The Elephant Lumbers Forward: India and its Economy on the Eve of Elections


Policy Update

by Eric Miller
Vice President, Canadian Council of Chief Executives
May, 2014


Table of Contents

 Executive Summary

This report surveys India’s economic and political trajectory on the eve of its parliamentary elections, which will conclude in May 2014. For Canada and its business leaders, India is all too often a paradox: a country of enormous opportunities that are frequently not realized. The explanations are well known: India is held back by political dysfunction, bureaucratic sclerosis, and poor infrastructure. These are accompanied by the unique challenges (and opportunities) that arise from India’s sheer scale and diversity; it does, after all, account for 1/7 of humanity. Building on this foundation India’s bold economic reforms in the early 1990s set off a decade-and-a-half of rapid economic growth. Foreign capital poured in and pundits began to talk of India as a new economic superpower. In recent years, however, both growth and the reform agenda have slowed. The next government will face some difficult choices about where it wants to take the economy. If it can revive growth, Canadian firms will benefit. Prioritizing sectors such as insurance, where Canadian firms are already active, would prove especially favourable.

Regardless of what happens in at the polls, Canadian firms should view India as a long-term play. The momentum of modernization means that there will be enormous demand for foodstuffs, energy, infrastructure, housing, and an array of specialized expertise. In too many of these sectors, entrenched local interests will try to thwart the participation of Canadian suppliers in the market. Good local partners and strong legal representation can overcome these challenges, but success is hardly guaranteed.

On the government side, Canada and India have had an uneven relationship over the years. Fortunately, the situation has stabilized and relations have been very positive for some time. The presence of a strong and growing Indian diaspora has helped. Strong, creative diplomatic leadership by Canada in Delhi and around the country is also an important factor. If either of the two leading candidates becomes Prime Minister in the 2014 election, Canada is well positioned to benefit. Canada has a strong relationship with the ruling Congress Party-led coalition, and there is no reason to believe that this would not continue if they return to government. Canada has also worked closely with Narendra Modi, the Prime Ministerial nominee of the main opposition party, in capacities such as sponsoring the bi-annual investment attraction conference in his home state of Gujarat. These relationships and continued strong engagement and leadership will serve Canada well as India enters a challenging and possibly momentous period. 


The Indian Economy: 1947-2014 

“The Economist” has been trying, with some frustration, to paint stripes on India since 1991. It doesn’t realize that India will never be a tiger. It is an elephant that has begun to lumber and move ahead. It will never have speed, but it will always have stamina. A Buddhist text says, “The elephant is the wisest of all animals/the only one who remembers his former lives/and he remains motionless for long periods of time/meditating thereon.”

- Gurcharan Das, India Unbound, 2000

Over the last two decades many Western observers have noted that the world’s economic dynamism is shifting to Asia, and some say China and India is where the future lies. Indeed, by 2013 China and India were already second and third in the world, respectively, in terms of total PPP-adjusted GDP, behind only the United States. Superficial parallels aside, the two Asian giants’ histories, political cultures, and economic models have little in common. An Asian Century will (or will not) result from choices made in individual countries, especially China, India, Indonesia, Korea, and Japan. This report will focus on India, offering a snapshot of the country in the spring of 2014 as it heads into a general election. With relatively slow economic growth and a government that appears tired, change may be on the horizon. This report will explore what that might mean for India and, by extension, Canadian business.

A discussion of economic reform in India must take into account the system that is being overhauled, based on an ideal that can be called socialist autarky. As India began to seek independence in the 1920s and 1930s, Mahatma Gandhi and others advocated boycotting British goods in favour of homemade production. Gandhi’s 1930 “Salt March” to the sea remains a touchstone for the idea of a united India growing stronger by pursuing self-sufficiency. After Independence in 1947, Prime Minister Nehru’s government built on the Gandhian model by pursuing import substitution and state-led economic development. While the leadership in Delhi wanted to break away from British domination of its economy, they faced more immediate concerns in the early years of the republic. The partition of India and Pakistan into two separate states had displaced 15 million people and put the territorial integrity of what remained of India very much in question. In fact, one prominent Delhi foreign policy analyst interviewed for this paper noted that India’s borders were not truly set until the 1960s. This tumultuous legacy persists: only after divisive debate in Parliament – that included the use of pepper spray – did the Indian Parliament vote in February 2014 to carve the new state of Telangana out of Andrah Pradesh, creating the country’s 29th state.

