Indo-Canadian relations at their lowest ebb: Analysing its impact on investments

October 28, 2024
Posted by: Anil Trigunayat
Category: Canada

Some analysts believe that if tensions persist, the broader economic relationship may be reassessed, though economic pragmatism could compel both sides to keep investment channels open

Diplomatic relations between India and Canada took a fresh hit when India withdrew its diplomats from Canada, including the High Commissioner, while expelling six Canadian diplomats. This has led to speculation about the future of bilateral relations, the impact on Canadian investments in India, and the broader dimensions of the relationship, including the presence and future of a large number of Indian students and citizens, not to mention the travel concerns of millions of people of Indian origin.

This steep political downfall in bilateral relations was triggered by the preposterous and baseless allegations made by Canadian Prime Minister Justin Trudeau, accusing the Indian government of involvement in the elimination of Hardeep Singh Nijjar, a wanted terrorist and Khalistani separatist who, along with his ilk, has found safe haven in Trudeau’s Canada.

Figures such as Gurmeet Singh, along with their political bedfellows, have not only launched tirades against India, in concert with the Canadian government (including the PM himself acting as their cheerleader), but have also generated violence and unrest in India. Trudeau even deemed it appropriate to comment on Indian farmers’ protests, interfering in India’s internal affairs. Instead of curbing the three evils of terrorism, extremism, and separatism at home, his government has fanned the flames, allowing these elements to become a direct threat to Indian diplomats.

Sponsored Links

Just as terrorists involved in the Air India Kanishka explosion moved about freely due to shoddy investigations, today’s extremists are celebrated when they pose a threat to Indian diplomats under the guise of freedom of expression and misplaced sovereignty issues. Canada has even crossed the bounds of diplomacy by declaring the Indian High Commissioner and senior diplomats as “Persons of Interest”. Hypocrisy galore.

Despite these baseless charges, the Indian government kept on asking for concrete evidence to support Canada’s allegations. Canada referred to some vague Five Eyes electronic intelligence, but mere information is not evidence. India has expressed its willingness to address the issue according to standard protocol, but for his myopic political objectives and to shore up his sagging popularity ahead of the 2025 elections, Trudeau chose public platforms to wantonly accuse India. After all, his government claims to uphold freedom of expression, howsoever irresponsible and untrue it may be.

India took exception to this illegitimate escalation and, perhaps for the first time, the Ministry of External Affairs issued a strongly worded and detailed statement, putting all facts on the ground, stating that “Prime Minister Trudeau’s hostility to India has long been in evidence….. It also serves the anti-India separatist agenda that the Trudeau Government has constantly pandered to for narrow political gains.”

India’s stance was proved yet again when Trudeau himself admitted, during testimony before the Foreign Interference Commission, that Canada had not shared any hard evidence, providing only the intelligence available. The head of the RCMP also vaguely stated that they were attempting to gather evidence for the Indian side, including the bizarre claim that India had engaged networks linked to the Lawrence Bishnoi (currently jailed in India) gang to execute the killing of Khalistani terrorist Hardeep Singh Nijjar and to carry out attacks on Sikh separatists.

What one expects from a friendly country is sensitivity to India’s security concerns, not a path that contradicts their own value systems and undermines the fight against terrorism. If they are indeed so enamoured with the Khalistanis, they might as well create such a state within their own territory and enjoy the company.

It’s a pertinent question: given the political and diplomatic relations between India and Canada are deteriorating, what will the fallout be on other areas of cooperation? Canada has been an important partner for decades. However, analysts and investment bankers suggest these tensions are unlikely to significantly impact major Canadian investors already entrenched in the Indian market. While there may be a short-term slump for new or prospective investors, there is no expectation of long-term effects on investment flows from Tier-1 Canadian funds. These investors, including Canada’s major pension funds, have established themselves in India long before the current political standoff, and recent political embargos are not expected to influence their decisions.

A Growing Presence

Canada has become a prime source of capital for Indian private companies, particularly in the infrastructure and energy sectors. Canadian institutional investors, including some of the world’s largest pension funds, have heavily invested in Indian projects that promise stable, long-term returns.

