Notes

With India-Canada diplomatic ties in a tailspin, business links could see a chill

Contact Counsellor

Last Updated17/10/2024

In one of the most significant escalations of tensions between India and Canada, India ordered the expulsion of six Canadian diplomats on Monday and announced the withdrawal of its High Commissioner to Canada.

The recent escalation in tensions between India and Canada has raised concerns about its impact on economic and trade ties. India has expelled six Canadian diplomats and announced the withdrawal of its High Commissioner. The standoff is affecting critical areas such as Canadian pension fund investments, paused trade negotiations, and the flow of remittances.

India and Canada had been in discussions for a Free Trade Agreement (FTA), which could have provided mutual benefits in trade sectors like garments, leather, machinery, and services. However, the diplomatic conflict has jeopardized these negotiations, with the deal now uncertain.
Missed Opportunity: An FTA could have enhanced export opportunities for India and boosted bilateral economic collaboration.
Impact on Services Sector: The growing services sector, especially in technology and finance, stands to lose from this stalled agreement.

Canadian investments in India, particularly through pension funds, have been significant. With over $75 billion invested, Canadian companies have stakes in key Indian sectors such as financial services, infrastructure, technology, and energy.
Key Investments: Canadian pension funds, including the Canada Pension Plan Investment Board (CPPIB) and Caisse de dépôt et placement du Québec (CDPQ), are involved in major Indian companies such as Kotak Mahindra Bank, Paytm, Infosys, and Nykaa.
Strategic Partnerships: These funds also have business relationships with Indian conglomerates like Larsen & Toubro and Piramal Enterprises.
Resilience of Investments: Despite the tensions, Canadian investors view India as too large a market to abandon. Some suggest that if direct investments become difficult, they could be rerouted through intermediaries like Singapore or the UAE.

Though India and Canada have a modest trade relationship, accounting for about 1% of each other's total trade, the sectors involved are vital for both countries.
India’s Exports to Canada: Gems, pharmaceuticals, garments, and machinery form major export categories.
India’s Imports from Canada: Pulses, fertilizers, wood pulp, and newsprint are key imports from Canada. Indian officials noted that alternative sources, such as Australia, could replace Canadian imports like lentils if necessary.
Minimal Disruptions: Despite the diplomatic tensions, bilateral trade remains stable, rising slightly to $8.4 billion in FY2024, demonstrating resilience.

India is the largest recipient of remittances globally, and Canada is among the top 10 sources. Indian professionals, students, and skilled workers in Canada contribute a substantial share of inward remittances.
Growing Diaspora: The Indian diaspora in Canada has seen significant growth, with 427,000 Indian students currently studying in Canada, and remittances contributing 0.6% of India's total inward remittances.
Potential Concerns: Continued diplomatic fallout could affect student exchanges and remittance inflows, but no immediate impact has been reported.

As India seeks closer economic integration with other global powers, the current tensions with Canada may prompt diversification of trade partners.
Ongoing FTAs: India is negotiating Free Trade Agreements (FTAs) with major economic blocs like the European Union and countries such as the UK and Australia.
Diversification of Imports: Canada’s contributions to India’s import basket, like pulses and fertilizers, can be substituted through trade agreements with other countries.