As diplomatic relations between India and Canada reach a critical juncture, the economic implications of escalating tensions are becoming clearer. While trade between the two nations remains modest, certain sectors, particularly tourism and education, are poised to face significant challenges.

Trade Overview: A Marginal Partnership

Despite rising geopolitical tensions, the overall trade between India and Canada is unlikely to suffer drastic consequences. In the fiscal year 2024, Canada’s contribution to India’s total trade was a mere 0.75 percent. This minor figure is reflected in the export-import dynamics, where only 0.9 percent of India’s exports target Canada, and 0.7 percent of its imports originate from there.

Historically, Canada’s trade share with India has been on a decline, a trend that predated the current diplomatic issues. For instance, in FY16, Canada constituted 1 percent of India’s total trade, showing a stark decrease over the years. The trade deficit, once exceeding $2 billion, has significantly narrowed to $700 million in FY24, indicating a shift in economic interactions that does not appear to be deeply affected by recent tensions.

Diplomatic Friction Escalates

The diplomatic row intensified on October 14, when India expelled Canadian diplomats following Canada’s investigation of Indian diplomats in connection with the assassination of a Sikh separatist leader in 2023. This development has undoubtedly strained the already delicate relationship, leading to speculation about the long-term implications for bilateral trade and investment.

The Ripple Effect on Education and Tourism

While trade may remain stable, the sectors of education and tourism could experience notable downturns. A significant number of Indian students have chosen Canada as their study destination, with their share in Canadian study permits soaring from 15 percent in 2015 to an impressive 41 percent in 2023. In the first seven months of this year alone, Indian students accounted for 107,385 of the 278,250 permits issued, representing 39 percent of the total.

This growing trend could be jeopardized if tensions persist, leading to fewer applications and a decline in student mobility, which has been a vital component of Canada’s international education strategy.

Tourism: A Vital Connection at Risk

Tourism is another sector that may feel the effects of strained relations. India ranks as the fourth largest source of tourists to Canada, with nearly 400,000 visitors recorded in the first 11 months of 2023. The financial impact of Indian tourists has been substantial, contributing approximately CAD 306 million to the Canadian economy in 2018, a figure that has grown significantly since 2011.

Conversely, Canada’s tourism inflow into India is less pronounced. In 2019, Canadian tourists made up only 3 percent of total arrivals in India, with a significant majority being of Indian origin, indicating that most visits were related to family or business rather than leisure.

Looking Ahead: The Long-Term Perspective

As India and Canada navigate these turbulent waters, the likelihood of lasting impact on trade seems minimal. However, the ramifications for education and tourism may pose longer-term challenges that could reshape the dynamics of bilateral relations. Stakeholders in both nations will need to monitor these developments closely, as the evolving geopolitical landscape continues to influence economic interactions.

In summary, while trade appears resilient, the potential declines in tourism and education sectors signal a need for both governments to engage in dialogue to mitigate the broader economic fallout from their current diplomatic rift.