Trade may not take a hit from Canada row

New Delhi’s relations with Ottawa sank to a new low on Monday with the former withdrawing some of its diplomats from Ottawa, and expelling some Canadian diplomats from the country. India withdrew its envoy and some other diplomats after Canada designated some of them as “persons of interest” in the investigation into the killing of Khalistan activist Hardeep Singh Nijjar, a move New Delhi described as “preposterous” and part of the Trudeau government’s vote bank politics.

The Canadian diplomats have been asked to leave India by or before 11:59 pm on 19 October, the ministry of external affairs (MEA) said. Meanwhile, an AP report citing a Canadian official said Ottawa expelled the Indian diplomats after uncovering evidence of “ongoing violent criminal activity” linked to the Indian government.

While the withdrawals may be more symbolic, without ramifications on trade and investments, efforts to de-escalate will be crucial to strengthen trade and economic relations, experts said.

“Canadian investments into India, especially through Canada’s pension fund and other investments are relatively small. Also, businesses invest in markets where they get good returns. So, the political difference between both governments is unlikely to impact investment,” an Indian government official said, requesting anonymity.

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Canadian pension funds have invested over $45 billion in India, making it the world’s fourth-largest recipient of Canadian foreign direct investment (FDI) by the end of 2022. The top sectors for Canadian pension fund investment in India include infrastructure, renewable energy, technology and financial services.

Canada is also one of the largest producers of potash, primarily used in fertilisers and crucial for India’s agricultural sector, and one of the largest exporters of pulses to India.

“It is too early to predict the impact on the trade of pulses, particularly lentils (masur) and yellow peas. However, any change in policy by the Indian government could significantly affect the import of pulses from Canada,” said Bimal Kothari, chairman of the India Pulses and Grains Association (IPGA). “It’s more of a political development than an economic one. If strained relations escalate, India has the option to import lentils from Australia,” Kothari added.

Trade with Canada has been a relatively small portion of India’s overall trade, even before relations soured last year. India’s total merchandise exports stood at $437.07 billion, in value terms, while imports stood at $678.22 billion in FY24. In comparison, India’s merchandise exports to Canada stood at $3.85 billion, while merchandise imports stood at $4.55 billion during FY24, compared to $4.11 billion in exports and $4.17 billion in imports, in value terms, during FY23.

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India’s top exports to Canada include pharmaceuticals, gems and jewellery, textiles, and machinery, while Canada’s top exports to India include pulses, timber, pulp and paper, and mining products.

“Despite these significant political frictions, the on-ground impact on trade between the two countries has been minimal. This is largely because trade happens at the private-sector level, and neither India nor Canada has introduced regulations that restrict the flow of goods or services, said Ajay Srivastava, founder, Global Trade Research Initiative.

“In other words, while diplomatic relations may have soured, businesses on both sides have continued to engage, insulated from the political noise,” Srivastava said.

A proposed Free Trade Agreement (FTA) talks between India and Canada has been on pause since September 2023, when Canada halted the talks in September 2023, due to political concerns.

A spokesperson of the ministry of commerce and industry didn’t respond to emailed queries.

“This is a stark manifestation of the fast plummeting relations between India and Canada. Hopefully, Canada would now get the message that India means business and Canada’s support and even promotion of terrorist activities cannot go unchecked,” said Manoranjan Sharma, chief economist at Infomerics Ratings and former chief economist at Canara Bank.

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“The bitterness and acrimony between the two countries is set to increase,” he added.

By Monday evening, Canadian charge d’affaires Stewart Wheeler was summoned to the external affairs ministry and informed that the “baseless targeting” of the Indian envoy was “completely unacceptable”. Wheeler was further told India had decided to withdraw the high commissioner and other targeted diplomats and officials because the “Trudeau government’s actions endangered their safety” in an “atmosphere of extremism and violence”, the ministry said.

“We have no faith in the current Canadian Government’s commitment to ensure their security,” the ministry said about the decision to withdraw the diplomats.

Rezaul H. Laskar and Anirudh Bhattacharyya contributed to this story.