CHALLENGES AND OPPORTUNITIES IN INDIA-CANADA TRADE

RELATIONS

By – Dr. Ruby Ojha1

An overview of India-Canada Relations

India was, at one time, the largest recipient of Canadian development aid to the

developing countries. Though Canada was a member of Non Aligned Treaty

Organization (NATO) and India was firmly Non-aligned still Canada co-operated

India with the economic assistance through the Canadian International Development

Agency (CIDA) in early years of India's independence. Canada remained an

important development partner for India during 1950s and 1960s. However, aid

figures have progressively gone down over the years as the India-Canada relationship

has transformed into one based on trade, rather than aid.

Politics and economics have not always gone together in shaping the bilateral

relations between India, and Canada. “India's peaceful nuclear explosion of 1974 led

to relations being frozen with Canada alleging that India had violated the terms of

agreement under which Canada had supplied a nuclear reactor in 1956 under the

Colombo Plan. Activities of Canada-based Sikh terrorist groups in planning and

carrying out acts of violence in India during the 1980s introduced an additional

element of strain”. (India, Canada Trade & Economic Relations, FICCI, 1999)

1
The author is Reader in Department of Economics, PGSR, SNDT Women’s University,
Churchgate, Mumbai. The paper was presented in International Conference on “Economic
Development and competitiveness – Canada and India” organized by SNDT Women’s University,
Mumbai and Canadian High Commission, New Delhi from Oct. 3-5, 2008

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But as time passed, trade between India and Canada picked up in the 1990s. With the

beginning of economic reform by India in July 1991, Canada began to expand its

economic presence in markets other than in the USA. The financial crisis in South

East Asian countries in 1997 also contributed to Canada's change in focus from South

East Asia to South Asia and it identified India as the largest market in the South

Asian region with enormous scope for business collaboration. Canada started

focusing on India in a big way. Special thrust was given to “Focus India” initiated by

the visit of the then Canadian Prime Minister Jean Chretien to India in January 1996

when he led a ‘Team Canada’ delegation. “Focus India” was a document released by

the then International Trade Minister Roy Maclaren. This document had mapped and

matched India’s requirements for international business with Canadian capabilities

and exhorted Canadian corporations to cash on the new business opportunities offered

by the Indian market.

The chill in India-Canada bilateral relations generated by India’s nuclear explosions

in May 1998 was broken and efforts were made to restore normal diplomatic relations

by the visit of the new Canadian Foreign Minister John Manley in November 2000

with his decision to “re-engage” India. He announced earlier on March 20, 2001 that

Canada would henceforth pursue the broadest possible political and economic

relationship with India. On its part, India welcomed this initiative. Since then, the

pace of high level political and business bilateral visits between India and Canada has

steadily grown to higher levels. (Charan Wadhva, 2005). Government to government

relations expanded with Canada’s enhanced trade presence in India. In the recent past

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there have been a record number of bilateral visits at the political as well as the

official levels.

The Asia-Pacific Foundation of Canada (APFC) has completed several major trade

studies and is fostering new ways to deepen commercial and economic relationship

between India and Canada. Several bilateral business organizations, such as the

Canada-India Business Council and the Indo-Canada Chamber of Commerce are also

working towards boosting economic and trade ties between the two nations.

The visit of Mr. Jim Peterson, Canada’s Minister for International Trade leading a

trade mission with a strong 70 member delegation of Canadian business

representatives to India during April 6-8, 2005, was fruitful in many ways.

Announcement was made that Canada and India would set up an India-Canada CEO

Forum. Indo-Canadian CEOs Forum had concluded that Canada and India should

enter into a new era of cooperation which should result in their concluding a

comprehensive Free Trade Agreement in 2008. Mr. Peterson also announced that

Canada is currently negotiating a Foreign Investment Promotion Agreement (FIPA)

as well as a Science and Technology agreement with India in order to share research

and development and promote commercialization of products. Canadian Trade

Minister Peterson also identified the five key areas i.e. Agro foods; Information

Technology; Communications; Energy; and Transportation &Financial Services

where Canada can contribute to India’s development.

