By: Guneet Sahni
Introduction
The bilateral ties between India and Canada have been marked by periods of collaboration and occasional strains. The recent diplomatic crisis between these two nations has its roots in set in sovereignty, democratic beliefs, free speech and Hardeep Singh Nijjar, who was an Indian-born Canadian known for advocating an independent Sikh nation called Khalistan, separate from India's Punjab state. He was shot dead in Surrey, British Columbia, in June 2023. Nijjar had been designated as a "terrorist" by Indian authorities in July 2020 and was warned about threats against him by Canada's spy agency. His assassination was seen as a targeted shooting.
Coupling of Sikhism and Canada
Canada is home to one of the largest overseas Indian-origin communities, with approximately 1.4 million individuals of Indian origin, including a substantial Sikh population (770,000 in 2021 census) making Canada's Sikh community one of the largest outside of Punjab. India has raised concerns about Sikh hardliners among the Indian diaspora in Canada, accusing them of attempting to revive the insurgency associated with the Khalistan movement. This has led to diplomatic tensions between the two countries. While Canadian Prime Minister Justin Trudeau assured India in 2018 that Canada would not support any efforts to revive a separatist movement in India, he has also emphasized the importance of respecting the right to free speech and assembly for protesters.
The 2023 Diplomatic Tensions
The catalyst for the crisis occurred when Canadian Prime Minister Justin Trudeau made a statement earlier this week, alluding to "credible allegations potentially linking" the Indian government to the assassination of Sikh separatist leader Hardeep Singh Nijjar on Canadian soil earlier in the year. India vehemently rejected these allegations, deeming them "absurd and motivated". In response to this exchange, India expelled a senior Canadian diplomat from its territory, mirroring Canada's expulsion of a top Indian diplomat. Furthermore, the Indian government temporarily suspended visa services in Canada with immediate effect on Thursday, September 21, 2023 further exacerbating the situation. Back in Canada, Trudeau is beholden to the New Democratic Party (NDP) by a mutual agreement which is led by Jagmeet Singh, to keep his government afloat, forcing him to turn a blind eye to the Khalistani issue and secure the Sikh diaspora in Canada. The economic and geopolitical significance of the India-Canada relationship adds complexity to this crisis, making it a matter of considerable concern for corporate security and international affairs.
India and Canada’s Economic Engagement
The India-Canada diplomatic crisis has far-reaching implications for corporate interests in both nations, with substantial investments and trade ties at stake. Canada's economic engagement with India has been significant, with Canadian companies pouring approximately $3,306 million into India between April 2000 and March 2023. This figure represents about 0.5% of India's total FDI inflows during that period. The investments encompass a diverse range of sectors, with services and infrastructure leading the way, accounting for 40.63% of total FDI investments from Canada to India in that period. The depth of this economic partnership is further illustrated by the presence of over 600 Canadian companies operating in India, and an additional 1,000 Canadian companies actively exploring business opportunities in the Indian market.
According to the data available at the Ministry of Commerce, India's total exports to Canada stood at $4,109.74 in FY23, mostly pharmaceuticals, gems and jewellery, textiles, and machinery, which was 0.9 per cent of India's total export in the last financial year. On the other hand, India's total imports from Canada in FY23, stood at $4,051.29 million mainly pulses, timber, pulp and paper, and mining products, which was nearly 0.6 per cent of India's total imports for the year. In terms of personal remittances, in 2022, India received nearly $859.83 million in personal remittances from Canada.
Experts point out that India and Canada do not compete on similar products but trade in complementary products so trade relationships may not be affected by these events, unlikely to have any major impact on new-age Indian tech stocks or the broader market However, instantly the blow was faced by the negotiations between India and Canada on the free trade agreement (FTA), which resumed after a decade, have come to a halt due to political concerns.
