Canada-India Joint Study Group Report: Exploring the Feasibility of a Comprehensive Economic Partnership Agreement

Chapter 1: Overview and Economic Relationship

1.1 Overview

In recent years, both India and Canada have been engaged in the process to enhance bilateral cooperation in a number of areas of mutual priority such as trade and investment; education; science, technology and innovation; environment and energy. With our shared values of democracy, the rule of law and pluralism, India and Canada are in many respects natural partners.

India and Canada have substantially expanded bilateral ties. Canada, for example, opened new trade offices in Hyderabad, Kolkata, and Ahmedabad in 2009, raising the total number of missions in India to eight. There remains, however, much untapped potential in the relationship.

India has emerged as one of the world's fastest-growing economies, and India's rising per capita income, rapidly expanding manufacturing base, expanding high technology and services sectors, with renewed focus on infrastructure and natural resources requirements, make it a market of tremendous opportunity. Canada is one of the G7 industrial economies. It has been ranked the 9th most competitive economy in the world, according to the Global Competitiveness Index 2009-10², and Canada's per capita gross domestic product of US$39,649 (2009 in current dollars) is among the top 20.³

The India-Canada CEO Roundtable issued a report in September 2008, urging the launch of free trade negotiations. Drafted by the Confederation of Indian Industry (CII) and the Canadian Council of Chief Executives (CCCE), the CEO Roundtable report made a number of recommendations on how to deepen the India-Canada bilateral relationship. In particular, it called for a single, modern, high-quality and comprehensive free trade agreement (FTA).

In January 2009, India's Joint Secretary at the Department of Commerce and Industry and Canada's Assistant Deputy Minister of Trade Policy and Negotiations met in New Delhi to discuss the CEO Roundtable recommendations and exchange initial information on India's and Canada's approach to trade agreements.

Following this discussion, on January 21, 2009, India's Minister of Commerce and Industry and Canada's Minister of International Trade stated in a joint announcement that India and Canada have agreed to initiate exploratory discussions toward a comprehensive economic partnership agreement.⁴

The Prime Minister of Canada, Mr. Stephen Harper, paid an official visit to India from November 15-18, 2009, at the invitation of the Prime Minister of India, Dr. Manmohan Singh. The two Heads of Governments reviewed the bilateral relations between India and Canada and discussed regional and global issues of shared interest.

The Prime Ministers noted the depth and dynamism of the relationship between the two countries which is marked by common values and shared traditions of democracy, the rule of law and pluralism. The two leaders recognised the contribution of the Indian diaspora in Canada in further strengthening the bilateral bonds between the societies of India and Canada. Leaders committed themselves to sustained political engagement, a structured exchange of high level visits and regular dialogues between their officials. Prime Ministers Singh and Harper also expressed the hope that bilateral trade between their two countries would increase to $15 billion annually in the next five years.

The Leaders also announced the setting up of a Joint Study Group that will explore the feasibility of a comprehensive economic partnership agreement between India and Canada.

The Joint Study Group was formally established by a memorandum of understanding, signed on November 17, 2009, by India's Minister of Commerce and Industry and Canada's Minister of International Trade. The signing of this memorandum of understanding was witnessed by both Prime Ministers.

The Joint Study Group, comprised of government officials, was tasked with looking at key sectors of interest and the possible parameters of a comprehensive trade agreement between the two countries. The objective of this Joint Study is to examine the feasibility of a comprehensive economic partnership agreement (CEPA). The memorandum of understanding provided six months for the report to be completed.

The Joint Study Group met twice, on December 7-8, 2009, in New Delhi and on May 6­-7, 2010, in Ottawa. Officials discussed the possible parameters of a CEPA, and India's and Canada's approaches related thereto. The following report, resulting from these discussions, is comprised of several components:

• Overview and Bilateral Economic Relationship;

• Trade in Goods;

• Trade in Services;

• Investment;

• Other Areas of Economic Cooperation; and

• Economic Modelling.

In Canada, a number of the issues discussed in these areas are, in whole or in part, under the jurisdiction of sub-national governments. A concluding chapter features a summary of recommendations contained throughout the report and the final conclusion of the Joint Study Group.

