India and Canada’s diplomatic ties took another hit when Canada suggested that India was involved in the killing of Khalistani terrorist Hardeep Singh Nijjar.
This accusation led to a rapid escalation, with India expelling Canadian envoys and recalling its high commissioner from Ottawa.
While the political relationship between the two nations has become increasingly strained, the economic impact is still unfolding.
Experts warn that prolonged tensions could result in significant consequences for the bilateral trade relationship between these two nations.
India-Canada economic partnership remains strong despite tensions
Despite the political discord, India and Canada have maintained a robust economic relationship.
The Global Trade Research Initiative (GTRI) reported that the current diplomatic tension has not yet had a major impact on the trade in goods between the two countries.
The bilateral merchandise trade between India and Canada experienced slight growth, from $8.3 billion in 2022-23 to $8.4 billion in 2023-24.
India’s imports from Canada increased to $4.6 billion, while exports to Canada fell marginally to $3.8 billion during the same period.
In the first 10 months of 2023, bilateral trade in goods reached $7.65 billion, with Indian exports accounting for $4.7 billion and imports standing at $2.95 billion.
This steady flow of trade highlights the resilience of the economic partnership amidst the political upheaval.
Canadian investments in India: a key pillar of the economic relationship
Canadian investments in India have also been significant, with Canada contributing $4 billion in foreign direct investment (FDI) from April 2000 to June 2024.
This flow of capital has helped fuel multiple sectors in the Indian economy.
A large portion of this investment comes from Canadian pension funds, which have collectively poured over $75 billion into India, primarily due to the country’s growth potential and favourable business climate.
This makes Canada one of the largest foreign investors in India, with over 600 Canadian companies currently operating in the Indian market.
Furthermore, more than 1,000 Canadian firms are actively exploring business opportunities across various sectors, including information technology, natural resources, and financial services.
What India imports and exports to Canada
India’s export portfolio to Canada is diverse, ranging from gems and jewellery to pharmaceutical products and ready-made garments.
Other major exports include organic chemicals, light engineering goods, and iron and steel articles.
On the other hand, India imports essential commodities such as pulses, newsprint, wood pulp, asbestos, and potash from Canada.
The trade also includes industrial chemicals, minerals, and metal scraps.
These varied trade flows reflect the deep economic integration between the two countries, which has so far managed to stay insulated from political fallout.
How political tensions could disrupt economic stability
The diplomatic row between India and Canada could, however, become a threat to their longstanding economic ties.
GTRI founder Ajay Srivastava noted that while trade relations have been resilient so far, they are not immune to political instability.
The current situation demands careful diplomacy to ensure that the economic partnership remains intact.
Ajay Srivastava warned,
If the dispute escalates further, the economic fallout could be substantial.
Both governments must prioritise maintaining the stability of their trade and investment relations to prevent wider damage to the economy. Srivastava highlighted that managing this crisis without disrupting economic ties will be a key challenge in the coming months.
Can the India-Canada relationship recover?
Looking ahead, much will depend on how both countries navigate the ongoing diplomatic conflict.
If relations continue to deteriorate, it could hamper not only trade but also affect Canadian investment in India.
With billions of dollars in investments at stake, particularly from Canadian pension funds, maintaining a stable business environment will be crucial for both nations.
The fact that the economic relationship has so far withstood the test of political upheaval offers a silver lining.
Both countries have significant economic incentives to preserve their trade and investment ties, even as their diplomatic relations continue to face turbulence.
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