India trade deal could boost Canadian prospects

The Canadian government is apparently working hard to negotiate a free trade agreement with India. While these agreements can take decades to come to fruition, the prospect of free trade is definitely a lucrative opportunity for Canadian investors with money on both sides of the deal.

Yesterday it was reported that Industry Canada is in talks with India to create a free trade agreement. One of the difficulties for Canadian investors seeking access to India is that while it is a free market economy, it is rife with barriers to entry to foreign players.

It’s imperative from an investment standpoint that Canadian companies and investors get access to countries like India. While the emerging superpower has been savaged by the downturn in global stock markets, most analysts anticipate India will continue to grow if not at a torrid pace, then at a consistently strong one.

A full-fledged free trade deal could take years to materialize. However, much of the growth projected from India is expected to be long term. It creates an interesting new dynamic for Canadian investors in a country already seeing large inflows of foreign capital.

The greatest benefit of a free trade deal would likely be the ability of Canadian-based companies to participate in the massive infrastructure spending boom that is expected to continue well into the next decade, says Levi Folk, emerging market economist for Excel Funds.

“Over the next few years, where all the spending is going, both private and public, will be in infrastructure,” he says. “China is allegedly going to spend $2.7 trillion on infrastructure, and India is going to be spending $620 billion.”

Folk says India’s economy is being driven by consumption and the ascendance of a middle class. Canada can provide both raw materials and expertise in the development of the Indian economy.

“The difference between China and India from the point of view of the Canadian investor is that the Indian market is obviously a more open free market,” Folk points out. “Much more of the spending in infrastructure will be shared by the private/public industries. In China, it’s more public oriented. I think the opportunities in India are much greater for Canadian companies, even though the spending figures are smaller.”

Currently, India subsidizes oil and fertilizer, spending about 4% of GDP on these key commodities, Folk says. As a major exporter of both, Canadian companies stand to gain.

The inverse could also be considered true. Other than the resources, India is a fairly closed off market in terms of its reliance on trade. To capitalize on growth within the country will require being invested in many of the domestic companies. Growth is projected broadly across a number of sectors, Folk says.

“It is a very diversified economy, but it’s also a much more closed economy than China, so trade is a much smaller proportion of GDP,” Folk says.

(01/21/09)