INDIA, Oct 16 — A diplomatic falling out between India and Canada over allegations that New Delhi was behind the killing of a Canadian Sikh activist threatens to overshadow increasingly close trade and investment ties between the countries.

Last year India responded angrily after Canadian Prime Minister Justin Trudeau publicly accused it of involvement in the murder of separatist Hardeep Singh Nijjar, who had been wanted by New Delhi and was shot dead in June 2023 near his home in Vancouver.

Indian authorities briefly curbed visas for Canadians and forced Ottawa to withdraw several diplomats.

Relations slowly improved, but this week both sides expelled the other’s top envoys and other diplomats after India said its ambassador was among the "persons of interest” named in the murder probe.

With neither side appearing ready to back down—Trudeau on Monday branded India’s behaviour "unacceptable”, while New Delhi has called the allegations "ludicrous”—a prolonged diplomatic rift could eventually impact economic ties.

"As this dispute drags on, both nations will need to carefully manage their actions to avoid a full-blown economic fallout,” Ajay Srivastava of the New Delhi-based Global Trade Research Initiative said in a brief.

Trade

India’s trade with Canada is small in comparison to some of New Delhi’s biggest trading partners, but it has grown steadily.

Bilateral merchandise trade rose from US$6.36 billion to US$8.27 billion between the 2019 and 2023 fiscal years, according to India’s commerce ministry.

And so far it appears to have weathered the storm, rising again, marginally, to US$8.4 billion in fiscal 2024.

India’s biggest exports to Canada include pharmaceuticals, steel and iron products and electrical machinery.

New Delhi, in turn, depends on Canadian fertiliser.

"I don’t foresee a major impact on trade immediately,” Srivastava told AFP.

"Companies in both countries export and import based on their needs. Unless either India or Canada choose to ban trade in some segments, it is unlikely that bilateral trade will be hurt”.

The diplomatic dispute, however, is unlikely to help the countries’ efforts to reach a free-trade agreement.

Talks on the proposed deal were put on hold last year, before the row broke out, but the possibility of any resumption seems remote before the political issues are addressed.

Investment

India is the world’s fastest-growing major economy, and Canada ranks 17th in terms of foreign direct investment into the country.

Canadian pension funds have cumulatively invested around US$55 billion in India, New Delhi’s foreign affairs ministry said in June.

The Canada Pension Plan Investment Board currently holds a more than one percent stake in companies such as food delivery app Zomato, and private-sector lender Kotak Mahindra Bank.

And the investment goes both ways.

India-based companies have invested billions of dollars and created thousands of jobs in Canada, industry associations estimate, including in some of its top IT giants TCS and Infosys.

Top Canadian firms, including aircraft manufacturer Bombardier, also have a strong presence in India.

Indian billionaire Gautam Adani in September said he discussed with Bombardier’s chief Eric Martel "transformative partnerships” in aircraft services and defence.

Students

More than two-fifths of international students in Canada come from India, contributing US$7 billion annually to the education sector, according to estimates made by CARE Ratings.

It remains to be seen how much the row may hurt the inflow of students.

Canadian study permit applications from India dropped around 15 percent last year, with the row erupting in September 2023.

But other factors also contributed, including a weaker jobs market and tougher Canadian regulations on cost-of-living requirements for students. — AFP