eaten up all his profits and then some. So until access roads are built, he has gone back to growing wheat and barley, which keeps him poor but self-sufficient. Bhutan's isolated independence

Since the 17th century, Bhutan has kept to itself, geographically locked into 18,000 square miles of mountainous terrain and culturally bound to the Lamaist tradition of Buddhism espoused by the Dalai Lama of Tibet. Until the institution of a hereditary monarchy in 1907, Bhutan was ruled by powerful lamas, who from their hilltop monastery-fortresses called ''dzongs'' preserved the country's security and unique culture.

Although the chief lama's role is now subordinated to the king's, the monks still wield considerable influence in the administration of the country's ancient legal codes and the daily lives of the Bhutanese. Lamas are requested and paid to pray at every birth, housewarming, marriage, illness, and bad omen. Bhutan's present monarch, the British-educated bachelor King Jigme Singye Wangchuck, waited two years for his coronation day in 1974, because that was the date the monk astrologers deemed auspicious.

The Chinese takeover of Tibet in 1959 convinced King Jigme's father that the time had come to open the Shangri-La kingdom to the outside world.

''Until the 1960s we followed a policy of complete isolationism,'' explained the young monarch in an interview earlier this year. ''We had no choice. And because we did, we kept our sovereignty and independence.''

Despite strong opposition from the lamas and other traditionalist-minded aristocrats, King Jigme set Bhutan on a path toward modernization with a series of five-year development plans beginning in 1962.

Hampered by a lack of financial resources, manpower, and expertise, and by a strong determination not to lose its Lamaist culture, change is coming slowly to Bhutan. ''We must be very selective about what we do. Once you start down one path in a situation like ours, there can be no going back,'' explained Ugyen Tshering. Armed with a recent degree from the University of California at Berkeley, he is undersecretary of planning.

Despite the caution, international development experts are impressed by the strides Bhutan has made already. ''They are moving much faster than I would have expected,'' said Tilak Malhotra, the United Nations Development Program representative in charge of a $24 million development budget for the 1981-86 period. ''They can afford to be cautious,'' Mr. Malhotra pointed out, ''because they are not working under heavy population pressures such as unemployment or malnutrition.''

Ninety-five percent of Bhutan's work force is engaged in agriculture, but at such a subsistence level that the average per capita income in 1981 was only $ 113. The country's gross national product was $127 million, making it the poorest country in the world after Laos and Kampuchea. Until recently it has been enough to keep the officially estimated 1.2 million Bhutanese in their usual diet of rice, chilies, yak meat, and buttered tea.

But like other developing countries, Bhutan is finding that the urbanization process has increased consumption, outstripping what Bhutanese farmers were able to supply with their medieval farming methods on the limited amount of land suited to agriculture.

In recent years Bhutan has had to import grains and other foodstuffs from India, thereby depleting the $10 million foreign currency reserves the government laboriously built up through tourism and the sale of stamps, coveted by philatelists the world over.

The first step in Bhutan's development was the construction of roads and schools. Two-thirds of the first five-year plan's $15 million budget went to build a road between Phuntsholing, on the Indian-Bhutanese border, and Thimphu, Bhutan's new capital. The Chinese takeover of Tibet provided the impetus for building this first road in the event Indian troops would need access to Bhutan's border with Tibet. India's leading role in development

But the obvious economic advantages to be gained from trade with Bhutan have spurred India to subsidize this project heavily. India has since contributed the lion's share of Bhutan's development, singlehandedly funding the first two five-year plans.

In addition to the financial help, India has provided the manpower required to build the 1,200 kilometers of roads now crisscrossing half the country. Along these new roads there are clusters of bamboo shacks where the Indian road crews live while they dig and scrape their way through the Himalayan landscape.

The Bhutanese are reluctant to discuss this foreign labor, but well-placed sources believe there are at least a quarter of a million Indians working in Bhutan at present. These same sources say there are only 700,000 Bhutanese in the country, contrary to the government's claim of 1.2 million.

Since India annexed neighboring Sikkim in 1974, its presence in Bhutan has been worrisome for the Bhutanese, who are walking a tightrope in their relationship with India between economic dependence and political independence. ''Our most important point is to become economically self-sustaining so we can stand on our own two feet, so our destiny is in the hands of the Bhutanese people,'' said King Jigme, ''Right now we are not on our feet.''

Careful not to antagonize India, with whom it recently signed a trade agreement, Bhutan began diversifying its benefactors under the reign of the young monarch. In 1981-82, more than a quarter of its aid came from United Nations agencies. And Bhutan is actively seeking bilateral aid as well, excluding foreign investment. A self-help development philosophy

''Nothing can change the fact that we are in a vulnerable geopolitical position,'' said Tshering, ''but we will have a lot more freedom if we handle our development ourselves.''

Bhutan has also shifted development priorities from roads and schools to agriculture, industry, and other income-generating projects. With the help of the UN Food and Agriculture Organization (FAO), Bhutan recently set up a number of ambitious projects to reclaim land and increase productivity.

Most of these programs are now run by the fiercely proud Bhutanese themselves , but this is creating problems for both the aid experts and the Bhutanese. The Bhutanese complain that too much of their programs' funds is being swallowed up by the technical experts launching the projects, leaving little for actual implementation.

For their part, FAO field personnel complain that too many decisions are taken by Bhutanese directors who lack the proper training and make drastic errors, thus wasting both time and money.

Despite occasional setbacks, progress is being made.

Less than one-tenth of Bhutan's mountainous terrain is under cultivation, but by renovating old irrigation channels and building new ones, several thousand acres of land have been rehabilitated, increasing the land for cereal crops by 40 percent. Farmers are taught about line planting. They are also encouraged to take advantage of the irrigation channels for rice all year round by growing wheat in the winter, which has boosted production significantly, says Pem Dorji, the director of the small farm development and irrigation project.

Mr. Dorji is proud that his $6.9 million program is funded not by a grant but by a loan from the International Fund for Agricultural Development, ''The first loan my government ever took out,'' he says.

Farmers like Sherabla flock to the locally trained agricultural experts for new improved seeds, pesticides, and advice. Their openness toward progress, FAO experts say, is one of the most important achievements of the programs.

A subtle but telling example of how attitudes are evolving is the secret erection of two government-funded slaughterhouses. Since the Buddhist religion forbids the taking of any life, the very idea of a slaughterhouse is strictly anathema to the principles of the once theocratic kingdom.

Nepalese are brought in for this work, but recently, the local people began mutilating the animals themselves in efforts to provoke natural death. ''The animals were dying in such a brutally slow and painful way that we had to intervene,'' explained Dr. Kinzang Dorji, one of the Bhutan's four veterinarians. ''The monks were opposed but finally they saw the wisdom in looking the other way.''

With FAO help, Bhutan is also developing a forestry industry to convert its richest natural resource into hard foreign currency. But its first commercial effort, the Gedu Veneer Plant, fell victim to development hazards - the plant was built before the roads to the logging areas were started.

Bhutan is trying to harness its abundant river power to produce electricity. A huge and costly hydroelectric plant will go on line at the end of this year, and more than 70 percent of its power will be exported to India.

It is one of the sad ironies of progress that the tea plantation in Darjeeling will probably get Bhutan electricity before Ngalangkang does.