As India stabilized economically and territorially, its state-led economic model grew dramatically, leading to the so-called “License Raj”. Many sectors were dominated by public monopolies, and even where private firms were allowed to participate, the government held sway over every important decision: new investments, production levels, prices, or financing. Up to 80 agencies need to sign off before a project moved forward—and many did not. Unsurprisingly, economic growth in the decades after Independence was anaemic, averaging a mere 1.25%. Middle-class Indians with ambitions and options left the country for Canada, the United States, or Britain, and it was next to impossible for Indian firms to attract international-grade managers.




The “Licence Raj” system lasted until the economic crisis of 1991. The Congress Party-led government faced a severe balance of payments crisis, leaving India close to default and able to finance barely three weeks’ worth of imports. Faced with the proverbial “burning platform”, reformers, including Dr. Manmohan Singh, then Finance Minister and now Prime Minister, seized the opportunity to dismantle the old socialist regime. The government began to open the economy, privatize public enterprises, and roll back the state’s regulatory reach. This process, though, was deliberate and gradual, and remains far from complete.

In response to the post-1991 reforms, foreign capital flooded into India, new domestic multinationals were built, and economic growth surged. This dynamism, in turn, raised the living standards and expectations of Indian consumers. As the availability of credit and consumer goods expanded, yet more projects were launched and shopping malls were built. New office and residential towers sprouted across the landscape. Newly capitalized Indian firms expanded abroad, both physically and virtually through the boom in business process outsourcing. By 2007, India had a growth rate of 9.7%.


India’s GDP Growth (annual %): 2004-2014


Source: World Bank


Then came the world economic crisis. India, like many countries, took a major hit in 2008, but recovered, comparatively, rather well in 2009 and 2010.  Thereafter, the country went into steady decline as the long-term infatuation of investors with emerging markets began to wane. The bar that Indian projects must clear to attract capital today is notably higher than it was five years ago.  

India’s recovery is uneven, in the last two years hovering at just below 5% growth, and the lack of new movement on economic reform has caused some investors to scale back their interest.  Moreover, at the best of times India offers a highly challenging environment, ranking 134th on the World Bank’s 2014 Doing Business survey. While not the “License Raj” of old, the Indian Government remains slow and inconsistent in approving projects, leaving foreign and domestic firms alike to suffer long periods of frustration.  Most analysts interviewed for this paper suggested that investors in India need a great deal of patience, deep pockets, and a good lawyer; this is especially true outside of the information and communications technology (ICT) and business process outsourcing sectors.  In a world where many projects and countries are seeking capital, India’s difficult business environment is often unappealing to investors.


From Macro Policy to Micro Policy

Evidence of economic retrenchment and instability abounds. The relative weakness of India’s economy and investors’ declining fascination with emerging market economies has pushed some of the country’s structural problems to the fore. The clearest example has been the recent volatility of the Indian Rupee (INR). A year ago, the exchange rate was about 52 INR to 1 USD. During the 2nd Quarter of 2013, however, emerging markets were faced with instability stemming from the likely unwinding of the Federal Reserve’s unconventional monetary policy. This was compounded in India by frustration on the part of investors with the stalling of the government’s economic reform agenda. Consequently, the Rupee began to plummet as spring turned to summer, reaching 68INR to the dollar in August 2013. The situation looked so dire that, as billions of dollars poured out of Indian bonds, investors and the financial press speculated about a full-scale economic crisis. The Reserve Bank of India helped to head off that outcome by imposing capital controls and loosening reserve requirements on banks for certain non-Rupee transactions. While the currency has stabilized in recent months at around 62INR, the government has still not addressed India’s deeper economic problems and lack of competitiveness, leaving a wide range of risks that could again threaten the country with crisis. The May 2014 parliamentary election is the most obvious short-term challenge. In fact, Standard and Poors warned in November 2013 that it would downgrade India’s credit rating if it failed to produce a government capable of reviving growth.

