Canada and India: A New Beginning

Authors: Vivek Dehejia, Rupa Subramanya

For the first time in more than 40 years, a sitting prime minister of India will make an official visit to Canada. From April 14-16, 2015, Prime Minister Narendra Modi of India will make stops in Toronto, Ottawa, and Vancouver. The visit is an opportunity for Canadians to take stock of the changes Modi has ushered in during his first year as prime minister; the opportunities and tensions that define relations between the two countries; and, the benefit of personal affinity that already exists between Modi and Prime Minister Stephen Harper.

Introduction

In May 2014, observers in Canada and around the world witnessed the largest democratic exercise in history as general elections took place in India. The result was a generational shift in Indian politics, with the defeat of the incumbent centre-left Congress-led government and the victory of the Bharatiya Janata Party (BJP) and its allies under the new Prime Minister, Narendra Modi. For the first time in three decades, a single party had won a majority in the Lok Sabha, the lower house of the Indian parliament. Modi's dynamic election campaign had focused on the economy and governance, and it was widely expected that these would be his top priorities once taking office.

Key Economic Initiatives

As expected, many of the Modi government's key initiatives have focused on improving the efficiency of government administration—what Modi himself refers to as "good governance"—as well as measures intended to jumpstart economic growth.

His key economic policy initiative has been the much-touted "Make in India" campaign, launched with great fanfare in October 2014. The ambitious (some might say overly ambitious) goal is to turn India into a global manufacturing hub, and it is attempting to bring this to fruition through a series of inter-related and complementary initiatives:

  • Making large-scale public investment in infrastructure which is necessary to support manufacturing, such as power, roads, and ports.
  • Simplifying the regulatory environment so that investors looking to set up manufacturing operations would be able to take care of environmental and other clearances through a single window and file these electronically, thereby minimizing red tape and corruption.
  • Encouraging Indian states to liberalize their labour laws, making it easier for employers to lay off workers during an economic downturn.
  • Enacting a crucial land acquisition bill which will make it easier for the government to use eminent domain powers to acquire land for development projects, including roads and infrastructure.

Challenges to Implementation

But these initiatives have encountered some challenges that implementation on the ground are likely to encounter:

India's growth model has failed to generate much employment…Unemployment: One of the unique features of the Indian growth story has been that, unlike in China and other East Asian economies, it has been driven not by large-scale, labour-intensive manufacturing for export, but by high-tech services and high-end manufacturing. While these have led to impressive growth in gross domestic product, projected to be around eight per cent next year, India's growth model has failed to generate much employment, a problem closely linked to another key challenge: managing the country's enormous demographic transition. The median age in India is 25 and a staggering 13 million young people are expected to enter the workforce every year for the next decade or more. This means that "Make in India" will have to generate a lot of jobs, and very quickly.

Political resistance: The BJP and its allies lack a majority in the Rajya Sabha, the upper house of parliament. This has allowed the defeated Congress Party and its allies to delay, if not block, key pieces of legislation. While the Modi government managed to pass important reforms in the area of insurance and mining, the land bill referred to above remains stalled in the upper house.

The government has managed a work around, using its executive powers to pass the land bill as an ordinance. But the difficulty is that an ordinance, unlike a law, lapses every six months and has to be re-promulgated. Investors are thus unlikely to come in large numbers given the uncertainty over the durability of an ordinance.

Decentralization: Like Canada, India is a federal country, with considerable powers resting with the states. However, unlike previous governments, Modi has parlayed this to his advantage by trying to engage state chief ministers in a project of "cooperative federalism." An important manifestation of this shift was the abolition of the planning commission, a holdover from the days of socialist central planning, and its replacement with a new body, Niti Aayog ("policy commission").

This new body brings to the table all of the states' chief ministers as partners in the process of making economic policy, with the aim of advancing the government's development agenda. As noted above, potentially controversial reforms to labour laws are not being pursued by the central government where they are likely to arouse considerable backlash from large trade unions. Rather, Modi has signaled an invitation to states to reform their own labour laws in light of local conditions. The western state of Rajasthan has been a pioneer in liberalizing its labour laws, which may serve as a catalyst for other states to do the same.

Foreign Policy

Modi has been more heavily engaged in foreign policy than any other Indian leader in recent times.Modi's activity on the foreign policy front has been surprising, given how heavily the campaign focused on the economy. In fact, since becoming Prime Minister, Modi has been more heavily engaged in foreign policy than any other Indian leader in recent times. He got off to a successful start in September 2014 with a visit to Japan, which was noteworthy for the warmth and personal chemistry between Modi and Prime Minister Shinzo Abe.

