India Inc.: Canada wants in on a booming economy

Canada wants in on a booming economy

The hour-long taxi ride from Mumbai's airport to its downtown core provides a fleeting glimpse of the new India. One passes pungent, dense neighbourhoods of cloth tents and jerry-built shacks, and, at night, whole families sleeping on the streets amid the oppressive heat. Beggars, lepers, eunuchs and mothers carrying naked babies jostle for rupees at congested intersections. Greater Mumbai is said to be home to Asia's largest slums; well over half the city's population of approximately 16 million live in them. The squalor can be neither hidden nor ignored.

Counterintuitive though it may seem, the slums are a testament to India's growing affluence. They're expanding rapidly due to an influx of migrants from other regions. Indians pour into Mumbai, the country's financial centre, hoping to seize economic opportunity. One billboard from a mutual fund firm sums up the underlying optimism: “IBM, Ford, Siemens and Nike are sourcing from Indian companies. This is just the beginning.”

Dozens of delegates from Canada's four-day trade mission drove through this chaotic scene in early April on their way to the Hilton Towers hotel, safely ensconced in Mumbai's affluent Nariman Point district. It's about as close as many came to confronting India's grim social, environmental and infrastructure dilemmas. Once inside, they cocooned themselves in air-conditioned conference rooms and enjoyed fine food and wine. They were treated to optimistic speeches and presentations about India's impressive economic potential, and opportunities available to Canadian businesses. The sessions were punctuated by schmoozefests, at which Canadians and Indians exchanged business cards and pleasantries during rapid-fire conversations designed to search out the powerful, influential and knowledgeable. Delegates continued on to Delhi for more of the same.

The trip was the latest of a series of government-led trade missions aimed at increasing Canada's profile in emerging markets. Jim Peterson, the minister of international trade, calls the missions a “cornerstone” of his emerging-market framework. He recently spearheaded similar events in China and Brazil. These three nations (along with Russia, last visited in 2002) are expected to experience explosive growth in coming decades.

Peterson fears that Canada has been left behind as others seize opportunities in these booming nations. “The Canadian company that does not have a China and India strategy is going to be swept behind in terms of global competitiveness,” he warned in a speech at the University of Toronto's Rotman School of Management in April. He's not alone in thinking that. But few Canadian firms have any genuine ties to India, the world's second-most-populous nation and largest democracy.

The federal government recently unveiled an international policy statement outlining the principles that are supposed to drive Canada's future international engagement. Much of it pertains to expanding global trade, particularly with emerging markets. Some believe that Canada's emerging-market strategy could prove one of the most important policy decisions for the coming decade. If Peterson's Indian expedition was any indication, however, the government's sales pitch still needs some polishing.

Canada is the world's fifth-largest exporter and importer. We are also among its least adventuresome when it comes to distant markets. Nearly three-quarters of our total trade last year was conducted with our immediate neighbour, the United States. If the U.S. were a basket, most of Canada's eggs would be in it.

Meanwhile, Canada has not been as aggressive in emerging markets as the U.S., Japan, Australia, and other developed countries. In fact, we run trade deficits with China, Mexico, South Korea, Brazil and India. Critics claim that Canada's bountiful trade surplus with the U.S. glosses over lost ground elsewhere.

Last year, two-way trade between Canada and India amounted to $2.4 billion–less than half a percentage point of each country's total. And while the accuracy of those statistics is disputed, the overall insignificance of the numbers is not.

A few bold Canadian firms have ventured to India. Results have been mixed. Sun Life Financial has commenced several successful joint ventures since the late 1990s, one of which has become a leading private-sector insurance firm. Engineering giant SNC-Lavalin has been active in India for decades, and opened its first permanent office there in late March. Other firms, such as Bell Canada International and TD Waterhouse tarried awhile before withdrawing. Nortel Networks has endured setbacks, but still maintains a presence.

Canada's disinterest has not always been unwarranted. India's infrastructure has long been a shambles. The highway between the major cities of Delhi and Agra, for example, is paved reasonably well, but the 200-kilometre journey can take well over three hours–partly because sports cars share the road with donkey carts. And Indian Minister for Commerce and Industry Kamal Nath's speech to Canadian delegates in Delhi was interrupted by power failure–not once, but twice.