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Canada-India business to business cooperation at the institutional level also grew

overtime. The Canada-India Business Council (CIBC) was set up in 1983. The CIBC

was a party to inter-institutional cooperation protocols between India and Canada

along with the Federation of Indian Chamber of Commerce and Industry (FICCI) and

Associated Chamber of Commerce (ASSOCHAM) of India. The third largest apex

chamber in India, the Confederation of Indian Industry (CII) had an operational

cooperation agreement with the Canadian Manufacturers Association (CMA) since

1982. (Charan Wadhva, 2005)

Most notable in the continuing chain of exchange of more frequent high level visits

between India and Canada was the visit of Canadian Prime Minister Paul Martin to

India in January 2005. A joint Declaration was issued by the visiting Prime Minister

Martin and the Indian Prime Minister Dr. Manmohan Singh on January 18, 2005 on

their meeting. Both Prime Ministers agreed on initiatives that strengthen the India-

Canada partnership and contribute to addressing global challenges more effectively.

Facts Relating to Canada and India

Canada’s economy is both mature and diverse, benefiting from an advanced services

sector, an abundance of natural resources, sound management and free trade

agreements. The Canadian economy is the eighth largest in the world according to the

IMF. As of 2007, its nominal GDP was $1.274 trillion, with growth of 2.7%. It is part

of the G8 and other ‘rich clubs’ such as the OECD.

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Unlike most developed economies, Canada has moved from agriculture straight to

services, which now account for nearly 67.9% of GDP. This industry is very diverse

and includes the retail sector, financial services, real estate, education, health, high-

tech, entertainment and tourism. The service industry employs 75% of the 17.9 million

working Canadians.

Another important factor in the country’s development was the free trade agreement

with the US that was signed in 1989, as well as the NAFTA treaty of 1994. These

agreements linked several other key countries such as Mexico, Israel, Chile and Costa

Rica to Canada and its economy. In January 2008, the country has also agreed to a

Canadian-European free trade association that has further developed its robust

economy.

On the other hand, India is a great country because of its rich culture and open

democracy. “India represents a large and growing economy, one with which Canadian

businesses must engage more actively. With a GDP of US$821 billion in 2006, India

is the 14th largest economy in the world (the fourth largest economy in the world

using purchasing power parity). Its population of 1.1 billion is more than 30 times

that of Canada. Per capita income in India rose 14.2 percent in 2006-07, prompting

dramatic increases in business investment, consumer spending and savings, but its

GDP per capita (at purchasing power parity) is still low at US$3,652.

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India’s gross domestic product has expanded by an average of nine percent in each of

the past three years, primarily due to strong performances in the services, mining and

manufacturing sectors. India is on a path to become a global economic heavyweight

and has the potential to become the world’s third-largest economy by 2050.

India’s strengths include a growing middle class and a large pool of educated and

skilled workers, many of whom speak English fluently. This has contributed to the

rapid expansion of the services sector and to India’s emergence as a regional

manufacturing centre. The opportunities for Canadian firms are therefore significant

in terms of investment and linkages into India’s large and quickly growing domestic

market as well as key global value chains.” (India and Canada: A New Era of

Cooperation, Report to Ministers of India-Canada CEO Roundtable Delhi and

Ottawa, September 2, 2008). The potential to collaborate with an Indian partner --

whether inside India or through outsourcing, joint ventures or partnerships in third

countries -- is equally important. the Indian economy is forecast to surpass Italy’s by

2016, France’s by 2019, UK’s by 2022, Germany’s by 2023, and Japan’s by 2032

(Asia-Pacific Foundation of Canada, as quoted in “Canada and India: Trade and

Investment Opportunities in the Services Sector”, March 2007). In 1991, India started

to dismantle through reforms its import substitution industrialization model and began

to introduce and implement many market-based reforms. Since then, India has rapidly

developed into an emerging economic power.

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Since the 1991 reform process began, India’s economy has more than doubled, with

GDP increasing from $317 billion USD in 1990 to approximately $785 billion USD

in 2005. India has also realized a dramatic increase in real GDP per capita, from $318

USD in 1990 to approximately $586 USD in 2005, illustrating productivity gains and

the bolstering of the nation’s standard of living (World Bank 2006). In 2005,

approximately 170 – 200 million people had growing purchasing power, creating a

larger middle-class and expanding consumer base (US Commercial Services 2006).

