Will Diplomatic Strain Impact Canada-India Economic Relations?

Diplomatic tensions between Canada and India have escalated due to allegations of the murder of a Khalistani terrorist. These tensions threaten their flourishing economic relationship, impacting investments, trade, and more. 

Strong Financial Connections

Canada and India have seen a significant increase in investments between them, reaching C$36.2 billion (₹2.24 lakh crore) in 2022, a 37% rise in just four years, according to Statistics Canada. This robust financial interconnection has played a pivotal role in strengthening their bilateral ties.

According to Invest India, Canada is the 18th largest foreign investor in India with an overall investment of about $3,306 million from April 2000 to March 2023. Thus, Canadian investment represented about 0.5 per cent of the total FDI (foreign direct investment) inflows into India. India was Canada's ninth-largest trading partner in 2022. Services and infrastructure together accounted for 40.63 per cent of the total FDI investments from Canada to India.

Over 600 Canadian companies have a presence in India, and over 1,000 are actively pursuing business in the Indian market, according to Invest India.

According to the data available at the Ministry of Commerce, India's total exports to Canada stood at $4,109.74 million in FY23, which was 0.9 per cent of India's total export of $450,958.43 million in the last financial year.

India's total imports from Canada in FY23 stood at $4,051.29 million which was nearly 0.6 per cent of India's total imports of $714,042.45 million for the year, Ministry of Commerce data showed.

According to a PTI report, India's exports to Canada include pharmaceuticals, gems and jewellery, textiles, and machinery, while Canada's exports to India include pulses, timber, pulp and paper, and mining products.

Education and Pension Funds

India significantly contributes to Canada's education sector, with the most international students studying in Canadian universities and colleges. Additionally, prominent Canadian pension funds, such as the Canada Pension Plan Investment Board, have established offices in Indian cities like Mumbai and New Delhi, managing a combined wealth exceeding C$1.2 trillion (₹74 lakh crore).

Canada Pension Plan Investment Board, the largest pension manager in Canada, disclosed a substantial $21 billion (₹1.74 lakh crore) investment in India, including a significant stake in Mumbai-based Kotak Mahindra Bank and holdings in approximately 70 other Indian publicly-traded firms.

Talks for a potential trade agreement between India and Canada have been put on hold. In 2022, Canada exported C$11.6 billion (₹71,700 crore) worth of goods and services to India. These exports comprised commodities like lentils, metallurgical coal, and newsprint. In contrast, India primarily exported smartphones and railway cars to Canada.

Diplomatic Spat

The diplomatic row intensified when Canadian Prime Minister Justin Trudeau accused India of orchestrating a murder in Vancouver. India swiftly dismissed these allegations as "absurd," leading to the expulsion of diplomats from both nations. This episode laid bare a widening chasm in relations between the two countries, which had otherwise been flourishing on economic fronts.

Potential Impact on Investments

Experts suggest that while there are no immediate risks, Indian companies with Canadian pension funds have significant holdings may face pressure if tensions escalate further. For instance, the Canadian Pension Fund held a 6% stake in Delhivery and stakes in Kotak Mahindra Bank, Zomato, and IndusTower as of June 30, 2023, according to shareholding pattern data available on BSE.

Canada ranks as the 18th largest foreign investor in India, with an investment of about $3,306 million from April 2000 to March 2023. Notably, services and infrastructure constitute a substantial portion of Canada's foreign direct investment (FDI) in India.

In the fiscal year 2023, India's total exports to Canada amounted to $4,109.74 million, accounting for 0.9% of India's total exports. Conversely, India's total imports from Canada in the same period stood at $4,051.29 million, nearly 0.6% of India's total imports. The exports include pharmaceuticals, gems and jewelry, textiles, and machinery, while Canada exports pulses, timber, pulp, paper, and mining products to India.

In 2022, India received nearly $859.83 million in personal remittances from Canada, according to World Bank data, indicating the presence of a significant Indian diaspora in Canada.