According to data from Bloomberg, Canadian pension funds and private investors, such as Brookfield Asset Management and Fairfax Financial, have collectively invested around $21 billion in India over the past few years, including during the Covid-19 pandemic. This resilience underscores the strength of Canadian capital in the attractive Indian market.

Several institutions, including the Canada Pension Plan Investment Board (CPPIB), Ontario Teachers’ Pension Plan (OTPP), and Caisse de dépôt et placement du Québec (CDPQ), have even established offices in India, deepening their engagement with local markets. These funds hold diverse portfolios spanning infrastructure, real estate, and energy, reflecting their sustained interest in India’s growing economy.

Experts suggest that while the political fallout may impact smaller Canadian funds —those just beginning to explore India as an alternative to China— it is unlikely to significantly affect Tier-1 investors. These smaller, Tier-2 funds may delay their decision-making due to concerns about the broader political environment. “Tier-2 Canadian pension funds, which were reducing their allocation to China and considering India as an alternative destination, are likely to slow their decision-making in the near term,” said an investment banker from Barclays. “However, in the medium to long term, this episode won’t have any major impact on the decisions of Tier-1 funds, which are already significantly present in India.”

Hence, Tier-1 funds such as CPPIB and OTPP are expected to remain committed to their Indian investments. These large pension funds, which manage billions of dollars in assets, have significant allocations to Indian infrastructure and energy projects that offer stable, long-term returns. Given India’s expanding infrastructure requirements and the steady returns these investments generate, Canadian pension funds are unlikely to withdraw, even amid temporary diplomatic tensions. The interplay between Canadian pension funds and India’s infrastructure projects is mutually a win-win for both nations.

Symbiotic Dependence

While India requires substantial capital to build infrastructure, Canadian funds, managing vast pension reserves from government workers, need investment opportunities like those in India to generate the necessary returns for their pensioners. Any further diplomatic downgrading or severance of ties between the two nations would result in a lose-lose scenario for both economies. If tensions were to escalate, it could complicate investments requiring government approvals, particularly in the infrastructure sector.

“We have observed significant interest from Canadian investors such as CPPIB, PSP Investments, OTPP, and OMERS, with some even establishing offices in India,” said Ruchir Sinha, Managing Partner at law firm Resolution Partners. “While investments in public equities are likely to remain largely unaffected, infrastructure investments by state-backed corporations may face pressure if tensions rise. This could cause delays in processes like changes in control or shareholding approvals, though we do not foresee any immediate impact.”

Analysts Remain Bullish

Despite the ongoing fracas, many analysts are optimistic that Canadian pension funds will continue to view India as a strategic investment destination, particularly in sectors like infrastructure and renewable energy, which align with their long-term objectives. The political scenario in both countries remains fluid and dynamic, and experts suggest that the outcome of Canada’s federal elections in 2025 could be a game changer for the diplomatic relationship between these two major nations. A potential change is highly likely, as the current political regime in Canada is significantly unpopular and is playing into the hands of Khalistani separatists. A change in the regime could help reset relations, easing concerns for investors and encouraging future capital flows.

A thaw in ties between Canada and India is unlikely to come soon, but it may not significantly hamper any long-term capital inflows from Canada. Meanwhile, some efforts will need to be made to ensure the welfare of Indian students and citizens, who contribute over $20 billion per annum to Canada’s economy. Their fears and the intra-community divisions within Canada, exacerbated by the canard being perpetuated by Canadian leadership, could escalate beyond a manageable point for the host country.

Some analysts also believe that if tensions persist, the broader economic relationship may be reassessed, though economic pragmatism could compel both sides to keep investment channels open.

Anil Trigunayat is a former Indian Ambassador; Dr Anil Pandey is Asst Professor at SIMATS, University of Chennai. Views expressed in the above piece are personal and solely those of the authors.

Indo-Canadian relations at their lowest ebb: Analysing its impact on investments

Leave a Reply Cancel reply