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The potential economic and trade fallout of strained Indo-Candian diplomatic relations | Explained

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File photo:- Canada’s Prime Minister Justin Trudeau, left, walks past Indian Prime Minister Narendra Modi as they take part in a wreath-laying ceremony at Raj Ghat, Mahatma Gandhi’s cremation site, during the G20 Summit in New Delhi, on September 10, 2023.

File photo:- Canada’s Prime Minister Justin Trudeau, left, walks past Indian Prime Minister Narendra Modi as they take part in a wreath-laying ceremony at Raj Ghat, Mahatma Gandhi’s cremation site, during the G20 Summit in New Delhi, on September 10, 2023.
| Photo Credit: Sean Kilpatrick

The story so far: The current strain in diplomatic relations between Canada and India has raised concerns about the impact spiralling onto commercial and economic spheres of cooperation. Negotiations towards the Early Progress Trade Agreement (EPTA), which was to serve as an early transitional step towards the larger Comprehensive Economic Partnership Agreement (CEPA) now stand “paused.” This was widely expected to be sealed in a trade mission that was expected to arrive in India this October — now cancelled. Further concerns relate to the longer-term impact on the larger commercial and economic sphere should relations further deteriorate.

How significant is the trade relationship between the two countries?  

As per the Ministry of Commerce’s TradeStat database, in FY 2022-23, Canada was India’s 35th largest trading partner overall.

Further, as put forth in an earlier joint statement following the sixth Ministerial Dialogue on Trade & Investment (MDTI) in Ottawa in May, Canada-India bilateral trade in goods reached C$12 billion in 2022, growing 57% on a year-over-year basis; of this, the bilateral services trade contributed C8.9 billion to the overall figure.

According to Mohit Singla, Chairman at the Trade Promotion Council of India (TPCI) the trade between the countries is “pretty balanced.” He elaborates that Canada is ranked 14th in imports globally (with a share of 2.3%), but is 32nd in India’s export markets, with a share of 0.9%, currently exhibiting “low potential.” Having said that, he adds that the past two years have seen a sudden upsurge in exports from India at a CAGR of 32%. Other than mineral fuels, categories that have shown strong CAGR in this period include iron and steel, electrical machinery, rubber, nuclear reactors, apparel, pearls, and furniture and plastics, Mr. Singla says.

“This shows a strong surge in confidence by Canadian companies when it comes to sourcing from India across a wide range of categories. Clearly, the momentum has been building as compared to the pre-2020 period, when the overall export CAGR (2013-20) from India to Canada was just around 4%,” said Mr Singla.

From the Canadian perspective, India is a “priority market.” It was the North American country’s 10th largest trading partner. Global Canada (the international diplomacy and affairs department) has also said that “India will be a key partner as Canada strengthens its economic links to the Indo-Pacific under a new, comprehensive strategy for the region.”

How will this impact trade relations? 

India imported merchandise worth approximately U.S.$4.05 billion in FY 2022-23 from Canada and exported about U.S.$4.11 billion worth of goods — indicating a largely balanced trade. India’s primary export items include coal, coke and briquettes, fertilisers, iron and steel, and lentils. On the other hand, India’s major items of export are pharmaceutical products, iron and steel products, organic chemicals and marine products, along with apparel and textiles of varied forms and variants.

The CEPA, which now stands “paused,” was to further take care of “trade in goods, trade in services, rules of origin, sanitary and phytosanitary measures, technical barriers to trade and other areas of economic cooperation”.

Mr Singla notes that, from available data, “Equivalent ad valorem tariff for India is high on dairy products, cereals, meat, fish, cocoa, apparel, textiles etc., which would undoubtedly be areas of interest for exporters,” adding that “to that extent, the FTA negotiations would delay possible easing of trade barriers in these sectors.”

On the other hand, as Mr Singla observes, “most of India’s top exports face minimal tariff barriers, with the exception of cereals and apparels, so a delay may not have a substantiative impact on India’s exports to Canada.”  

What about the investment ecosystem? 

As per the National Investment Promotion and Facilitation Agency’s Invest India, Canada is the 18th largest foreign investor in India..

Several Canadian companies have established their presence in India; this is besides the country’s more important pension funds such as the Canadian Pension Fund (or CPP). As reported by news agency Reuters, CPP increased its investment in the Indian markets to about $15 billion in areas such as real estate, renewables and the financial sector at the end of the previous financial year.

Other big pension funds with sizeable exposure to India include Caisse de dépôt et placement du Québec (CDPQ) — which has investments of about C$8 billion and the Ontario Teacher’s Pension Plan (OTPP) with $3 billion — both until the end of last year. Observers in Canada believe that in the immediate term, their positions might not be at risk. They argue that the tensions could however cause operational inconveniences, as travel may be an issue.

What about education in Canada?  

As per official statistics, Canada has about 1.08 lakh students from India at present. This accounts for more than 37% of its overall international student pool. Canada- based publication The Global and Mailwrote that the international student tuition (fee) is “several times higher than for Canadian students,” adding that it “has become essential to the finances of many postsecondary schools.” Any strain in the relationship between the two countries would not bode well for them.

In an advisory on September 23, the Ministry of External Affairs in India urged Indian nationals and students in Canada to “exercise utmost caution.”

Jeff Nankivell, President and CEO at the think-tank Asia Pacific Foundation of Canada told BNN Bloomberg that the “single greatest economic relationship between the two countries is the inflow of students from India… and if that is diminished, it would have negative implications not just for educational institutions but also for Canadian communities that are hosts to Indian international students.”

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