Corruption is rampant in India's government and civil service. (The country attained an abysmal score of 2.8 out of a possible 10 on Transparency International's 2004 Corruption Perception Index.) Its bureaucracy is legendarily cumbersome. And despite considerable progress since the 1970s, one-quarter of Indians are poor.

Such realities have often offset India's long-understood merits, such as its large English-speaking population and familiar legal system. “By the late 1980s, Indian industry was globally uncompetitive,” observed a recent report by the Asia Pacific Foundation of Canada. “Its trade and industrial policies were structurally rigid, and the Indian economy was one of the most restrictive in the world.”

In 1991, though, things began to change. That year, India was compelled to seek emergency assistance from the International Monetary Fund due to a precipitous decline in foreign reserves. Then-prime minister P. V. Narasimha Rao and his finance minister, Manmohan Singh, embarked on an ambitious series of reforms. The country quickly shifted from a centrally planned economy to a more market-oriented one. (Reforms continue today under Singh, who became prime minister in May 2004.)

Canada wasn't blind to the opportunities. Former prime minister Jean Chrétien led a trade mission of 300 delegates to India in 1996. Two years later, however, relations suffered a serious setback when India detonated five underground nuclear devices in the Rajasthan desert. The country's first nuclear test, in 1974, was facilitated using fissionable material produced by a Canadian-built CANDU reactor. Canada was not linked to the 1998 explosions, but they rankled nonetheless. Ottawa immediately froze political relations. The Canadian high commissioner in Delhi was recalled temporarily, non-humanitarian aid was suspended and military exports were banned.

A thaw didn't come until March 2001, when John Manley, the foreign affairs minister at the time, declared Ottawa would normalize relations. Soon, a steady stream of Canadian politicians headed to India, vowing to double trade by 2003. Such promises have rung hollow, however, amid the disappointing figures that continue to roll in.

Some fear the nuclear issue squandered valuable time. “The rest of the world chose to ignore what India had done, but Canada decided to disengage and not work with India,” says Pradeep Sood, president of the North York, Ont.-based Indo-Canada Chamber of Commerce. “It left a bitter taste in the mouth, and so we lost four or five years. But those four or five years were the most critical, when India's IT industry was growing very fast.” Indian delegates at the trade mission echoed those sentiments: Canada's presence, they said, is barely felt in their country.

How can government improve the situation? The new federal international policy statement lays out the abstract theoretical framework. It emphasizes the importance of trade agreements and the World Trade Organization, which Ottawa believes is key to eliminating tariffs and regulations that stifle trade.

Sure, the U.S. remains a key focus. But “you have to think ahead as to where you can best place your emphasis,” Peterson said in an interview with Canadian Business in Delhi. “We've seen rapidly growing economies such as Brazil, India and China, which are huge economies and where we have very little presence.” While Canada accounts for nearly 4% of the world's trade, Peterson points out, it claims only 1.4% of Brazil's trade, 1.3% of China's and less than 1% of India's.

Canada's exports to India stood at $828 million last year. Peterson vows to increase them to more than $2 billion by 2010–an aggressive target reminiscent of those made by his predecessors. He is now attempting to hammer out a foreign-investment promotion and protection agreement with India. Such arrangements generally give companies assurances that their assets in foreign countries will not be nationalized or victimized by predatory regulation. Canada and India have been negotiating this for the better part of a decade, with little to show for it; Peterson says the two sides will meet again this summer to move things forward.

Peterson and his Indian counterpart, Nath, have also agreed to form a round table of Canadian and Indian executives. “It's dialogue, it's a frank exchange from a business person's point of view as to how they view the opportunities and challenges in two-way trade and investment,” Peterson says. He expects the committee to be formed within months. Its membership could prove an interesting barometer of how seriously India is taken in corporate Canada–and vice versa.

Trade missions will continue to be an important part of Ottawa's approach. But the India mission illustrates some of the shortcomings. In the past, the government has emphasized deal signings as evidence of success. This measure is imperfect at best: such agreements are typically tentative or preliminary, often saved for the occasion, and sometimes ultimately amount to nothing. The latest India mission, for instance, resulted in only a smattering of such deals.

