Blogs & Comment

Canada-India free trade gathering steam

With a coming free trade deal, opportunities abound for both Canadian and Indian tech companies.

(Photo: Dieter Spannknebel/Getty)

When people think of countries that are tech powerhouses they think primarily of Japan and the U.S. But a free trade agreement currently under negotiation between Canada and India may help the latter get that much closer to joining the club—and expand Canada’s economy by at least $6 billion.

It’s called the Comprehensive Economic Partnership Agreement (CEPA) and grew out of a 2010 Canada-India Joint Study recommending trade liberalization. (In addition to this, there are other, smaller agreements currently under negotiation, such as the Foreign Investment Promotion and Protection Agreement.)

At present, Canada’s trade with India is a modest, though not insignificant $5.2 billion. But that trade has been growing quickly, with the merchandise portion (about 80% of total trade) up 73% since 2004. This reflects the reality of the developing world’s strong growth in contrast to mature economies which are just muddling along. For comparison, Canada’s GDP grew at 3.2% in 2010, while India saw 9%—and that’s in the middle of a global economic slump. And until recently, direct investment from India was insignificant but exploded by 2,900% in 2008, almost in concert with the economic implosion in the west. India hasn’t looked back since.

Tech and infrastructure businesses are going to benefit the most from liberalized trade, says Rana Sarkar, president and CEO of the Canada-India Business Council at BMO Capital Markets. He singles out clean tech in particular as being “huge.” Core infrastructure, resources and services businesses should all do well because of India’s need for the basic building blocks of economic development.

Tony Balasubramanian, partner in PricewaterhouseCoopers tech consulting practice, agrees: “Energy is a big issue in India as it is in all the BRIC countries. From an energy and base infrastructure perspective I think there’s a great opportunity for Canadian companies in India.” He adds that robotics is another industry that should see measurable gains as a result of any deal.

There have so far been five business roundtables—the last was in July—bringing together government and business leaders from both countries. One major participant has been SNC-Lavalin. In a statement, Ronald Denom, president of SNC-Lavalin International, said, “As far as the high-tech industry goes, some of the advantages that free trade with India would bring to Canadian companies include privileged access to a very large and rapidly growing market for their goods and services, additional sources of both financial and human capital, and greater exposure to ‘frugal innovation,’ which is an interesting characteristic of the Indian high-tech markets and extremely relevant for companies seeking to expand their worldwide sales in emerging markets.”

In the other direction, India’s tech sector—characterized by IT and tech consulting firms like Tata and Infosys—could benefit immensely from liberalized trade between the two countries.
However, Sarkar says the opportunity stretches beyond IT. “There’s a number of industries where India has strengths—there’s a number of engineering companies that are increasingly involved globally, and those are broadly service sector expertise. Indians have a strong interest in making sure that’s part of the negotiations as well. But also broadly in terms of investment, Indian companies are fairly aggressive, looking globally, both as kind of a risk hedge on their side to their own domestic growth.”

Perhaps already leading the way is Wipro (NYSE: WIT), which, at a market value of US$23B, is now the world’s largest third-party engineering services firm. It opened a new office in Mississauga, Ont., in February 2011, characterizing the expansion as part of its “plans to intensify its focus on Canada, as one of the strategic geographies supporting Wipro’s growth.”

Trade negotiations on the Canadian side are being headed up by Ed Fast, Minister of International Trade and Minister for the Asia-Pacific Gateway. The feds say an agreement is expected to be reached by 2013 after which it goes to Parliament. (Note that the Canada-U.S. free trade agreement signed in 1987 took effect a year later.)

Satish Thakkar, president of the Indo-Canada Chamber of Commerce, which has been involved in the talks, says the chamber is satisfied with the pace of negotiations. He points to no major stumbling blocks, but cautions that “given the scope of CEPA, negotiations are likely to be protracted.”

SNC-Lavalin’s Denom says “we are still a long way from a free trade agreement with India.”

However, in talking to these folks, the optimism is palpable, and with good reason. There’s still a lot to be done in India and that means plenty of opportunity. Yet at the same time, India is more than just another sweatshop outpost—Indian companies are big players and they’ll also be setting up shop in Canada and spending investment dollars. And that’s quite a bit different from the free trade relationship between, say, Canada and Mexico.

Says Sarkar, “India is being built at the moment so all these things that we do really well in Canada, like soft infrastructure—rules and regulations when you’re building a new town, how to set up associations, architectural engineering—all of those things are going to go through an enormous growth curve in India.”