Analysis Of Canada And India Trade Relationship

This report analyzes the history and current trade relations between Canada and India, main challenges and disputes and gives recommendations on how to improve them in the future.

History and Current Relationship

Canada and India have similar history. Both gained independence from British and are democratic countries. India became independent in 1947 and for many years was either in the Non-Aligned Movement or close to the communist Soviet Union. It did not trade much with the free world and tried to protect its local industry with high tariffs and trade barriers. Therefore, trade with Canada was also not much though India got financial aid from Canada over the years and they traded in small amounts. In 1950 two way trade was only CAD $68 million. India tested a nuclear bomb in 1974 that Canada believed used nuclear material from a reactor it supplied. Then the bombing of an Air India flight by terrorists of Indian background Canada happened in 1985. These events impacted the overall relations between the two countries and had a bad effect on trade.

However, in 1990s with globalization increasing, India started to reform its economy and opened up for trade with the rest of the world. This was a great opportunity for Canada as India had a big population and market. As India’s economy began to grow by the year 2000, the trade with Canada also increased. It has continued to grow since then and two way trade reached over $8 billion by 2016. Initially India exported to Canada ready made garment, textiles, steel, jewellery, precious stones, leather products, coffee and tea, spices and carpets. India imported newsprint, pulp, lumber, peas, asbestos, iron, copper and other industrial materials from Canada. Over the time the trade relationship has expanded to include exports from Canada of conventional and nuclear energy and clean and renewable energy technology. Also, Canada is putting money in India's transportation infrastructure, education, skills development and increasing food exports including pulses that are consumed in big amounts in India (in 2016, 27. 5% of Canadian pulse exports went to India) and migration of a large number of skilled technology workers from India into Canada. At present there are over 1. 2 million Indian people living in Canada. There has been major increase in India’s export revenue in the past few years. Major Indian exports to Canada continue to include readymade garments, cotton yarn, carpets, gems and precious stones, spices, light engineering goods. A big increase has occurred in software related foreign direct investment (FDI) by Indian companies in Canada.

Even though bilateral trade between the two countries has gradually increased, there is a lot of room to make it better. In 2016 Canada imported goods worth $3. 9 billion from India and exported over $4 billion to it. However, it is only about one percent of Canada’s overall trade. With India's economy expected to grow at over 7 percent in 2018, Canada has a huge opportunity to increase its trade and investment with India which is the fastest growing economy in the world.

Current Trade Agreements

To promote better trade Canada and India are working on a Comprehensive Economic Partnership Agreement (CEPA) and a Foreign Investment Promotion and Protection Agreement (FIPA). However, these have not been finalized despite years of negotiations. Talks on CPEA began in 2010 under Prime Minister Stephen Harper but there was no result after 10 rounds. Politics, different negotiating styles and priorities have prevented a deal. Canada under Prime Minister Trudeau has brought in issues like environment and child labour into discussions making an agreement difficult to reach as India does not have high standards in these things. Both countries also have several agreements related to bilateral trade:

• Nuclear Cooperation Agreement
• Double Taxation Agreement
• Science and Technology Agreement.

There are other agreements to promote collaboration in agriculture, civil, aviation, energy, rail, transportation, education, information and communications technologies and higher education. In 2017, more than 400 Canadian Companies had a presence in India, more than 1000 are actively were actively pursuing business in the Indian market. Trade Disputes India has many trade barriers including high tariffs or import duties and subsidies it provides to local industries that make it harder for Canada to export. India has recently put tariffs on pulse crops, which is Canada's largest export to India. The province of Saskatchewan would be hit hard as it is a leading producer of pulses in the world and its economy depends on its export. It exported pulses worth $1. 1 billion to India in 2016. Now it faces duties between 30 and 50% on pulses. India is asking for fumigation of pulses to protect its crop from pests while Canada believes that no such concern exists in the Prairies crops. However India has not yet agreed to lift the new tariffs. Looks India is not willing to give market access that Canada is used to in other trade agreements.