India-Canada Bilateral Trade

The emergence of India on the international scene is compelling all countries,

including Canada, to re-think their economic and political engagements. Barriers to

trade and investment in India are declining with more competition being introduced

into the Indian marketplace, resulting in a growing economy and numerous Indian

firms investing abroad. India's exports to Canada comprise mostly textiles and

apparel, jewellery, and chemicals, iron and steel products. Canada’s most significant

exports to India are: aerospace and aircraft parts; cereals, vegetables and fertilizers;

pulp and paper products; machinery and equipment (electrical and nuclear/boiler),

and ores, slag and nickel products.

India is Canada's largest trading partner in South Asia. But in 2006, India was

Canada's 14th largest export market. There is a room for improvement in the trade

between the two countries as India's share in Canada's imports is not even 0.5%.

India-Canada bilateral trade from 1980-81 onwards is shown in table 1.

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 Table-1: India’s Trade with Canada (Rs. Crore)
Years Export to Canada Import from Canada Trade Balance
1980-81 62.30 332.30 -270.00
1981-82 67.40 308.60 -241.20
1982-83 57.50 237.30 -179.80
1983-84 91.80 332.60 -240.80
1984-85 131.10 499.30 -368.20
1985-86 132.10 451.10 -319.00
1986-87 136.80 380.40 -243.60
1987-88 166.00 299.00 -133.00
1988-89 197.00 428.00 -231.00
1989-90 264.00 454.00 -190.00
1990-91 281.00 559.00 -278.00
1991-92 465.00 690.00 -225.00
1992-93 554.00 1174.00 -620.00
1993-94 710.00 731.00 -21.00
1994-95 838.00 834.00 4.00
1995-96 1022.00 1275.00 -253.00
1996-97 1253.00 1112.00 141.00
1997-98 1610.00 1564.00 46.00
1998-99 1990.00 1622.00 368.00
1999-2000 2578.00 1605.00 937.00
2000-01 2999.00 1814.00 1185.00
2001-02 2789.00 2525.00 264.00
2002-03 3379.00 2741.00 638.00
2003-04 3507.00 3336.00 171.00
2004-05 3894.73 3485.43 409.30
2005-06 4465.80 3962.76 503.04
2006-07 5024.50 8042.70 -3018.20
2007-08 5094.00 7940.20 -2846.20
Source: Table is compiled from the data obtained from Department of
commerce, based on DGCI and S Provisional data as given in various issues of
Economic survey, Government of India.

As shown in the table, Indian exports to Canada have increased from Rs. 63.20 Crore

in 1980-81 to Rs. 5094.00 crore in 2007-08. Canadian exports to India also have

increased from Rs. 332.30 crore in 1980-81 to Rs. 7940.20 crore in 2007-08. We can

observe in the table that this increase in bilateral trade between India and Canada has

tremendously increased after economic reforms were introduced in India since 1991.

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The trade balance has been in India's favour ever since 1994-95 excepting in the year

1995-96. This positive trade balance was there till 2005-06 and after that imports

have more than doubled which has resulted in negative trade balance.

Several epoch making developments since 1980s including the collapse of the former

Soviet Union in the 1980’s signaling end of the Cold War; intensification of the

process of competitive economic globalisation facilitated by the revolutions

unleashed by information technology and faster and cheaper transport connectivity

world-wide; and the open economy reforms launched by two of the most populated

and large sized countries, namely China in 1979 (with most visible success) and by

India in 1991(with reasonable success within the constraints of its democratic polity)

and the growing presence of the Indian diaspora in Canada have facilitated this

development in India-Canada trade relations. (Charan Wadhva, 2005).

Despite the impressive recent expansion in Canada-India trade and investment, the

overwhelming consensus of CEO Roundtable participants is that current levels are

well below potential. In addition, Roundtable participants agreed that the Canadian

private sector needs to develop a stronger presence in India. In the words of one

Canadian participant, India may not need Canada, but Canada certainly needs India.

(“India and Canada: A New Era of Cooperation”, Report to Ministers of India-

Canada CEO Roundtable Delhi and Ottawa, September 2, 2008)

The trade situation as it has improved in the post reform period shows the scope of

further improvement in coming years. Officials believe the improving relations will

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lead to trade flows jumping to $20 billion annually over the next few years. A

bilateral trade target of $10 billion annually in goods and $10 billion in services, set

by the India-Canada CEOs roundtable at its first meeting in New Delhi, was

reaffirmed by participants at the second recent meeting held in Montreal.