The next key visit, and one of hugely symbolic importance, was to the United States. Modi had been banned from entering that country when he was Chief Minister of the state of Gujarat, due to concerns by members of the US Congress about the alleged lack of religious freedom in the state and his alleged role in failing to prevent sectarian violence between Hindus and Muslims (a frequent occurrence not just in Gujarat but other states) in 2002, shortly after he became chief minister. (For the record, Modi has never been charged with any crime, and in 2012, a special investigating team set up by India's Supreme Court found no evidence against him, nor has there been a recurrence of such violence since 2002.)

The fact that Modi visited President Obama at the White House and that the two of them even wrote a joint op-ed in the Washington Post thus marked a sea change in US-India relations. From being a pariah, Modi was now seen as a hero, especially to the record crowd, which included members of the diaspora, that greeted him like a rockstar at an event at Madison Square Garden.

President Obama returned the favour by visiting New Delhi in January. He was not only the first sitting US president to visit India twice while in office, but also the first US president to be guest of honour at India's Republic Day parade on January 26. The most tangible takeaway from the visit was a commitment by both leaders to resolve outstanding issues on their landmark civil nuclear accord. The sticking point remains India's stringent liability law, which places the burden on a foreign supplier of nuclear technology in the event of an accident. Thus far, this has discouraged American firms from investing.

Issues in Canada-India Bilateral Relations

The combination of Prime Minister Stephen Harper in Canada and Prime Minster Narendra Modi in India bodes well for the future of the bilateral relationship. In an important sense, it represents a fresh start for both sides, and an opportunity to move beyond irritants.

One of these is the "nuclear issue." India's first nuclear test in 1974 used Candu (Canada Deuterium Uranium) technology, causing the bilateral relationship to take a nosedive. The relationship took another blow in 1998 when India conducted its second set of nuclear tests and declared itself to be a nuclear armed state. Jean Chretien, who had been Justice Minister in 1974 and was personally embarrassed by the Indian test, was Prime Minister when these second tests occurred. In response, Canada imposed some of the most stringent sanctions on India, which were only slowly lifted after the US made its own separate accord with India in 2008.

On the Indian side, the main irritant has been the perception that Canada has been soft on the Khalistan separatist movement, which it believes with some justification receives funding and support from some Sikh Canadians. The botched trial of the accused terrorists who brought down an Air India jet in 1985 only reinforced India's suspicion that the politics of the domestic diaspora trumped foreign relations when it came to cracking down on extremism in the Sikh Canadian community.

Lead up to Modi's Visit

In October 2014, then Foreign Affairs Minister John Baird visited New Delhi and met his counterpart, India's External Affairs Minister Sushma Swaraj, and Modi. The two sides agreed to push forward on civil nuclear cooperation following a landmark agreement in 2010. Because the nuclear issue has been a persistent irritant, the fact that there's been progress on this file is extremely significant. News reports suggest that a final deal may be in the offing during Modi's upcoming visit.

It also significant that in an op-ed in the Hindu, a leading Indian daily newspaper, Baird stressed that trade was a central focus of the visit and vital to the bilateral relationship. He wrote: "Global trade and prosperity ultimately depends on global stability and security, both of which are feeling more fragile in 2014 than in previous years." Baird directly linked a thriving international trade environment with international security and welcomed Modi taking a leadership role on the issue of terrorism.

One key area where progress has stalled, however, is the bilateral Comprehensive Economic Partnership Agreement (CEPA) which has gone through many rounds of protracted negotiations since the talks were launched in 2010. A hold-up appears to be that the Indian government is reviewing all of its bilateral trade and investment agreements to ensure that they fit in with their preferred template.

On the trade file, the US-India agreement on November 13, 2014 opened the way for ratification of the WTO's trade facilitation agreement (TFA), thus removing another potential irritant in the India-Canada relationship. Canada argued strongly in favour of the TFA at a WTO Ministerial meeting in July 2014, whereas India was widely criticized for scuppering the agreement. With the likely resolution of the multilateral trade negotiations, there will no doubt be renewed emphasis on pending bilateral negotiations, which should provide some impetus to the India-Canada CEPA.

Given that the bilateral trade and investment relationship is starting from such a low base — with bilateral trade and investment flows being on the order of only one percent of each country's total trade and investment activity — there is enormous scope for progress in boosting the trade and investment relationship.