1.2 Canada's and India's Economic Relationship

The following section undertakes an analysis of the trends in the India-Canada economic relationship for the period 1999-2009 which is to serve as context for the analysis of factors affecting India-Canada trade and investment. This section provides an overview of both Indian and Canadian economies, their sectoral composition, employment situation and their trade and investment relationship. The key economic indicators for India and Canada are outlined, including growth rates, per capita gross domestic product (GDP) levels and inflation rates, as well as bilateral trade patterns and the respective rankings of India and Canada as each other's trade partner.

India⁵

Main Indicators

India's economy has followed an impressive growth path in the recent decade with real GDP increasing around 8.0% annually during the period 2003-08. Nominal GDP was US$1.21 trillion in 2008 and is expected to reach US$1.24 trillion in 2009. Over the examined period, India's GDP per capita more than doubled to reach US$1,017 in 2008 from US$429 in 1999. In real terms, this translates into an annual real growth of 10.1%, which exceeds the growth of real GDP over the same period. In 2009, despite the global recession, the Indian economy is expected to be one of the fastest growing economies in the world, and is expected to grow at 7.2% in 2009-10. However India has witnessed inflationary pressure with an average rate of 5.8%, mainly due to supply side constraints. India's current account deficit vis-à-vis the rest of the world expanded to US$26.6 billion in 2008 from US$3.2 billion in 1999. In terms of a percentage of GDP, however, it remained at a modest 2.2%.

With the international economic situation improving on the back of revival in world trade and industrial production, India's external sector has witnessed a revival. After a continuous decline for over twelve consecutive months, export growth has turned around since October 2009. Exports during March, 2010 were valued at US$19.9 billion which was 54.1% higher than the level during March, 2009. Cumulative value of exports for the period April, 2009 to March, 2010 was US$176.6 billion as against US$185.3 billion registering a negative growth of 4.7% over the same period last year. Imports during March, 2010 were valued at US$27.7 billion representing a growth of 67.1% over the level during March, 2009. Cumulative value of imports for the period April, 2009 to March, 2010 was US$278.7 billion, registering a negative growth of 8.2% over the same period last year. The trade deficit for April, 2009 to March, 2010 was estimated at US$102.1 billion which was 13.8% lower than the deficit recorded during April, 2008 to March, 2009.

Table 1.1 Key economic Indicators, India, 1999-2009

Note: Figures for 2009 are estimate.
Source: IMF World Economic Outlook Database, May 2010.

Sectoral Composition of the Indian Economy

The Indian economy is passing through a phase of sectoral transformation since early 1990s. During the last few decades, the Indian economy has been driven mostly by the services sector, which contributed to 53.4% of the country's GDP in 2008 (Table 1.2). The contribution of the agricultural sector in the total value-added has been declining during the past decade.

Table 1.2 Structural Changes in the Indian Economy

Source: World Development Indicators 2009 CD, World Bank.

The agricultural sector has provided the maximum number of job opportunities in the country relative to other sectors in the economy. It absorbed 52.1% of total employment in 2004-05 as presented in Table 1.3. During the same year, the share of manufacturing sector in the India's total employment was nearly 13.0% and its share has been rising in recent years. The role of the services sector in generating employment in the country is gradually increasing. Labour absorption is significant in certain sub-sectors within the services sector (trade & hotel and community services, among others).

Table 1.3 Employment across Industries (%)

Source: Planning Commission of India

Indian Merchandise Trade Pattern

In 2008, with total world merchandise trade amounting to US$ 32.5 trillion, India was the 16^th largest importer and the 27^th largest exporter in the world.⁶ According to Directorate General of Commercial Intelligence and Statistics, India, the country's top trading partners were the United Arab Emirates, China and the United States, accounting for 9.9% and 8.6% and 8.1% of India's total merchandise trade, respectively (2008-09). Canada was ranked as India's 30^th trading partner.

Bilateral trade between Canada and India expanded dramatically in the past decade. Canada's total merchandise exports to India in 2008 were six times higher than that in 1999 and reached an all time high of US$2.6 billion in 2008. India's exports to Canada also grew by 10.7% CAGR to reach US$1.4 billion in 2008 from US$560 million in 1999. Since imports from Canada were larger than exports to Canada, India had a trade deficit vis-à-vis Canada of nearly US$1.2 billion in 2008. Despite impressive growth of bilateral trade in merchandise, Canada's relative importance as a trading partner for India has declined over the past decade. Canada's share of India's total merchandise exports has declined from 1.3% in 2001 to 0.7% in 2008. Similarly, Canada's share in India's total imports also marginally fell from 1.0% to 0.8% over the same period (See Figure 1.1).

