Province Failing to Tap Into Emerging Economic Giant

TORONTO, June 24, 2011 /CNW/ - Ontario companies quickly need to shift their export focus to booming economies like India or risk falling further behind other jurisdictions that have already established solid trade relations, finds a new report from CIBC World Markets Inc.  

Currently, Ontario companies export a meager $400 million a year to India. This is despite the fact that the province produces many of the goods and services India has been consuming while seeing GDP growth average 6.5 per cent a year over the past two decades. India exports about $1.2 billion a year worth of goods and services to Ontario.

"The rapidly changing global economy is dictating the need for Ontario to broaden its trade perspectives," said Benjamin Tal, Deputy Chief Economist at CIBC. "India should obviously be a top priority in this shift given the size and rapid growth of the Indian economy and the many cultural and other links between the two jurisdictions."

Mr. Tal, who released his report today at a global business forum on Ontario-India trade relations, told the delegates "it's clearly in the interests of both to see trade and investment climb from current levels". The forum, held in conjunction with Saturday's International Indian Film Academy Awards in Toronto, was attended by business and government leaders from Ontario and India.

He believes that India would benefit from Ontario's world-recognized capabilities in many of its highest need areas -- from developing its infrastructure by expanding its power, road and rail grids, to improving the safety of the food supply chain, to expanding educational opportunities for its young population.

Mr. Tal noted that, until recently, the province's success in supplying the U.S. meant that it largely ignored other markets and opportunities. But with the fatigue of consumers in that market likely to persist for a while he believes Ontario firms "need to take a more aggressive approach in order to compete with other jurisdictions that have established deeper trade linkages with India".

"Distance between India and Ontario is an obvious impediment to trade, but controlling for that in a gravity model of trade - one using distance between trade partners and GDP of trade partners - to gauge India's trade potential with the rest of the world, we observe that trade with Ontario has underperformed not just relative to potential but also relative to most of India's trade partners."

This means Ontario is not capitalizing on the rapid development in India that is expected to see its middle class grow by some 300 million people by 2025. Mr. Tal says this will quadruple consumer spending in the country in the next two decades.

In addition to limited exports to India, Canadian direct investment in the world's largest democracy has lagged other parts of the world. "The share of Canadian direct investment going to India was only 0.1 per cent last year, unchanged over the past two decades," noted Mr. Tal. "While Canadian corporations were looking elsewhere to invest their dollars, others were looking at India as a land of opportunity, pumping in US$ 37.9 billion last year, up from US$22.7 billion or 67 per cent in just the last five years."

Mr. Tal noted that it is not just the world heading to India, but increasingly India itself is reaching out to the world. "Indian green field and M&A investments into Canada have already outstripped Canadian investments into India. Not only does Ontario provide a gateway to the American market, but its ever expanding service sector provides a natural expansion base for Indian companies in sectors such as film and information technology and communication (ICT). Indian software developers will increasingly look for "near shoring" opportunities to service the North American market by taking advantage of Ontario's low cost environment and favorable tax-based incentives for research and development."

He added that Canadian and Indian businesses can go even further. The relative strength of India in fields such as management, IT support, ICT technology and specialized equipment naturally complements Canada's strength and expertise in engineering, equipment technology and environmental sciences - synergism that can be easily translated into joint ventures in projects in developing countries.

"The recent efforts of the Ontario government to accelerate ties between the two jurisdictions should help increase Ontario's economic participation in India.  However, in the end growth is dependent upon Ontario companies broadening their horizons and adopting a more aggressive approach to doing business in the world's largest democracy."

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/canada-india.pdf

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