Strained India-Canada relations unlikely to impact long-term capital flows, say I-bankers

Canada has seen a staggering 670% rise in reported antisemitic incidents since October 7, 2023

Deteriorating ties between Canada and India are unlikely to significantly affect long-term capital inflows from the North American nation, industry experts said. While escalating tensions may deter new investors, Canadian pension funds and private investors with established operations in India are expected to weather the strain in bilateral relations, drawn by the attractive long-term returns offered by infrastructure and energy projects.

Diplomatic relations between the two nations took a fresh hit when India withdrew its diplomats from Canada while expelling that country’s representatives, prompting speculation about the future of Canadian investments in India. However, analysts and investment bankers suggest that these tensions are unlikely to deeply affect major Canadian investors already embedded in the Indian market.

“There may be some slowdown in the short term for new investors or those considering entering the Indian market, but we do not anticipate any long-term effect on investment flows from Tier-1 Canadian funds,” said a Mumbai-based investment banker who preferred to remain anonymous. “These investors, including Canada’s largest pension funds, have already established themselves here and are unlikely to reverse their decisions based on political changes.”

A Growing Presence

Canada has become a significant source of capital for Indian private companies, particularly in the infrastructure and energy sectors. Canadian institutional investors, including some of the world’s largest pension funds, have heavily invested in Indian projects that promise stable, long-term returns.

According to data from the London Stock Exchange Group (LSEG), Canadian pension funds and private investors like Brookfield Asset Management and Fairfax Financial have collectively invested around $21 billion in India over the past five years, including during the disruptions caused by the COVID-19 pandemic. This resilience underscores the strength of Canadian capital in the Indian market.

Several of these institutions, such as the Canada Pension Plan Investment Board (CPPIB), Ontario Teachers’ Pension Plan (OTPP), and Caisse de dépôt et placement du Québec (CDPQ), have even established offices in India, deepening their engagement with local markets. These funds have diverse portfolios across infrastructure, real estate, and energy, reflecting their sustained interest in India's growing economy.

Limited Impact

Experts suggest that while the political fallout may have an impact on smaller Canadian funds—those just beginning to explore India as an alternative to China—it is unlikely to significantly affect Tier-1 investors. These smaller, or Tier-2, funds may slow their decision-making due to concerns about the broader political environment.

“Tier-2 Canadian pension funds, which were reducing their allocation to China and looking at India as an alternative destination, are likely to go slow on their decision-making in the near term,” said the investment banker. “But in the medium to long term, this episode won’t have any major impact on the decisions of Tier-1 funds, which are already present in India in a big way.”

Abhishek Kumar, Executive Director at investment banking firm Avener Capital, added that while existing investments may not be immediately affected, new investments could slow down or be put on hold.

In contrast, Tier-1 funds such as CPPIB and OTPP are expected to remain committed to their Indian investments. These large pension funds, which manage billions of dollars in assets, have significant allocations to Indian infrastructure and energy projects that offer stable returns over the long term. Given India’s growing infrastructure needs and the steady returns generated by these investments, Canadian pension funds are unlikely to withdraw, even amid temporary diplomatic tensions.

Mutual Dependence

The relationship between Canadian pension funds and India’s infrastructure projects is mutually beneficial. India requires significant capital to meet its ambitious infrastructure goals, while Canadian pension funds, which manage the retirement savings of millions of workers, constantly seek reliable investment opportunities that offer stable, long-term yields.

“While India needs large amounts of capital to build infrastructure, Canadian funds, sitting on a massive pension corpus of government workers, need investment avenues like India to generate the returns they require for their pensioners,” the banker explained. “Any further deterioration in diplomatic ties between the two countries would be a lose-lose scenario.”

Canadian funds have long viewed India as an attractive destination for capital due to its high growth potential and large infrastructure needs. However, experts agree that the relationship is not immune to political turbulence. If tensions escalate further, it could create complications for investments requiring government approvals, particularly in the infrastructure sector.

Infrastructure Investments

While public and private market investments are expected to remain largely unaffected, experts caution that state-backed infrastructure investments by Canadian funds could face delays if tensions continue to rise. Infrastructure projects often involve governmental cooperation, and a cooling of diplomatic relations could slow these processes.

“We have observed significant interest from Canadian investors such as CPPIB, PSP Investments, OTPP, and OMERS, with some of them even establishing offices in India,” said Ruchir Sinha, Managing Partner at law firm Resolut Partners. “While investments in public equities are likely to remain largely unaffected, infrastructure investments by state-backed corporations may experience some pressure if tensions escalate. This could lead to delays in processes like changes in control or shareholding approvals, though we do not foresee any immediate impact.”

Analysts Remain Optimistic

Despite these concerns, many analysts remain optimistic that Canadian pension funds will continue to view India as a strategic investment destination, especially in sectors like infrastructure and renewable energy, which align with their long-term objectives. The political landscape in both countries remains fluid, and experts suggest that the outcome of Canada’s federal elections in 2025 could be pivotal for the diplomatic relationship. A potential change in the political regime in Canada could help reset relations, easing concerns for investors and encouraging future capital flows.

“Dealmakers are watching the situation closely,” said another Mumbai-based investment banker. “It might slow down investments, but we don’t think people will pull out. The long-term outlook remains positive.”

Avener's Kumar added that if tensions persist, the broader economic relationship may be reassessed, though economic pragmatism could push both sides to keep investment channels open.