While Central Banks in the developed world have been worried about deflation since 2008, India has struggled with inflation, which has hovered above 9% annually for all but one of the past five years. The September 2013 appointment of Raghuram Rajan as Governor of the Reserve Bank of India (RBI) marked an important turning point in this struggle. Dr. Rajan, a former Chief Economist of the International Monetary Fund, has made a concerted effort to battle what he calls the “destructive disease” of inflation.  Avoiding the highly restrictive approach taken by U.S. Federal Reserve Chair Paul Volcker in the early 1980s, Dr. Rajan has instead undertaken a monetary policy that does not entirely choke off demand and credit. The Governor’s nuanced approach appears to be having a degree of success. The Wholesale Price Index, India’s key measure for tracking headline inflation, fell to an 8-month low of 5.05% in January 2014. This followed a five-month low of 6.16% in December 2013. Economists remain cautious, however, because the RBI’s core inflation index rose 3% in January, the strongest surge since April 2013. Governor Rajan undoubtedly has a long battle ahead.


India’s Consumer Price Inflation: 2004-2013


Source: World Bank


Importantly for social stability and the governing coalition’s electoral prospects, food prices have begun to moderate after a severe spike in the second half of 2013. Food inflation was running at a comparatively moderate 8.8% in January, down from 13.7% in December. The price of vegetables, always important in a country where much of the population does not eat meat, rose by 16.6% in January, a much smaller increase than the 57.3% registered in December and November’s nearly 100% jump. In light of 2013’s robust harvest, many analysts raised questions about collusion in the distribution system. The moderation of vegetable prices, though, was at least in part offset by a 7.2% increase in milk prices and a 10% increase in fuel and power. The budgets of middle and lower class Indian consumers continue to be strained. Indians are eating out less, for example, in turn straining the restaurant sector. As recently reported by the Mumbai daily DNA, fast food restaurants have begun to battle this downturn by offering “happy hours” to get customers through the door. A transportation sector worker interviewed separately noted that his co-workers are frequenting Chinese restaurants because their vegetarian dishes are cheaper than those in traditional Indian restaurants.

As the price of daily necessities surges, demand for discretionary purchases declines. Facing a precipitous drop-off in foot traffic and sales in recent years, many shopping centre operators, particularly below the top tier, are finding it hard to survive. As in any downturn, consumers with disposable income are more discerning about where they spend their resources, engaging in a “flight to quality”. The Business Standard reported on February 16, 2014 that there are two-dozen western-style “dead” or near-dead malls for sale across the country. Those that are surviving all aggressively advertise and are concurrently undertaking major expansions to attract stores and stay ahead of evolving trends. After more than a decade of headlong expansion, India’s shopping malls and similar western-type developments are entering a period of consolidation. This should concern the government, as in recent years the expanding retail sector has accounted for a sizeable portion of urban employment growth in the formal sector. Considering that large retail operations in India appear to employ at least four times as many people per square foot as their counterparts in Canada, there is plenty of room to reduce payrolls.

Weak consumer demand has been a key contributor to the relative stagnation of the Indian economy. This has posed a growing problem for the governing United Progressive Alliance (UPA), in which the Congress Party is the largest coalition partner. With the May election top of mind, Finance Minister P. Chidambaram packed his farewell budget, presented on February 17, with a series of measures designed to stimulate consumption. To prop up car sales, which fell by 10% in 2013, the Minister cut the excise duty on every category of motor vehicle—from motorcycles to luxury SUVs—by 3 to 6% for the next four months (i.e., until after the election). For the same period the Minister also cut taxes on a variety of white goods and electronics by 2%. As one analyst told the Economic Times: “This is a stimulus package and a shot in the arm for the next four months. … If (the excise cuts) are not enough we are in serious trouble.”

