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India-Canada tensions: As the diplomatic row escalates, what impact can it have on bilateral trade?

Trade talks between India and Canada are expected to remain stuck for the foreseeable future amidst rising diplomatic tensions between the two countries over the Khalistan issue. But, ongoing investments and trade between the two countries may remain unaffected.

“It seems unlikely that the trade talks will resume anytime soon. It will be taken up only when both sides are more at ease,” says a source.

Tensions between the two countries escalated after Canadian Prime Minister Justin Trudeau announced that there were “credible allegations” of the Indian government being behind the killing of Canadian citizen Hardeep Singh Nijjar, who was the Khalistan Tiger Force (KTF) chief and a designated terrorist in India. While India has strongly denied the allegation, a full-blown diplomatic war has flared up between the two nations.

The chill in relations was evident even before the G20 Leaders’ Summit in New Delhi on September 9 and 10 that was also attended by Trudeau. Prior to his visit, Canadian government officials had said trade negotiations between the two countries had been paused.

This was later confirmed by a top Indian commerce ministry official, who had said that talks for an early harvest scheme (under the trade agreement) have been paused due to “certain political developments”.

The India-Canada Comprehensive Economic Partnership Agreement (CEPA) negotiations were formally re-launched in March 2022 and the two countries had been keen on completing the negotiations by 2023-end.

In fact, nine rounds of talks had already taken place till July 2023, and negotiations on topics like goods, trade remedies and rules of origin were underway.

This is, however, not the first time that the negotiations have broken down. The CEPA talks had been initiated under the Manmohan Singh-led government in 2010, but were abandoned in 2017 due to diverging viewpoints. Despite that, business and trade ties have flourished in their natural course.

India has been a key destination for Canadian investments from entities such as the Canadian Pension Plan Investment Board and asset management firm Brookfield in sectors ranging from infrastructure to start-ups.

According to Invest India, Canada is the 18th largest foreign investor in India with a cumulative investment of $3.3 billion between April 2000 and March 2023, representing 0.5 per cent of the total FDI inflows into India.

India was also Canada’s ninth largest trading partner in 2022, with bilateral trade between them touching $8.16 billion in FY23. Between April and July 2023, India’s exports to Canada stood at $1.24 billion, while imports amounted to $1.32 billion.

Top exports from India to Canada include pharmaceuticals, iron and steel products, and telecom instruments, while top imports include coal, fertilisers and pulses.

Over 600 Canadian firms are present in India and more than 1,000 companies are actively pursuing business in the Indian market. The two countries have also been working on co-operation in sectors such as mining of critical metals, education and skilled labour. Canada also has a large Indian diaspora, with close to 1.6 million Persons of Indian Origin and 700,000 non-resident Indians calling it home.

India also imports masoor dal (red lentil) from Canada. With retail inflation in pulses remaining in double digits in the country, India may have to continue relying on imports from Canada to ease domestic supplies. Retail inflation in pulses was at 13.04 per cent in August.

For now, it seems to be business as usual between the two countries in terms of trade, despite developments like the suspension of visa services for Canadians by India, and travel advisories put out by both nations.

The Competition Commission of India on September 20 approved some investments by Canadian entities, including the proposed acquisition of additional unit holding in Highways Infrastructure Trust and equity stake in Highway Concessions One Private Limited by 2452991 Ontario Limited and 2743298 Ontario Limited, respectively; both are controlled by the Ontario Teachers’ Pension Plan Board.

There is also optimism that India’s trade talks with other countries such as the UK will continue, although the UK is a close ally of Canada and part of the Five Eyes intelligence alliance. Until now, the free trade agreement (FTA) talks between the UK and India remain unaffected. Britain’s Business and Trade Secretary Kemi Badenoch recently said the two countries are very close to achieving a mutually beneficial FTA.

Economists agree that given the strong economic relationship and people to people connect between India and Canada, trade ties between them are unlikely to be disrupted. Nagesh Kumar, Director of Institute for Studies in Industrial Development, points out that trade is driven by mutuality of demand and supply, despite the hiccups caused by some issues in the past related to Sikh extremists.

“This is perhaps the first time that India-Canada relations have sunk to such a low. I expect ongoing trade to not be affected significantly unless something more serious happens,” he says.

However, he notes that the pause in the trade talks is likely to have some impact on overall sentiment as businesses might choose to be more cautious about any future expansion plans. Trade policy specialist Samridhi Bimal also points out that the recent developments are worrisome, but they are unlikely to have a significant impact on economic relations.

“Khalistan has been a long-standing issue but it has not impacted trade between the two countries until now. The pause in trade negotiations is a temporary hiccup and should not be seen as a full stop. The two countries share strong economic ties, which should work as an incentive for them to work on a peaceful resolution,” she says.

Clearly, breaking off trade ties will be in neither country’s interest, but how soon a speedy resolution materialises will be crucial in the backdrop of the global slowdown and the ongoing war in Ukraine that has already dampened the economic outlook for most countries.


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