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

Executive Summary

On November 17, 2009 in Delhi, in the presence of Prime Minister Harper and Prime Minister Singh, Canada's Minister of International Trade and India's Minister of Commerce and Industry signed a Memorandum of Understanding (MOU) establishing a Joint Study Group to examine the feasibility of a comprehensive economic partnership agreement (CEPA).¹

The Joint Study Group took a comprehensive view of bilateral economic linkages between India and Canada. The Joint Study Group, which comprised officials from both Canada and India, met twice, on December 7-8, 2009, and May 6-7, 2010, and engaged in substantive discussions on the parameters of a possible CEPA. Both parties also engaged in consultations to obtain views on a possible bilateral trade initiative.

The thrust of the exploratory analysis, together with the Joint Study Group's findings and recommendations, are presented in this report. It has been drafted jointly by the Government of Canada and the Government of India.

Overview and Economic Relationship

The introductory chapter offers a brief overview of the bilateral and economic relation between Canada and India, as well as provides an economic profile of the two economies. It notes the growing depth and dynamism of the relationship between the two countries which is marked by common values and similar political structures. The Joint Study Group remarks however, that despite the substantially expanded bilateral ties between Canada and India, there remains much untapped potential in the relationship.

Main Indicators

India's economy has followed an impressive growth path in the recent decade with real gross domestic product (GDP) increasing around 8.0% annually during the period 2003-08. Against a backdrop of global recession, India's economy is expected to remain among the fastest growing in the world, at 7.2% in 2009-10. In addition, since the early 1990s, the Indian economy is passing through a phase of sectoral transformation, driven increasingly by the services sector, which contributed to 53.4% of the country's GDP in 2008. By contrast, the contribution of the agricultural sector in the total value-added has been declining during the past decade, although it remains the biggest source of job opportunities, absorbing 52.1% of total employment in 2004-05.

From 1999 to 2008, the Canadian economy has experienced stable growth, with real GDP increasing by 2.6% annually. The economic crisis that started in 2008 had an impact on Canada's economic performance, with negative growth in 2009, but the economy will return to positive growth in 2010. In real terms, GDP per capita increased 1.6% at a compound annual rate, for a total of US$45,064 at market prices in 2008. Similar to India, over the last decade, the share of services in Canada's GDP increased steadily, and in 2008 accounted for 70% of Canada's GDP and 80% of employment. By contrast, the agricultural sector has maintained its relative position in the overall economy, accounting for 2% of GDP.

India-Canada Merchandise Trade

According to Canadian statistics, 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 over the past ten years. Canadian merchandise exports to India increased at an annual compound rate of 24% over this period, while imports from India grew by 13%. India was Canada's 16th merchandise trade partner.

According to Indian statistics, in 2008, India's total merchandise trade was US$516.5 billion, and its top trading partners were the United Arab Emirates, China and the United States, accounting for 9.9% and 8.6% and 8.1% of total merchandise trade, respectively (2008-09). Canada was ranked as India's 30th trading partner.

Canada's and India's respective merchandise trade data also show that while Canada's relative importance as a trading partner for India has declined over the past decade, India's share of both total Canadian imports and exports has increased.

Accounting for more than 70% of total Indian merchandise exports to Canada, India's leading sectors of export in 2008 were chemical products (25.2% of total exports to Canada) followed by textiles and wearing apparel (24.9%, down from 46% in 1999), miscellaneous manufacturing products as well as machinery and equipment. Canada's merchandise trade exports to India were also concentrated in four sectors, comprising 80% of total exports to India: chemical products (33%), vegetables, fruits and nuts (mainly pulses including dried peas and lentils); pulp and paper products; and machinery and equipment.

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.

India-Canada Services Trade

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. While Canada's exports of commercial services to India peaked in 2001 and 2002, and have since been declining, India's exports have expanded rapidly from US$16 million in 1999 to US$130 million in 2007. The driving forces underlying this expansion were India's exports of computer and information services and business services to Canada, which mirrored the dynamics of India's services sector in the age of services outsourcing. As a result of these changes, since 2005, Canada has become a net importer of services from India, especially in the area of commercial services.

Canada-India Investment Relationship

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 2008, India is now Canada's 20th largest source of foreign direct investment (FDI) while Canada is India's 40th largest source of FDI.

Nevertheless, bilateral investment flows have picked up substantially since 2005. The stock of Canadian investment to India more than doubled to reach US$753 million in 2008, while the stock of Indian investment in Canada reached an all time high of US$961 million. As a result, in 2008, for the first time in history, Canada became a net importer of FDI from India.

¹ 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.