The RBI has responded to the economy’s relative stagnation through its main instrument: the setting of interest rates.  Rejecting calls for a monetary stimulus, in late January Governor Rajan surprised the markets by raising the RBI’s repurchase rate from 7.75% to 8%. This strengthened the value of the Rupee and enhanced his credibility internationally. It also ensured, though, that the cost of credit for buying a home, a car, or anything else will remain among the highest in Asia for the foreseeable future. The headline rate for mortgages provides an important example. Indiabulls, a major Mumbai-based finance house, is aggressively trumpeting its rate of 10.25% for a mortgage with 0.5% down and a three-month lock-in period. This rate, which is fairly typical among major lenders, looks excellent compared to the rate for commercial bank construction loans, which is closer to 15%. Some consumers are still buying homes despite the high cost of capital and significant challenges with property rights. The continued mass migration from India’s countryside to its cities will help the Indian property market over the longer term. One analyst has estimated that India will need to build an astounding 900 million new square meters of residential space by 2030 to accommodate the inflow. For the time being, however, many consumers prefer to rent.

High interest rates are causing the Indian market to significantly underperform its potential while encouraging unintended consequences, such as greater sprawl and traffic congestion. From a consumer perspective, the net effect of high interest rates is to lower consumers’ purchasing power, driving them to search for small homes further from the city centre. Yet, in India, as in many countries, investors have piled money in recent years into building luxury high-rises closer to the centre, and a mismatch has arisen between supply and demand. As the Indian Express newspaper detailed on February 19, 2014, the more central parts of cities like Mumbai are unaffordable to Indians on an average wage and there are not enough foreign or domestic property investors to pick up the slack. Therefore many of the gleaming new luxury buildings have low occupancy rates, which has hurt the ROI for the builders and those who financed them. By contrast, homes in the northern suburbs of Mumbai are more in demand, as they are affordable to middle-class families with incomes of US$250-$1250 per month. Depending on the structure of the deals, this does suggest a shift in the types of real estate investments that may be profitable.

Given India’s economic stagnation, both foreign and domestic investors have grown reluctant to finance projects, and in recent months private sector investment has plummeted to next to nothing. The Center for Monitoring the Indian Economy reported that new private sector investment projects declined to a mere 0.6% of GDP in Q4 of 2013, down from 1.4% in Q3 and double-digits levels from 2005 to 2010. The public sector has tried to counter the decline with an increase in investments through its financing institutions, but India’s deficit, equivalent of 4.6% of GDP, has left New Delhi with little room to manoeuvre. The financial press is full of stories of companies “waiting and watching”, in the words of Linde AG CEO Wolfgang Reitzie, before making further investments.

Beyond its fundamentals, India’s economy has suffered a major drag from both informal and formal policy frameworks. In background conversations, advisors of foreign companies recount numerous cases where firms or groups of foreign professionals have been invited into the country only to face predatory regulations or local harassment when they actually pursue business. The advisors also recount numerous cases where foreign companies face difficulties in receiving the full amount owed for goods provided or services rendered. Even when those companies are eventually paid in full, some have faced obstacles to repatriating their profits. When foreign firms face resistance they also face local governments and a judiciary that are overwhelmingly predisposed against their interests. These and other factors have caused certain foreign firms to conclude that making money in India is not necessarily worth the risk—hardly a desired reputation for a country with a pressing need for FDI in a variety of areas.