From the outset, there were signs that the Indian mission would underperform. After its announcement in February, observers griped that Peterson had not left sufficient time for top-tier Canadian executives to make arrangements to attend. Indeed, the only big name on board was Sun Life CEO Donald Stewart. “I think he came largely as a courtesy to the minister,” opined one attendee. “Look at our delegates. Small players, most of them, looking for commissions, looking to make 2% on a deal.” He was not alone in being underwhelmed; the mission warranted barely any mention in the Indian media.

“It is not clear that the broad-brush approach of Team Canada has provided the desired long-term boost in Canadian exports to the countries visited,” the Asia Pacific Foundation has opined in a paper. “Business did not always follow through with leads generated by the missions, undermining their credibility as serious trade-building events.” Nizar Assanie, an Asia Pacific Foundation economist, says that personal networks–including, importantly, business people drawn from the community of 800,000 Indo-Canadians–matter more than irregular trade missions when it comes to making Indian contacts.

Sitting in a lobby of Delhi's Maurya Sheraton Towers after the trade mission wrapped up, Suresh Thakrar concluded that Peterson and other politicians and bureaucrats had at least seen India's potential first-hand. “Was it as successful as other trade missions sent by other countries? No,” says Thakrar, a board member with the Toronto-based Canada-India Business Council. “But it is a beginning.”

The Asia Pacific Foundation's Assanie doesn't see any novel initiatives in Peterson's policy statement. But he does observe a new understanding on the part of politicians and bureaucrats. “The world is no longer just about exports and imports,” he says. “The trade and commercial world has moved from that to supply chains and investment in foreign markets. I know of a firm run by Canadians, but headquartered in Barbados, manufacturing in China and shipping all over the world. The government implicitly recognizes that this is the direction in which the business world is moving.”

Still, Assanie argues Canada will need to be more aggressive. He believes the government should sign bilateral free-trade agreements with India and other emerging markets. He points to Australia, which has been much more proactive and has cut such deals with its Asian neighbours. “When it comes to emerging markets, we really haven't gone the extra step,” he says. “We have to be able to secure these markets right now. Investment protection agreements are just not going to do it.”

Not everyone is keen on closer ties with India. Some labour unions perceive the courting of emerging markets as a threat. In early May, the Canadian Auto Workers blasted Ottawa's emerging-market strategy, particularly its focus on trade liberalization. The union is concerned that low labour costs in China and India may siphon jobs from Canada. “Our trade patterns have shifted from a position of relative balance–where both sides could reasonably claim to benefit from trade–to what increasingly resembles a 'one-way street,'” CAW president Buzz Hargrove has warned. “The job losses associated with those imbalances are becoming significant in our overall economy, and are now measured in the hundreds of thousands.” The CAW points to Bombardier Inc., which is interested in transferring technical writing jobs from Toronto to low-cost suppliers in India, and advocates strong protectionist trade policies to shield Canadian jobs.

That's a political tightrope Peterson must walk. Meanwhile, there is only so much the government can do to encourage businesses to brave the challenging Indian market. Whatever tools they're given, it will be up to Canadian companies to take the plunge. According to Kam Rathee, the Canada-India Business Council's executive director, that will require a dramatic shift in Canada's conservative business culture. “Canadian business people are very naive, in the sense that they don't know how to do business in these Third World countries,” he says.

That, many believe, must change. “In the old days it was developing countries like India who needed Canada to come there,” says Rathee's colleague Thakrar. Now, Thakrar says, it is Canada that needs India. “We have to be here. It will hurt us five to 10 years from now if we are not.”

Canada's global reach ($bil)

Total Total Two-way

Rank exports imports trade

1 United States 348.18 208.83 557.06

2 China 6.61 24.08 30.70

3 Japan 8.53 13.37 21.89

4 United Kingdom 7.61 9.65 17.25 5 Mexico 2.98 13.40 16.38

6 Germany 2.66 9.42 12.08

7 South Korea 2.26 5.82 8.08

8 France 2.37 5.33 7.70

9 Norway 1.41 4.95 6.36

21 India 0.88 1.58 2.45

Total trade 411.36 355.24 766.59

source: industry canada