In respect of Foreign Direct Investment, Canadian FDI in India reached Cdn $144

million in 2002, which increased to Cdn $ 327 million in 2006. On the other hand,

Indian FDI in Canada increased from Cdn $ 29 million in 2002 to Cdn $201 million

in 2006. With the removal of the overseas investment ceiling of US $100 million,

rapid increase in FDI in Canada by Indian software manufacturers has been seen.

Since 2001, Indian flagship companies have expanded their operations in Canada

with setting up of software development centers. Indian companies include Tata

Consultancy Services, Wipro, Infosys and Satyam. Areas of Indian investment also

include pharmaceuticals, metals, petro chemicals, auto ancillaries, financial services,

etc. Though, Canadian companies are enjoying increasing success in the Indian

market, Canada has a modest presence in India in terms of investment. Their major

thrust is in five areas: power & energy, equipment & services; oil and gas;

environment products & services; telecommunications & information technology; and

the financial sector, including insurance.

Opportunities and Challenges of Doing Business in India

The economic reforms launched by India in 1991 signaling a U-turn from its past

centralized import substituting economy to an increasingly more open and more

competitive economy with leading role for the private sector (including foreign

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investment) have generated new interest among most countries of the world including

Canada.(Charan Wadhva, 2005)

Despite numerous improvements in India’s social conditions, this diverse country is

still characterized with large areas of inequality and poor infrastructure.

Approximately 60 percent of the population is illiterate and about 39 percent live on

less than one dollar a day (US Commercial Services 2006). Despite recent trends of

migration to the urban centres, it is estimated that 60 percent of the population live in

rural areas, some of which are without even the basics of electricity and roads

(Economist Intelligence Unit 2005). Also, the growing rate of migration to the major

cities coupled with decades of under investment has created infrastructure constraints

in the major economic cities. The Indian government is very aware of these

challenges and is actively attempting to address them. This provides an opportunity

for Canadian services companies in many sectors including the provision of private

education, telecommunications, energy, and transportation services as subcontractors

to the large infrastructure development projects that are currently being proposed in

India. (The Canadian Services Coalition “Canada and India: Trade and Investment

Opportunities in the Services Sector”, March 2007)

Following the economic reforms, the end of the Cold War, the growing realization

that Canada should expand its economic presence in markets other than in the USA

and the financial crisis in South East Asian countries in the second half of the 1990s,

Canada identified India as the largest market in the region with enormous scope for

commercial cooperation. Services trade offers great potential to Canada but especially

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to India. In terms of commercial services trade, the WTO ranks India 12th and

Canada 15th globally. However, it is universally recognized that India is a services

trade powerhouse, and will continue to grow in stature.

It is agreed that India is self-confident and leaving many with the view that it is not

just emerging, but has arrived. Canada's economic relations with India are moving

and India needs to be recognized for its own merits. In a number of recent statements,

including his nomination acceptance speech, Prime Minister Martin has identified

India as a foreign policy priority.

Three important issues, mainly for promoting commerce/trade relations, are now

being observed by Canadians in India:

1. Attitudes in India has changed dramatically with the collapse of the license raj

and easing of bureaucratic constraints. People no longer assume that things

will not happen. Instead, they are asking how they can make things happen.

This is a very positive development.

2. Governments are stable and voters are becoming more knowledgeable. The

electorate has demonstrated that it no longer blindly follows one party

regardless of its policies. It is now clear that voters are becoming more

educated.

3. The number of people who have moved above the poverty line in India has

increased. People are doing better. It is important to address the reality behind

this new found growth, prosperity and business confidence.

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Along with opportunities come challenges which are mainly based on human

development indicators and environmental factors. In particular, economic growth

can have severe social consequences which should be addressed when looking at

opportunities arising from developments in India. Economic growth has increased the

divide between rich and poor. There is unequal development in India and it is not

possible to discuss development without also examining regional differences.

Education and knowledge are critical for the future as they are the basis for growth.

Infrastructure is crucial as the population and labour force continues to grow.