India further suffers from a culture of impunity and unpredictability in its public institutions. Reports ranging from unchecked police beatings to endemic corruption fill the newspapers, and ordinary Indian citizens are angry and frustrated with the current state of affairs, leading to regular protests and rising populism. If foreigners can ultimately escape from this dysfunction, they still have to navigate it while in country. A striking example is the ever-challenging issue of firms moving their employees into and out of the country. Indian professional bodies have long been reported to use the courts and, allegedly, extra-judicial means to keep out foreign lawyers, architects, and engineers, and problems with the government’s processing of visas are increasingly coming to light. Any foreigner making more than a cursory visit to the country is required to interface with the Foreigners Regional Registration Office, a branch of the local police. The FRRO is notoriously unpredictable in its treatment of cases, approving some quickly and for no apparent reason referring others to the Ministry of Home Affairs in New Delhi. Standards of treatment, moreover, differ significantly across the country. In one notable recent case, an Italian multinational executive who had been issued a multi-year visa at the Indian Embassy in Rome saw its term reduced to three months when she registered with the FRRO. Those whose cases are referred to the Home Ministry find that there is no easy way to track their status, and at times FRRO officials have told applicants that how quickly their case is resolved depends on how much pressure is exerted by their home country embassies. When the paperwork does ultimately come back from the Ministry, it is not uncommon for the subject of the investigation to be asked to pay a “fine” for violating one rule or another. This wasteful process neither attracts FDI nor promotes international competitiveness.

India’s formal policy framework has for its part suffered from a repeated inability to deliver on high profile promised reforms.  The most prominent of these in recent years has involved multi-brand retail. Indian law already permits foreign single-brand shops, which are widespread in the country’s malls and shopping districts. What they do not have are the likes of Walmart, Ikea, and Carrefour. (Carrefour and Walmart have a number of wholesale stores, a segment in which they can have 100% ownership, but no standard retail stores.) As India’s consumer society took off in the 2000s, large U.S. and European multi-brand retailers began pushing hard to establish stores in the country, and in September 2012 the Indian Government raised the threshold for foreign ownership of multi-brand retail operations to 51%. In effect, big foreign retailers could enter the market if they had a local partner. While this measure seemed to represent major liberalization of the retail sector, the central government left it to the states to approve or block multi-brand stores in their territory. With only 11 of India’s 28 states now allowing multi-brand retailing, reality is falling far short of previous sweeping rhetoric. Significantly, the states that are home to Mumbai and Hyderabad, the first and fourth most populous metro areas in the country, have signed on. So far in 2014, however, two previously supportive states have reversed their positions: Delhi, home to the second most populous metro area in India, and the northern state of Rajasthan. To underscore the political sensitivities that now surround multi-brand retail, a senior advisor to Narendra Modi, the opposition’s leading candidate in the 2014 elections, was careful not to endorse liberalization in this area in a February 10, 2014 interview with the Economic Times, despite his pro-free enterprise track record. India’s evolving patchwork in retail has come to worry a number of constitutional experts, who fear that the central government will increasingly devolve authority over FDI to the states. The key point of the retail saga, during which only UK-based Tesco has advanced toward opening stores, is not the impact of greater consumer choice on the macro economy; instead, it is the Indian Government’s inability to deliver on what it promises.

The Indian Government has likewise failed to fully carry through in insurance. The Life Insurance Corporation of India (LIC) held the monopoly in this market before 1991, but in the wake of liberalization foreigners were allowed to buy up to 26% of insurance ventures. Funds flowed in, including those from several prominent Canadian operators. In 2008, the government agreed in principle to raise the ownership cap for insurance companies to 49%, which would help attract additional capital and enhance foreign firms’ ability to improve customer service. Raising the insurance sector’s FDI cap in practice, however,  would require an Act of Parliament, which the government has been unwilling or unable to pursue. The government last promised to raise the cap in the insurance sector during the mini-economic crisis in 2013, yet it still sits at 49%. Meanwhile, the Indian insurance market has undergone important changes since greater liberalization was proposed. When the LIC lost its monopoly, its share of the insurance market plummeted to 50% as the public fled to private operators.