Table 1.4 India's Merchandise Trade Partners 2008, billions of US$

Note: Countries are ranked by total trade value. GDP is measured in current prices, billions of US$.
Source: IMF World Economic Outlook Database, October 2009 and the Directorate General of Commercial Intelligence and Statistics, Indian Ministry of Commerce.

Looking at table 1.4, it appears that the India-Canada trade relationship is significantly under-traded. For example, total trade between India and Canada is three times smaller than the size of trade between India and Australia, even though the Canadian economy is about 50% larger than that of Australia.⁷

The composition of India's merchandise exports to Canada has undergone a fundamental transformation in the past decade. Whereas in 1999, textile and apparel accounted for 46.0% of India's exports to Canada, in 2008, that share decreased to 24.9%. India's leading sectors of exports to Canada in 2008 were chemical products, which accounted for 25.2% of total exports to Canada, followed by textiles and wearing apparel, miscellaneous manufacturing products as well as machinery and equipment. These four categories together made up more than 70.0% of the total Indian merchandise exports to Canada. Products that reported strong import growth in the past ten years included chemical, rubber and plastic products, textiles and apparel, machinery and equipment, as well as miscellaneous manufacturing products.

The structure of India's bilateral trade with Canada is different from its overall exports to the rest of the world. In 2008-09, India's exports to Canada consisted of drugs and pharmaceuticals (including chemicals), ready made garments, base metals, gems and jewellery, machinery, marine products, and plastic and linoleum products.

Table 1.5 India's Merchandise Exports to Canada, millions of US$

Note: The product classification is aggregated from HS codes to GTAP sectors.
Source: The Directorate General of Commercial Intelligence and Statistics, Indian Ministry of Commerce.

1.3 Canada's and India's Economic Relationship

Canada⁸

Main Indicators

From 1999 to 2008, the Canadian economy has experienced stable growth, with real GDP increasing by 2.6% annually, in Canadian dollar terms. The economic crisis that started in 2008 had an impact on Canada's economic performance, with negative growth in 2009, but the economy is expected to return to positive growth in 2010. Canadian GDP per capita at the market price improved to reach US$45,038 in 2008 from US$21,748 in 1999. In real Canadian dollar terms, GDP per capita increased 1.6% at a compound annual rate over the same period.

Economic growth in Canada was accompanied by stable inflation that averaged 2.2% between 1999 and 2008. For many decades, Canada has maintained a current account surplus with the rest of the world. Due to weaker commodity prices and the recession in the United States, however, Canada's current account balance went into a deficit of US$36.2 billion in 2009. This was the first current account deficit recorded since 1999. The current account balance is expected to improve as global demand and commodity prices recover.

Table 1.6 Key Economic Indicators, Canada, 1999-2009

Source: Statistics Canada, May 2010.

Sectoral Composition of the Canadian Economy

Services represent the largest sector of the Canadian economy, accounting for about 71% of Canada's GDP in 2008. Over the decade, the share of services in Canada's GDP increased steadily as Canada has become a more services-oriented economy, while the relative importance of other sectors was on a downward trend. In particular, the manufacturing share of the GDP declined to 13.9% in 2008 from 18.5% in 2000. The agricultural sector has maintained its relative position in the overall economy, accounting for about 2% of GDP.

Table 1.7 Structural Change in the Canadian Economy

Source: Statistics Canada

Table 1.8 present a broad picture of structural adjustment in terms of employment in Canada over the past several decades. The share of services in total Canadian employment increased to 80.6% in 2008 from only 66.9% in 1980. The manufacturing sector has the largest decline in terms of its share in total employment, which dropped to 9.5% in 2008 from 18.8% in 1980. Agricultural employment also experienced a significant drop in its share of total employment. In 2008, agriculture accounted for only 1.6% of total Canadian employment in 2008, compared to 3.8% of total employment three decades ago.

Table 1.8 Employment across Industries in Canada, %

Source: Statistics Canada

Canadian Merchandise Trade Pattern

Canada's total merchandise trade in 2008 was US$865 billion, 66% of which was with the United States. In this context, Canada's US$4 billion total merchandise trade with India in 2008 appears modest, but Canada's trade in merchandise with India has been expanding rapidly between 1999 and 2008. Canadian merchandise exports to India increased at an annual compound rate of 24%, up from US$323.8 million in 1999 to US$2.2 billion in 2008, while imports from India grew by 13% annually, up from US$685 million in 1999 to US$2.1 billion in 2008. Canada had a trade surplus in merchandise with India of US$167.4 million in 2008. India was Canada's 16^th merchandise trade partner.