Exchange Rate Trend

We can see that 1 CAD was equal to 60 INR in 2014 and then started to drop in value till it reached INR 45 in early 2016. This helped Canadian exports to India by making them cheaper and made imports from India more expensive. The exchange rate has moved up and down and in 2018 INR has lost value against CAD going up to 57. This would now help Indian exports to Canada. The Canadian dollar is likely to stay strong against INR as oil prices are going up that makes CAD higher in value as Canada produces a lot of oil. High inflation in India will make INR lose value but it would be favorable for its exports.

Balance of Trade Trend

Canada exports and import as are roughly the same with a small surplus and deficit in 2015 and 2016 respectively. However, in the first 3 months of 2018, Canadian exports have dropped a lot compared to same period in 2017 while India’s exports increased by 25% over the same period. This could partly be due to depreciation in the Indian rupee as shown in the previous chart that is helping Indian exports. If Canadian dollar get stronger, it could further increase Canada‘s trade deficit with India.

Recommendations

Potential Areas of Comparative Advantage and Interdependence

Canada has a long comparative advantage in resources, transportation, infrastructure, information and communication technology, clean energy and agriculture products. This is on account of better technology, a more educated population and vast resources in land, water reserves, forests and minerals. It produces a lot more natural resources than other nations like wheat, meat, and oilseeds, mineral products like natural gas and metals; and forest products like wood and paper. India has a comparative advantage in manufactured goods such as garments, textiles and leather products due to availability of raw materials like cotton and cheap labour used.

Low labour costs and people who can speak

English also allows it to produce software and provide other services like calls centres and back office operations at low costs for companies that has benefited from offshoring work to India. Other goods where India has a comparative advantage are food items, agricultural raw materials, fuels and ores, metals and precious stones.

Interdependence

Canada and India have strong political and people ties due to a large number of Indians settled in Canada. Both use English as the main language for business and have similar laws and government institutions. Therefore, economic and trade ties can grow easily if both countries can agree on benefiting from freer trade. FDI, services industry and labour movement face high barriers that need to be removed. Canada can offer resources, technology and expertise that India’s expanding market badly needs whereas India’s cheap labour can help Canada's manufacturing industry to provide cheaper goods to consumers in Canada. India’s software industry is one of the largest in the world and with its low labour cost can be good source of FDI into Canada. As an example Indian software companies Tata and Infosys who are in over 40 countries are investing in Canadian market. It can also supply in large numbers high tech workers to Canada that has a shortage of them.

Foreign Direct Investment Opportunities

FDI between the two countries has stayed low. Canadian FDI into India was $1. 12 billion in 2014 and $1. 2 billion in 2016. Indian FDI into Canada dropped from $3. 9 billion in 2014 to $2. 8 billion in 2016. This can be improved with better policies to encourage FDI. In India there is great potential for investment in many industries. Cheap labor, expanding economy with need for technology and a growing middle class are good for foreign investment. The Indian Government is encouraging FDI by offering tax breaks and raising the allowed limits in various industries. Overall annual FDI inflows in the country are expected to rise to US$ 75 billion over the next five years, as per a report by UBS and Canada can benefit from it. Canada is not among the leading countries investing in India but has a good opportunity since it has the latest technology and expertise in many of the industries India is looking to grow and can invest in them. These include telecommunications, retail, energy, computer hardware and software, pharmaceuticals, construction and services. Construction alone comprises 10% of India's GDP. Canadian companies in financial and hospitality services industry have invested in India. e. g. Brookfield, Fairfax India Holdings Corporation and Quebec based Darram Inc Key Economic data is given in the charts below for inflation and interest rate and unemployment.

Indian companies can take advantage of economic stability, cheaper funds and lower inflation to invest in businesses in software, and other services. Canada’s economy is growing steadily and Indian companies can take advantage of the well-off and multicultural population that is looking for good and services of all kind. Canada can make visas easy for temporary Indian workers to increase FDI by India. On the other hand, higher inflation and interest rates in India make investment less attractive for Canadian companies. Also, Indian government can make quick changes in policies that makes investors worry. But higher economic growth rates in India offset these disadvantages making direct investment in India an good option for businesses willing to take a chance. In trade deals between the two countries, India can offer tax breaks and cheap funding for FDI from Canada. Higher unemployment rates in Canada should make the Canadian government to promote FDI from Indian companies to create new jobs.