More recently, a surge in poor customer experiences and consumer complaints has allowed the new-and-improved LIC to take a 65% market share. The Indian insurance sector could benefit greatly from both the capital and the expertise that Canadian operators could deliver, but in this area, like others, both sides continue to wait.

Foreign investors face additional difficulties in their treatment under the Indian tax regime. The defining case has been that of Vodofone, which entered the Indian market in 2007 through its Dutch-based subsidiary. Vodofone paid $11.7 billion for a stake in an existing venture held by a Hong Kong-based company, a transaction completed in the Cayman Islands. While standard international practice suggested that it did not have jurisdiction, the Indian Income Tax Department brought an action against Vodofone for unpaid taxes. In January 2012, the Indian Supreme Court ruled in favour of Vodofone, finding that the Income Tax Department had “no jurisdiction” to levy taxes on foreign transaction between two companies based outside of India. Not satisfied with the judicial outcome, the Government of India subsequently amended its Income Tax Act to make any company that had engaged in a transaction similar to Vodofone retroactively liable for taxation. In May 2012, the Indian Government announced that Vodofone would be fined $3.3 billion for back taxes and penalties. This case is presently before the courts. Vodofone is seeking resolution of the issue through the India-Netherlands Bilateral Investment and Promotion Agreement (BIPA). India is arguing that the BIPA does not cover taxation. It is as yet unclear how this case will end and what, if any, Vodafone’s ultimate liability will be. This case is by no means unique. The Indian tax authorities are presently trying to block the transfer of Nokia’s factory in Chennai to Microsoft on tax grounds, and they are also seeking billions in taxes from Royal Dutch Shell. Many investors view India’s tax regime as becoming increasingly unpredictable and arbitrary, and this can only discourage further foreign investment.

India’s approach to foreign enterprises sometimes even verges on hostility. In recent months, for example, the Indian business press has been filled with stories alleging that other countries, particularly the United States, are attempting to keep Indian companies from succeeding in foreign markets. While India’s opinion leaders prominently note every success by a PIO (or Person of Indian Origin) in America (the appointment of Hyderabad-born Satya Nadella as the new CEO of Microsoft, for example, generated days of coverage),  these same voices are quick to view quality and competitiveness issues through the lens of confrontation.

This situation has only worsened since the explosive confrontation between India and the United States over the December 2013 arrest of an Indian diplomat in New York. A particularly acrimonious series of events began in late January of this year when the U.S. Food and Drug Administration (FDA) barred Indian generic pharmaceutical companies Ranbaxy and Wockhardt from selling their products into the U.S. market. This move came in response to FDA audits of their Indian manufacturing facilities. The audit report’s findings included flies “too numerous to count” in a drug storage room, uncalibrated instruments in a laboratory, and non-adherence to standard sample analysis procedures. Ranbaxy and Wockhardt are hardly alone in facing a temporary bar from the U.S. market. Yet, instead of focusing on fixing the process issues with their facilities, the Indian press has cast this as yet another example of U.S. hostility and protectionism. The action against the two companies was taken just days before a visit to India by FDA Commissioner Margaret Hamburg. The press covered her every move, even critiquing her blog posts. The Indian Government, moreover, reinforced perceptions that the FDA action was based on politics, not science and safety. The Business Standard prominently reported on February 11, 2014 that Minister of Commerce and Industry Anand Sharma’s key demands of Commissioner Hamburg included advance notice of FDA audits of Indian pharmaceutical facilities producing U.S.-bound drugs, and he further asked that Indian government officials be invited to participate in the site visits. Given that surprise is a key tool for driving ongoing compliance, the FDA is unlikely to agree to the Indian demands. The Indian Government has seemed more inclined to complain than to work with Ranbaxy and Wockhardt to help them to meet and maintain international safety standards.