Diaspora Politics: Strength or Weakness of the Relationship?

It is interesting to note that the Indo-American diaspora has played a hugely important role in fostering the Indo-US bilateral relationship. The 2008 civil nuclear accord, which was voted in by a lame duck session of Congress in the last months of the Bush administration, came to fruition only because of the lobbying efforts of Indo-American groups.

As a percentage of the population, persons of Indian origin (around one million) are more important in Canada than in the US. But the diaspora in Canada has not as yet played such a significant a role in boosting the Indo-Canadian bilateral relationship.

One crucial reason is the different demographic character of the diaspora. In Canada, unlike the US, the diaspora is dominated by migrants, some Hindu but mostly Sikh, from the Indian state of Punjab. In places such as British Columbia, Sikhs arrived to work as loggers, farmers and ranchers as much as a century ago. They do not have the same emotional ties to India as recent immigrants to the US.

If anything, given the rancour over the Khalistan issue, many Sikh Canadians look with disfavour rather than affection toward India. In fact, in the lead up to the Modi visit, a coalition of Sikh Canadian groups, including heads of gurudwaras supporting the Khalistan demand, have urged Harper to raise the issue with Modi and to press the Indian side to hold a referendum on independence for Khalistan — a debate which is a non-issue in India.

Strength of the Harper-Modi Relationship

Harper and Modi do not carry all the baggage from the historical bilateral relationship...As individual leaders, Harper and Modi do not carry all the baggage from the historical bilateral relationship, since neither was involved with the nuclear dispute or the mishandling of the Air India bombing. In fact, Harper was one of the first western leaders to reach out to Modi at a time when he was still seen as a pariah in London and Washington.

As early as 2006, just four years after the 2002 sectarian violence in Gujarat and at a time when few western leaders would have thought of Modi as a future leader of India, Harper announced the opening of a trade office in Ahmedabad, Gujarat's commercial capital. Also, Canada under Harper has been an important partner of the Vibrant Gujarat business and investment summits that were an important plank of Modi's economic policy when he was Chief Minister of Gujarat. What is more, unlike the US, Canada never imposed a ban on Modi applying for a visa to visit.

As with Abe of Japan, there is the intangible but nonetheless important dimension of Modi and Harper sharing a worldview. Both see themselves as conservatives and political outsiders who have shaken up the political cultures of their respective capitals, and both have reasons to believe that the mainstream media and intellectual establishment are biased against them. Both are also political pragmatists rather than ideologues, and they have pursued a strikingly similar gradual, rather than radical, approach to their legislative agendas.

Moving from Symbolic Importance to Tangible Outcomes

The symbolic importance of the upcoming visit to Canada cannot be overstated. The last visit to Canada by a sitting Indian prime minister was when Indira Gandhi called on Pierre Trudeau in 1973. A year later, India's nuclear tests derailed the bilateral relationship and no Indian prime minister has visited since then.

Canada has not been on the radar screen of India's political elites for four decades, a reality which will hopefully start to change. While it is not clear if any major bilateral deals will be struck, apart, perhaps on nuclear energy, it will at least be an opportunity to introduce Modi to Canadian politicians and the Canadian public when he addresses a large gathering, including members of the diaspora, in Toronto.

It is noteworthy that second to Punjabis, the next important group within the Indo-Canadian community are those who trace their roots to Gujarat. Just as in the US and the UK, members of Canada's Gujarati diaspora have been very supportive of Modi, even before he became prime minister. They and other members of the diaspora should take a more active role in promoting economic, cultural and other ties between their native and adopted countries.

Canadian policy makers should use the visit to jumpstart a relationship long mired in misunderstandings and staleness by creating the opportunities for Canadian companies to get a piece of the action in what is now the world's fastest growing large economy.

Back in 2006, a forward-looking Harper realized that Modi was someone worth reaching out to at a time when he was being shunned in other western capitals. And Modi is the sort of politician to remember who his friends were when he was down. The Canadian government should capitalize on this unique advantage. A rapidly growing India will need raw materials, energy and expertise to build its manufacturing base and power its growth. Canada has these in spades, and there is no reason why it shouldn't benefit from India's rise. Now is the time for Canada to consolidate on this unique opportunity.

Vivek Dehejia is an economics professor at Carleton University and a columnist for Mint, a leading Indian business daily. Rupa Subramanya is an economist based in Mumbai, who previously wrote for the Wall Street Journal India and currently writes for Foreign Policy.

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