Furthermore, the importance of trade with India has increased over recent years both in terms of India's share in total Canadian imports and total exports. In 1999, imports of merchandises from India accounted for 0.3% of total Canadian imports. This share has been progressing to reach 0.5% in 2008. Similarly, India's share in Canada's total exports also increased steadily from 0.14% of total exports in 1999 to 0.5% in 2008.

Canada's exports to India are broad-based, ranging from industrial products and machinery and equipment, to agricultural and other resources-related products. Chemical products lead exports to India, accounting for more than 33% of total Canadian merchandises exports to India. This is followed by vegetables, fruits and nuts (mainly pulses including dried peas and lentils); as well as pulp and paper products, which represent 18% and 16% of total Canadian merchandises exports to India respectively. Along with machinery and equipment, these four sectors made up more than 80% of total exported merchandise from Canada to India in 2008. While almost every sector has recorded growth, merchandise trade in chemical products, vegetables and fruits, pulp and papers, machinery and equipment, and metals has grown at a much faster rate.

Table 1.9 Canada's Main Merchandise Trade Partners 2008, billions of US$

Note: Countries are ranked by total trade value. GDP is measured in current prices, billions of US$.
Source: Statistics Canada. IMF World Economic Outlook Database, April 2010.

Table 1.10 Canada's Merchandise Exports to India, millions of US$

Note: the product classification is aggregated from HS codes to GTAP sectors.
Source: Statistics Canada

India-Canada Trade in Services

According to Statistics Canada, over the past nine years, bilateral trade in services between Canada and India nearly tripled to reach US$693 million in 2007 from US$241 million in 1999. Canada's leading services receipts from India were travel, which accounted for 50% of total Canadian services receipts from India in 2007. Canada's exports of commercial services to India peaked in 2001 and 2002, but have declined since then. In contrast, Canada's imports of commercial services from India expanded rapidly in recent years to reach US$130 million in 2007, from US$16 million in 1999. The driving forces underlying such an expansion were Canada's imports of computer and information services and business services from India, which mirrored the dynamics of India's services sector in the age of services outsourcing. As a result of such changes, since 2005, Canada has become a net importer of services from India, especially in the area of commercial services.

Table 1.11 India-Canada Bilateral Trade in Services, 1999-2007, millions of US$

Note: Some values of commercial services have been suppressed to preserve the confidentiality of the sources
Source: Statistics Canada.

India and Canada Direct Investment

While the bilateral Canada-India investment relationship has been expanding, it remains modest compared to the level investment that each country receives from the rest of the world. As of 2009, India is now Canada's 13^th largest source of foreign direct investment (FDI) and the 42^nd largest destination of Canadian direct investment.

Nevertheless, both inward and outward direct investment stocks have increased substantially since 2005. The stock of Canadian direct investment in India reached US$574 million in 2009, while the stock of direct investment in Canada from India reached an all time high of US$2.8 billion. Since 2008, Canada is now a net importer of FDI from India.

Table 1.12 Canada's Foreign Direct Investment, 1999-2009, millions of US$

Source: Statistics Canada.

² The Global Competitiveness Index 2009–2010 rankings and 2008–2009 comparisons (PDF Version, 231 KB) ^*

³ Statistics Canada and World Economic Outlook database

⁴ For the purposes of this Canada-India Joint Study, without prejudice to the final results, the comprehensive economic partnership agreement (CEPA) and free trade agreement (FTA) are used interchangeably, reflecting normal terminology in India and Canada respectively, where both refer to a broad-coverage, high-ambition, high-quality trade liberalisation agreement.

⁵ Data in this section are sourced from India's national statistical agency unless otherwise indicated.

⁶ WTO International Trade Statistics, 2009: Leading exporters and importers in world merchandise trade, Table 1.8

⁷ See also the feature article "Canada's Performance in the Emerging Markets" p.88 in "Canada's State of Trade: Trade and Investment Update - 2009"published by Foreign Affairs and International Trade Canada

⁸ Data in this section are sourced from Statistics Canada unless otherwise indicated.

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