Indian IT Inc. on Standby Amid India Canada Strain Could Also Significantly Impact Big-Ticket Foreign Direct Investments (FDIs) Valued At USD 100 billion

Tensions between India and Canada have put Indian IT companies, particularly those with business ties in Canada, in a state of cautious anticipation since many Indian IT firms, which serve customers in the United States, have also established delivery centers in Canada.

As a result, the industry body Nasscom has initiated informal communications with its member companies but maintains that there is “no immediate cause for concern.” An industry official commented, “Companies are currently adopting a wait-and-see approach.”

Still, industry experts have expressed concerns about potential delays in ongoing business deals and the movement of professionals. 

As put by Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting, “While there is no immediate cause for concern, ongoing discussions for new deals may experience delays. This is perceived as a risk, particularly for companies with offices in Canada. The already sluggish decision-making process due to the macroeconomic environment is further compounded by this additional layer of slowdown in completing transactions.”

Jain estimates that Canada could contribute a modest share of revenue, in the mid-single digits, to the approximately $245-billion Indian IT services and business process outsourcing market.

However, given the way things stand currently, some companies are pausing their expansion or entry plans into Canada due to the current situation. 

Gagan Sabharwal, Chief Growth Officer at Zeta-V Technology Solutions, mentioned that the startup is reconsidering its plans to establish operations in Canada, citing the excessive political uncertainty as a hindrance to business growth. Sabharwal noted, “A favorable political climate is essential for business growth.”

Notable Indian IT companies like Tata Consultancy Services (TCS) and Infosys have a significant presence in Canada; likewise, TCS, the largest Indian IT service provider, has been serving the Canadian market for over 25 years, with offices in Toronto, Montreal, Calgary, and Vancouver and is among the top 10 IT service providers in Canada and is known for recruiting tech talent.

Similarly, Infosys also has centers in Toronto, Calgary, and Vancouver and has plans to employ roughly 8,000 people in Canada by the next year.

It is also worth noting that, according to a report by the Technology Councils of North America and Canada’s Tech Network, Indians in Canada represented the largest group of global tech industry workers from April 2022 to March 2023.

FDI’s 

Aside from its evident diplomatic implications, the India-Canada rift has the potential to significantly impact big-ticket foreign direct investments (FDIs), trade relationships worth billions of dollars, cultural exchanges, and much more. 

India hosts nearly 600 Canadian companies, including major players like Bombardier and SNC Lavalin, while over 100 Indian firms such as TCS, Infosys, and Wipro conduct business in Canada, employing 24,000 Canadians and this robust commercial partnership is valued at USD 100 billion and is currently under strain.

Here’s a breakdown of the various aspects encompassing investment, trade, economics, culture, and diplomacy that could be affected by the ongoing dispute between the two nations:

Investments and Trade: Potential Changes

• Canada ranks as the 18th largest foreign investor in India, having infused USD 3.6 billion into the country since 2000. Canadian investors have contributed billions to Indian stock and debt markets, infrastructure, renewable energy, technology, and financial services.

• Leading Indian entities where Canadian firms have investments include ICICI Bank, Kotak Mahindra Bank, Paytm, Zomato, Nykaa, Delhivery, Wipro, and Infosys.

• Canadian investments represent 0.5% of the total FDI inflow into India.

• Services and Infrastructure collectively account for 40.63% of total FDI investments from Canada to India.

• Prominent Canadian pension funds, such as CPP, CDPQ, and OTPP, have substantial investments in India, totalling in the billions, indicating significant financial stakes.

• Reportedly, Canadian pension funds have a combined investment of nearly USD 900 billion in India.

• Future investments may be at risk as a trade delegation to India known as “Team Canada,” originally scheduled for next month, has been postponed without an official explanation.

• Despite the shadow of the pandemic and the disruptions caused by the Ukraine conflict, bilateral trade between the two countries experienced growth in 2022.

