India-Canada trade deal gets a second wind as diplomatic ties improve

Both countries have agreed to resume talks for an interim trade agreement in a volatile global scenario as part of their effort to reset diplomatic relations following a bitter fallout under Trudeau

After an acrimonious fallout late last year, India and Canada are tentatively trying to reset diplomatic relations, following the establishment of a new government in the north American nation, with the resumption of talks for an interim trade agreement.

 

The new push comes after Indian Prime Minister Narendra Modi and his Canadian counterpart Mike Carney met on the sidelines of the G7 Summit in Alberta, where they also agreed to restart senior ministerial as well as working-level engagements across various domains to ‘rebuild trust’ and ‘bring momentum’ to the relationship. Both leaders have also decided to designate new high commissioners to each other's capitals.

 

The meeting was Modi’s first in-person interaction with the Canadian prime minister, who assumed office in March this year following general elections in which he defeated conservative Pierre Poilievre.

 

The resumption of talks is significant, considering the ties between both countries had fallen to historic lows over the past two years. The timing also remains crucial, considering the ongoing churn in the global geopolitical scenario, with more countries moving towards forging stronger economic bilateral deals.

 

The diplomatic disaster

 

India-Canada relations crashed and burned in the aftermath of a diplomatic spat last year over the 2023 assassination of Khalistani separatist Hardeep Singh Nijjar when then Prime Minister Justin Trudeau alleged the Indian government was behind the killing, without offering any concrete evidence to back up his accusations. Subsequently, in October 2024, India recalled its high commissioner and five other diplomats after Canadian authorities suggested they were linked to the Nijjar case. India also expelled an equal number of Canadian diplomats.

 

As a result of the political tensions in the immediate aftermath of Nijjar's killing in June 2023, trade talks stalled in September that year even as negotiations were at an advanced stage and both sides hoped to finalise the agreement by the end of the year.

 

A years-old problem in search of a new solution

 

The negotiations for a Comprehensive Economic Partnership Agreement (CEPA) between India and Canada was launched nearly 15 years ago in New Delhi. However, no headway has been made on the proposed trade pact even after the tenth round of negotiations in August 2017.

 

After several stocktaking meetings over the next three years, both sides decided to go ahead with a so-called 'early harvest' deal. 

 

In March 2022, India and Canada formally re-launched talks for a comprehensive trade deal in order to create new opportunities for boosting trade and investment flows. It was decided that an early progress trade agreement (EPTA) would be a transitional step towards the CEPA.

 

It was decided at the time that the EPTA would include discussions on goods, services, rules of origin, sanitary, and phytosanitary measures, technical barriers to trade, and dispute settlement.

 

Government officials had said India’s key areas of interest would be greater market access for pharmaceutical products, readymade garments, agriculture goods and easier movement of skilled workers, and to create more jobs for its swelling army of information technology professionals.

 

On the other hand, Canada’s priority was seeking greater market access for agricultural products such as pulses, among other things. Canada and India had also decided to accelerate negotiations, alongside the CEPA, on a Bilateral Investment Agreement – a top priority for Ottawa.

 

Ajay Srivastava, former trade ministry official and founder of Delhi-based think-tank Global Trade Research Initiative (GTRI), said that an India-Canada trade deal will be easy to conclude, giving New Delhi the opportunity to secure raw material access while advancing negotiations on services, investment, and skilled worker mobility

 

This is because unlike free trade agreements (FTAs) with manufacturing-heavy countries, Canada’s export profile complements India’s needs.

 

Of the $4.4 billion imports from Canada in FY25, over 76 per cent were essential raw materials and primary commodities, such as lentils ($466 million), yellow peas ($478 million), coking coal ($417 million), potassium chloride fertiliser ($369 million), and petroleum crude ($219 million). All of these are critical to India’s food security, steel production, and energy needs. India also sourced rough and polished diamonds, wood pulp, newsprint and scrap materials like aluminium and steel from Canada.

 

“Since these imports are largely non-competitive and feed directly into India's industrial supply chains, a trade deal with Canada poses little threat to domestic producers,” Srivastava explained.

 

Agneshwar Sen, Lead (trade policy) at EY India, said that an early harvest deal between India and Canada could focus on sectors where complementarities are strong and sensitivities are low, such as like textiles, gems and jewellery, agri-products, critical minerals and clean energy.

 

“If handled pragmatically, an India-Canada early harvest deal could also serve as a confidence-building measure to re-establish momentum for broader economic engagement. Given Canada’s need to diversify trade beyond the US and China and India’s growing role as a manufacturing and services hub, the strategic rationale is sound,” Sen said.

 

He pointed out that that since sectors like textiles, leather footwear, and gems and jewellery — in which India enjoys global competitiveness — stand to gain significantly. “For instance, Canada imports over $3 billion worth of footwear and leather goods annually, but India's share is under 2 per cent. Similarly, India's gems and jewellery exports exceeded $35 billion last year, while its exports to Canada were less than $300 million,” he added.

 

Business ties remain solid

 

Despite the tensions, trade between India and Canada has not been negatively impacted. During the financial year 2024-25, the total bilateral trade goods between India and Canada stood at $8.6 billion, with the trade balance tilting only slightly favour of Canada at $0.2 billion.

 

Exports to Canada remained robust, too. India exported goods worth $4.2 billion during the financial year ended March 2025, up 9.8 per cent year-on-year. Major items of Indian exports include medicines, garments, diamonds, electronic goods, chemicals, gems and jewellery, marine products, engineering goods, rice, among others. The share of exports to Canada, however, was less than 1 per cent of total merchandise exports.

 

On the other hand, imports from Canada contracted 2 per cent to $4.4 billion during FY25. India’s import dependency on Canada, vis-a-vis the rest of the world is only 0.6 per cent.

 

Canada’s international trade and investment factsheet showed that services exports to India grew 55.7 per cent on-year to $14.1 billion in 2023 and was mainly driven by travel spending.

 

The size of services imports from India was much smaller at $3.2 billion in 2023, with a 3.2 per cent contraction. Commercial services accounted for nearly 81 per cent of imports from India.

 

According to estimates from the ministry of external affairs, Canadian pension funds have cumulatively invested over $55 billion in India, underscoring their interest in India as a favourable investment destination. More than 600 Canadian companies have a presence in India, and more than 1,000 companies are actively pursuing business in the Indian market. Indian companies in Canada are active in various sectors, including IT, banking, natural resources, financial services, among others.