This scenario presents something of a policy dilemma for Canada-India relations -

how to pursue both the challenges and opportunities in tandem.

Concluding Remarks

Both the countries, Canada and India have entered the twenty-first century with a

shared vision to promote mutually rewarding economic partnership in an increasingly

competitive and dynamic global economy. Currently, two-way trade and investment

between Canada and India is below potential. For realizing the potential following

points are worth noting:

1. Upgrading political relations between India and Canada and more frequent

exchange of views for better understanding and consensus building would

greatly help to improve the environment for business to business cooperation

in both countries for synergizing such cooperation.

2. Educational institutions and think-tanks in both countries can play a vital

supportive role for promoting public and private sector initiatives for

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 strengthening economic partnership between India and Canada in the dynamic

global market economy.

3. The services sector is Canada’s largest and fastest growing economic

component. Canadian services providers are continuing to look abroad in

order to take advantage of expanding opportunities in the global marketplace.

Opportunities exist in India’s financial, education, transportation,

telecommunications, energy, and computer and related services sectors. In

India, the services sector is largely responsible for the economic growth it has

experienced over the last decade and a half. The combined strengths of

Canada’s and India’s respective services sectors may largely complement one-

another.

4. Canada is one of the most trade dependent nations amongst the G7 countries

with international trade representing approximately 72 percent of Canadian

gross domestic product (GDP). India can take advantage of this.

5. The products and services that Canada and India produce and what each

country needs are complementary.

Recommendations

1. Detailed feasibility studies are needed for formulating concrete action plans

for cashing on the new opportunities for international business.

2. The growth of China-Canada investment relations during the last two decades

can show the way for transforming India- Canada investment relations.

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 3. Indian companies can work with Canadian companies for more easily and

profitably accessing the business opportunities in the North American Free

Trade Area (NAFTA) through Canada.

4. It would be useful to study examples of linkages between the voluntary sector

and corporate Canada as practical examples of corporate social responsibility.

5. China has done some tremendous work educating others about its

achievements. China has been successful not just because of foreign

investment, but because of the image it has managed to build internationally.

India can take lessons from that because building a relationship is about

building an image and profile.

6. There is no Canadian press in India and India is not treated seriously by the

Canadian media. NGOs can do more to promote information about India.

7. The Government's ability to promote growth will depend on whether it can

put in place adequate infrastructure. This will be a major challenge but cannot

be left to the private sector to do.

8. Nothing is done without self interest. Relations between Canada and India will

improve if there is a reason to do so. As yet, in Canada, new developments in

India have hardly been noticed. Therefore, there is a need to showcase the

opportunities in India that can be grabbed by Canadians.

The scope to conduct business bilaterally is limitless and that the time to engage is

now.

References:

1. Ajit Jain, “India, Canada FTA Recommended” Toronto, Sep.10, 2008

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2. “Canada – India Fact Sheet”, Foreign Affairs and International Trade –

Canada, 2008

3. “Canada’s Economy”, Economy Watch, 2008

4. Charan Wadhva “A Note on Recent Trends and Prospects for Strengthening

India-Canada Economic Partnership in World Economy”, Centre For Policy

Research New Delhi, India, 2005

5. “India Export Import Trade Statistics with Trading Partners”, Infodrive

India, 2008

6. “India, Canada sign pact to protect trade, investment”, Behind the News,

June 25, 2007

7. India, Canada Trade & Economic Relations, FICCI, 1999.

8. Jade Norton, “Will Canada-India Trade Spice Up?” in BC Stats, Service BC,

Ministry of Labour and Citizens’ Services, May - 2005, Page – 3

9. Phil Taylor, “EDC to establish second Indian representation in Mumbai”

Public Affairs, Export Development Canada – 2008

10. The Canadian Council of Chief Executives and Confederation of Indian

Industry “India and Canada: A New Era of Cooperation”, Report to Ministers

of India-Canada CEO Roundtable Delhi and Ottawa, September 2, 2008

11. The Canadian Services Coalition “Canada and India: Trade and Investment

Opportunities in the Services Sector”, March 2007

12. Victoria Walker, “Roaring India - A Dialogue on India-Canada Relations”,

Full Report, , South Asia Partnership, Ottawa, Canada, March 1, 2004,

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