Corporate Vulnerabilities
Start-ups:
Canada's Start-up Visa Program and Canada-United States-Mexico Trade Agreement (CUSMA) which fosters cross-border trade and economic cooperation among these North American nations, and other 15 free trade agreements encompassing 51 different countries has been drawing global attention as it successfully lures high-calibre (immigrant) entrepreneurs to launch businesses in the country due to reduced trade barriers, increased market access, and a stable regulatory environment within this significant economic bloc, facilitating easier expansion and growth opportunities across borders. This, along with several other collaborative initiatives, provides Canada-based start-ups an expedited immigration pathway for expanding into the lucrative US market. Indian start-ups that had been eyeing Canada as a launchpad to North American markets may encounter disruptions due to the escalating tensions like increased tarrifs etc. However, given India's robust trade relations with the United States, these start-ups may pivot towards direct engagement with the U.S. market. Now, companies may choose to look for other near-shore destinations to the US, maybe a gain for Mexico or some other Lat-Am countries. Alternate locations like Gift City, Dubai, or even Delaware may become the focus for start-ups.
Finance and Investment:
Canadian pension funds have made substantial investments in India, particularly in infrastructure, renewable energy, technology, and financial services. By the end of 2022, these funds had injected over $45 billion into India, making it the fourth-largest recipient of Canadian FDI globally. The Fund ended FY23 with net assets worth around INR 1.3 Lakh Cr in India, which includes its investments in listed startups such as Kotak Mahindra Bank Ltd, Zomato Ltd, Nykaa, Delhivery Ltd and IIFL Wealth. Data showed Canadian pension fund owned 1.5-6 per cent stakes in some of these companies, as on June 30, which are worth Rs 16,062 crore, as of Wednesday's intraday prices. Besides, CPPIB has investments in many unlisted Indian tech startups including ACKO, VerSe Innovation, and BYJU’S, while CDPQ counts PharmEasy and private equity firm Fundamentum among its investments in India. However, as of now, the market seems to be taking a more composed stance, viewing the issue primarily as a political one.
Personnel Issue:
Canada's Permanent Residency (PR) program, previously considered a viable option for H1B visa holders facing potential non-extension of their visas, now faces uncertainty. Indians residing in the US with H1B visas may opt to return to India instead of pursuing Canada PR if their H1B extensions are denied, which posits issues to qualified personnel in North America.
Masur (Red Lentils) Industry:
India imports a significant quantity of masur (red lentils) from Canada, amounting to approximately 4-5 lakh tonnes annually. Any disruption in the supply chain could have repercussions on the immediate availability and pricing of masur in India.
Education Industry:
India sent over 220,000 students to Canada in 2022, making up 41 per cent of the country's international student community, symbolizes the depth of the inter-country relationships. The industry could see a potential slowdown in the number of students going to Canada. Canada may be fast replaced by other competitive markets like Australia and the UK.
Extended Geopolitical Concerns
The crisis also torpedoes Canada’s Indo-Pacific Strategy, unveiled in November 2022, which criticized Chinese policies and sought to build stronger ties with India. Now, that hope is dead, and with it, a small part of India’s plan to counter China’s influence in the Indo-Pacific. Even more importantly, the crisis has sent shock waves around the world. Just after it hosted a highly successful G-20 summit, India’s reputation as a stable and reliable democratic partner has taken a hit, to the benefit of its chief geopolitical rival.
Mitigating Risks
Even though the market sees the issue as a political one and given the Canadian investment interests in India, the tension should not shore up, the markets in due time may fuel up with nationalism as seen by cancellation of Shubh’s India Tour by BoAt and BookMyShow. The best way forward for the government could be to separate the market and politics, by setting up Special Representatives out of the media’s eye to deescalate the tensions in due time. As of American, British and other prominent investments in India stay safe and are likely to remain the same for long. Slight variability in the stocks have been witnessed this week, but nothing that might blow over, as the pace stays steady.
Conclusion
The tensions have triggered a complex web of corporate interests and vulnerabilities. While the full extent of its impact remains uncertain, corporations must remain vigilant and prepared for a range of scenarios, including supply chain disruptions, regulatory challenges, and potential cybersecurity threats. Effective risk management strategies and diversification may prove critical for businesses operating in this uncertain geopolitical landscape.
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