Trade Update: Trading with India

by Christian Sivière

The signing of a new air services agreement between Canada and India gives us the opportunity to examine our relationship with this regional power, a country that will surpass China to become the world’s most populous country next year.

Christian Sivière runs Solimpex and is an international trade consultant and lecturer.

According to the United Nations, the world’s population reached eight billion in mid-November, just 11 years after it passed seven billion, highlighting the accelerated growth of the last few decades, and raising concerns about food scarcity around the world. According to the World Food Program, a United Nations agency that provides food assistance globally, since 2019 the number of people facing significant food insecurity has increased from 135 million to 345 million, not taking into account the consequences of Russia’s invasion of Ukraine.

India is therefore not just an important trading partner for us, but may soon be at the forefront of a global food crisis.

The expanded air transport agreement recently signed allows designated airlines, namely Air Canada and Air India, to operate unlimited flights between our two countries. The previous agreement, originally reached in 1982 and expanded in 2011, limited each country to 35 flights per week.

The agreement gives Canadian airlines access to Bangalore, Chennai, Delhi, Hyderabad, Kolkata and Mumbai, and Indian airlines get access to Toronto, Montreal, Edmonton and Vancouver, with two additional points to be selected by India. Other cities in both countries can only be served indirectly through code-sharing services. Traffic rights for all-cargo services were already unrestricted.

What is surprising is that the deal comes at a time when international travel is far from pre-pandemic levels. The latest IATA statistics reveal that international air travel had only reached 69.9 percent of 2019 levels in September. Airfreight is doing better, as international air cargo stood at just 3.6 percent below 2019.

One explanation could be the increase in the number of Indian students coming to study in Canada. According to Immigration, Refugees and Citizenship Canada (IRCC), out of a total of 23,950 study permits issued in the first two month of 2022, more than half were issued to students from India. In British Columbia, there are more than 143,000 international students, and India ranks as the top source country. Studying in Canada is a very practical way to land permanent residency after graduating. And India has been a big contributor to Canadian immigration: according to IRCC, 25 percent of new permanent residents in 2019 were from India.

Two-way merchandise trade between Canada and India stood at $10.1 billion in 2019 but decreased to $8.7 billion in 2020, due to the pandemic.

The top Canadian exports to India are mineral fuels, pulses, wood pulp, precious metals and paper and paperboard. The top Canadian imports from India were jewelry and precious stones, pharmaceuticals, organic chemicals, machinery and textiles. Last year, India ranked 13th as Canada’s source of imports, while Canada came 30th as a supplier to India.

Every now and then, we hear from Ottawa about Free Trade Agreement discussions with India. We concluded a fourth round of negotiations on an Early Progress Trade Agreement (EPTA) in September, a first step before moving to full-fledged FTA negotiations, which is what Canada hopes to achieve.

Historically though, India has been a rather protectionist country, where rules can change overnight or higher tariffs are imposed when the government decides to protect certain industries. For example, in February, the Indian government increased tariffs on 31 product categories including cotton, palm oil, ethanol, solar panels and walnuts.

Canadian pulses exporters know the market very well, as India used to be Canada’s biggest customer for lentils and other pulse crops. But as India developed its own production, it started imposing 33 percent tariffs on lentils and 50 percent on peas in 2017, to protect its own producers. A few years ago, Indian Customs decided to change the HS code for incoming solar panels overnight so it could tax imports and protect the emerging Indian solar panels industry.

Another factor is that supply chains are stretched. There is a push to bring some manufacturing closer to home and develop regional supply chains. Reshoring and nearshoring have become post-pandemic buzzwords, but India is a bit far away to fit that model.

A new buzzword was recently introduced by our deputy prime minister. “Friend-shoring” means favouring trade with countries that share our values of democracy, freedom of expression, equality, non-discrimination and the rule of law. This is a noble cause, although it may be difficult to put in practice.

It was mostly aimed at excluding Russia and the countries that support its invasion of Ukraine, namely China. But India is in that gang as well. It has not applied sanctions, and actually benefits from the energy and commodity crisis caused by Russia. India’s imports from Russia broke records this year, mainly thanks to Indian purchases of fertilizers and oil bought below world prices, helping Russia by-pass Western sanctions.

Politically, Indian Prime Minister Narendra Modi’s Hindu nationalist government has embarked on the Hinduization of India, to the detriment of Muslim, Christian and Kashmiri minorities, who are treated like second-class citizens. These are not exactly Canadian values, and take “friend-shoring” with India off the table.