Cultural and Diplomatic Shifts

• Invest India, a government-led organization aimed at promoting investments in India, prominently features a photo of Justin Trudeau and Narendra Modi on its main Canada page, stating “India-Canada: Natural allies and partners towards growth.” However, the current crisis may alter this perception.

• Major Canadian pension funds, including OTPP and CPPIB, have invested in the National Investment and Infrastructure Fund (NIIF), a platform backed by the Indian government with participation from global investors.

• CPPIB, for instance, has committed USD 160 million to Multiples Private Equity Fund IV, targeting mid-market growth opportunities in India, and invested an additional USD 400 million in the Indian toll roads portfolio company, IndInfravit Trust.

• In FY22, Canada invested nearly USD 76 million to support 52 international assistance projects in India, focusing on sustainable economic development, infectious disease treatment, nutrition, and renewable energy projects in vulnerable communities.

Economic Ties, What’s at Risk

Over the years, both India and Canada have worked diligently to establish a thriving economic partnership. However, the ongoing political and diplomatic tensions have put several crucial aspects of this relationship in jeopardy:

Free Trade Agreement Negotiations: Negotiations on a free trade agreement between the two countries have come to a halt due to political and diplomatic issues.

Manufactured Goods Export: Canada’s export of manufactured goods to India accounted for 0.23% of India’s total manufacturing production in 2020.

Comprehensive Economic Partnership Agreement (CEPA): In 2022, India and Canada formally re-launched negotiations for the India-Canada Comprehensive Economic Partnership Agreement (CEPA); to pave the way for CEPA, discussions on an Early Progress Trade Agreement (EPTA) have been ongoing, covering commitments in goods, services, investment, rules of origin, sanitary and phytosanitary measures, technical barriers to trade, and dispute resolution.

Investment Agreements: Both countries have been actively working towards a Comprehensive Economic Partnership Agreement and a Foreign Investment Promotion and Protection Agreement (FIPA/BIPPA), and Ministerial Dialogues on Trade and Investment (MDTI) have been held regularly to deepen this commercial relationship, but this may be at stake now.

Sectoral Cooperation: India and Canada have also been enhancing cooperation in various sectors, including clean technologies for infrastructure development, critical minerals, electric vehicles and batteries, renewable energy/hydrogen, and artificial intelligence. 

Migration and Mobility: There is a significant movement of professionals, skilled workers, students, and business travellers between the two countries; at the same time, discussions have been ongoing to enhance cooperation in the area of migration and mobility.

Diplomatic, Cultural, and Educational Implications:

• Diplomatically, the current dispute could impact the 75-year history of diplomatic relations and collaboration between India and Canada in international forums such as the UN, Commonwealth, WTO, OECD, and G20.

• Canada is home to the most prominent Sikh population outside India, with approximately 770,000 people identifying as Sikhs in a 2021 census.

• In 2022, Canada hosted over 340,000 Indian students, making it the top global destination for Indian international students, and there are 600 education Memorandums of Understanding (MoUs) between Canadian and Indian institutions.

•  India and Canada have also collaborated in cultural endeavours, for example, Canada being the Country of Focus at the 48th International Film Festival of India in 2017 and signing an audio-visual co-production agreement in 2014.

Recent Allegations: Recent allegations and travel advisories have strained relations further; India has cited “politically condoned violence” and issued a travel advisory for Indian nationals in Canada, while Canada has advised its citizens to exercise caution when travelling to various regions in India.

Diplomatic Resolution: Experts suggest effective diplomatic channels are necessary to address these issues and prevent more enormous implications on reputation, economics, and politics. While there may be a momentary pause in trade and investments due to political tensions, the potential for mutually beneficial trade and investments remains, and diplomatic efforts can help sustain this momentum.

The Last Bit, As India and Canada find themselves at a critical juncture in their relationship, characterized by escalating tensions and uncertainties, the resolution of fresh allegations and geopolitical implications will serve as a defining factor in the bilateral ties.

While challenges abound, yet there remains hope that both countries will work together for mutual interests, trade, and investments that have brought prosperity to both countries alike.