India-Canada interim trade deal back on the table after 2 years of tensions

After two years of strained diplomatic relations, as India and Canada look to iron out creases, the interim trade deal is back on the table

For the last few years, relations between India and Canada have been cold — even frigid — but a thaw is in sight. Among the factors effecting this shift is bilateralism, which has become the flavour of the season, courtesy Trump-era trade wars. Also, there has been a regime change in Canada, with Justin Trudeau making way for a new Prime Minister.      

 

Last month, as part of the efforts to reset their diplomatic ties, India and Canada decided to resume talks for an interim trade agreement after a lull of nearly two years.

 

The decision followed a meeting between Prime Minister Narendra Modi and his Canadian counterpart, Mike Carney, on the sidelines of the G7 Summit in Alberta, the westernmost of Canada’s three prairie provinces. Modi and Carney also agreed to resume senior ministerial as well as working-level engagements across domains to “rebuild trust” and “bring momentum” to the relationship. Another decision was to designate new high commissioners in each other’s capitals. This was Modi’s first in-person interaction with Canada’s new Prime Minister. 

 

The development is significant, considering how severely fractured the relations had become.

 

The ties plummeted to an all-time low after a diplomatic spat over the killing of Khalistani separatist Hardeep Singh Nijjar in June 2023, with then Canadian prime minister, Justin Trudeau, alleging a potential India link to it. Things went further downhill last year when Canadian authorities suggested that the Indian high commissioner and five other diplomats were linked to Nijjar’s murder. In protest, India recalled the six diplomats in October, and also expelled an equal number of Canadian diplomats.

 

The political tensions had a direct impact on trade deal talks, which were stalled in September 2023. Negotiations, at that point, were at an advanced stage and both sides had hoped to finalise the deal by the end of that year.

 

The decision to resume talks comes at a critical time when the geopolitical situation is evolving fast, necessitating the need to forge stronger bilateral economic deals. Years in the making The trade deal between India and Canada has been in the works for years.

 

Negotiations for a Comprehensive Economic Partnership Agreement (CEPA) between the two started nearly 15 years ago in New Delhi. However, even after the 10th round of negotiations, in August 2017, a trade pact was nowhere in sight. Over the following three years, after several stocktaking meetings, both sides decided to go ahead with an early harvest deal, or a preliminary agreement.

 

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

 

The EPTA, it was decided, would include discussions on goods, services, rules of origin, sanitary and phytosanitary measures (regulations to protect human, animal, and plant life or health from risks associated with international trade), technical barriers to trade, and dispute settlement.

 

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

 

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

 

Ask him what the picture looks like now and Ajay Srivastava, a former trade ministry official and founder of Delhi-based think-tank Global Trade Research Initiative, says the India-Canada trade deal will be easy to conclude. This, he adds, will give New Delhi the opportunity to secure access to raw material, while advancing negotiations on services, investment, and skilled worker mobility.

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

 

Of the $4.4 billion worth of imports from Canada, 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 are crucial for 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.

 

“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 explains.

 

Agneshwar Sen, Trade Policy Leader, EY India, too, is of the view that an early harvest deal between India and Canada could focus on sectors where complementarities are strong and sensitivities low — like textiles, gems and jewellery, agri-products, critical minerals, and clean energy.

 

“Handled pragmatically, an India-Canada early harvest deal could also serve as a confidence-building measure to re-establish momentum for broader economic engagement,” Sen says. “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.”

 

He adds that sectors like textiles, leather footwear, and gems and jewellery — where India has 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,” he says. “Similarly, while India’s gems and jewellery exports exceeded $35 billion last year, less than $300 million were sent to Canada.” 

 

Business as usual

 

Meanwhile, despite the tensions, trade between India and Canada hasn’t been negatively impacted.

 

During the 2024-25 financial year (FY25), the total bilateral trade in goods between the two countries stood at $8.6 billion.

While Canada accounts for less than 1 per cent of India’s total exports, its share has been rising. (Overall, India exported goods worth $4.2 billion during FY25, up 9.8 per cent year-on-year. The major exports included medicines, garments, diamonds, electronic goods, chemicals, gems and jewellery, marine products, engineering goods, rice, among others.)

 

Imports from Canada, meanwhile, 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. The trade balance was in favour of Canada, and stood at $0.2 billion.

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

 

The size of services imported from India was much smaller — $3.2 billion in 2023, with a 3.2 per cent contraction. Commercial services accounted for nearly 81 per cent of imports from India. For Canada, India is also a favourable investment destination.

 

According to the external affairs ministry, Canadian pension funds have cumulatively invested over $55 billion in India. More than 600 Canadian companies have a presence in India, and more than 1,000 are actively pursuing business in the Indian market.

Indian companies, too, are active in Canada in various sectors: IT, banking, natural resources, financial services, and so on.

A deal, even if an interim one, can solidify this engagement, and perhaps also help iron out the creases.