How tensions between India and Canada can impact investment flows, dealmaking

The recent tensions between India and Canada have sparked concerns about the future of cross-border investments and M&A deals between the two nations.

Canada has been a crucial financial partner for India, investing across various sectors of the economy. However, the current political climate may hinder the momentum of these investments, potentially impacting the collaboration built over the years.

The current state of India-Canada economic relations

Canada is a significant source of FDI in India, with over 600 Canadian companies currently operating in the country and more than 1,000 firms exploring business opportunities.

Major Canadian pension funds, including the Canada Pension Plan Investment Board (CPPIB), British Columbia Investment Management (BCI), and Caisse de Depot et Placement du Quebec (CDPQ), have invested over $75 billion in India, making Canada the 17th largest foreign investor in the nation. Currently, trade between India and Canada stands at $8.4 billion, with India exporting $3.8 billion and importing $4.6 billion worth of goods from Canada.

However, relations have soured following allegations related to the killing of a Sikh separatist leader, escalating tensions between the two countries. As a result, discussions surrounding the Comprehensive Economic Partnership Agreement (CEPA) have temporarily stalled.

This agreement has the potential to contribute between $3.8-5.9 billion to Canada’s economy by 2035. Furthermore, Canadian investment flows to India have dropped from 22 billion Canadian dollars in 2021 to just 2.6 billion in 2023, marking a staggering 90% decrease amid the rising political tensions.

Cross-border impacts on M&A activity

The current tensions between the two countries present significant challenges for Indian companies seeking M&A opportunities in Canada.

Many Indian firms have been looking to expand into the Canadian market through acquisitions; however, the current political climate may lead to Canadian regulators to adopt a stricter approach to deal approvals.

For instance, Indian pharmaceutical companies attempting to acquire Canadian firms might face delays, prompting them to reconsider their strategies and explore alternative growth avenues.

Indian firms already operating in Canada, particularly in technology and services, may also encounter operational challenges as these sectors are often viewed as sectors vital to national interests and security. Major IT conglomerates like TCS, Infosys and Wipro, which employ thousands in Canada, could face complications that affect job stability and their contributions to both economies.

Moreover, the current political landscape might compel Indian companies to rethink their investment strategies in Canada. Canada could potentially implement measures such as tariffs or import restrictions, impacting key sectors like agriculture.

Given that India relies on Canada for about 25% of its pulse imports - such as lentils and peas - any disruptions could raise costs for Indian businesses and complicate supply chain management.

The pause in CEPA talks further adds to this uncertainty, leading Indian companies to be more cautious in pursuing new deals. In the absence of this agreement, Indian firms may hesitate to engage in strategic acquisitions and partnerships that could have been facilitated by improved trade conditions.

This cautious mindset could ultimately lead to a decline in domestic M&A activity as companies carefully weigh the risks associated with potential geopolitical fallout.

Looking ahead

Despite the strained relations, Canadian pension funds are expected to continue investing in India’s key sectors, including infrastructure, energy, financial services, and technology.

India remains a top investment destination, with projections indicating it could become the world’s third-largest economy by 2027. There is significant potential for the two economies to collaborate in sectors of mutual interest, such as clean technologies for infrastructure development, critical minerals, electric vehicles and batteries, renewable energy and artificial intelligence.

While the political situation may lead to Canadian investors adopting a more cautious stance, a complete withdrawal is unlikely. However, a temporary setback in the short term cannot be ruled out. Investors may opt for a ‘temporary standstill’ approach to navigate regulatory uncertainties and potential changes in government policy.

Additionally, many Canadian firms might choose to invest through third countries, such as Singapore, Mauritius and USA, to mitigate political impact while capitalising on the high-growth market opportunities that India presents

Source:-  VCCircle