Alleged American bias against India has also been attributed to the results of a comprehensive U.S. Federal Aviation Administration (FAA) investigation into the safety of India’s aviation system. While frequent travellers to India have long cited safety concerns, the U.S. audit formally downgraded India from a “Category One” to a “Category Two” country, putting it on par with Bangladesh, Ghana, and Swaziland. In practical terms, this means that Indian carriers are barred from launching new flights to the United States or new codeshares with U.S. carriers. Indian carriers will also be subject to extra checks at U.S. airports. Given the credibility of the U.S. findings, Singapore subsequently announced its own extra checks on Indian carriers. The downgrade was a particular blow to Air India, which, newly equipped with Boeing Dreamliners, had planned to launch direct service to half-a-dozen U.S. destinations.

Regardless of hurt feelings among the chattering classes and parts of the government, Indian companies operate in a world of rules. The real dividing line between developed and developing countries is the degree of process consistency, whether in manufacturing or the delivery of services, and in pharma and aviation India has neither achieved a high level of consistency nor arrived at a strategy for doing so. Indian companies in these sectors will thus continue to walk on a razor’s edge between the process-inconsistent developing world and a quality and safety-obsessed developed world.

India has, however, recently lowered a barrier to economic activity in tourism. The quality of India’s tourism offerings is among the best in the world and its generous tax incentives for the construction of hotels above the two-star level have dramatically improved its accommodations mix in recent years. Nonetheless, India ranks 41st in the world in tourist intake, with only 6.8 million international arrivals out of a total of 1.1 billion globally in 2013. Arguably the biggest single reason for India’s poor performance is the arduous process for obtaining a visa, which was made even more difficult after the 2008 terrorist attacks in Mumbai. Yet, in a world where more key competitor destinations have gone to visa-on-arrival, India’s regime of requiring prospective visitors to wait a week or more no longer works. Consequently, India announced in early February that it is phasing in a visa-on-arrival regime for 180 countries before the next tourist season, which begins in October. India had previously announced its goal of drawing 12.6 million visitors per year by 2016,  and this change to the country’s visa regime offers it a fighting chance of reaching that goal. A 2011 evaluation by the Planning Ministry of a pilot visa-on-arrival program found that it had a “significant and positive impact” on foreigners’ decision to travel to India.  In announcing the change, Planning Minister Rajeev Shukla was asked by reporters whether India would demand reciprocity from the countries to which it would extend visa-on-arrival privileges. He essentially said no, commenting, “India needs these tourists. They may not”. This is welcome news and should serve as a stimulus for a sector that generates a large amount of foreign exchange and a large number of jobs.


The Economy and the Election

Most business leaders interviewed for this paper suggest that those with capital are waiting for the April-May 2014 parliamentary elections before deciding where and in what to invest. A decisive result seen as favourable for the private sector perspective could bring capital off the sidelines, boosting the Indian economy. If the poll produces a messy coalition government, foreign and domestic investor sentiment will be less favourable. The current stasis in the business climate took hold more than a year ago as the business community lost faith in the present government’s ability to deliver significant results, and the mini economic crisis in the summer of 2013 was the coup de grace. Many in Delhi’s trade association world are passing the time re-writing their position papers and waiting for the May vote.


Legacy Candidate

So why are the 2014 elections so important? For the first time in a decade, India will have a new Prime Minister. In early-January, 81-year-old Manmohan Singh announced what many had suspected—that he would step down as Prime Minister after the present Parliament. The 2014 poll will thus be marked not only by the lack of an incumbency, but also by the ascension of a new generation of leaders. Dr. Singh has been a major force in Indian political life for two decades. As noted, he drove the reforms of the 1990s as Finance Minister and helped to sustain them as Prime Minister starting in 2004. The 2005 U.S.-India Civil Nuclear Agreement, which moved beyond the decades long stand-off between the two countries over India’s nuclear program, was seen as the signature achievement of the Singh Government’s first term. Yet, after his government’s re-election in 2009, there have been no big initiatives and little momentum toward pursuing previously stated goals. The Canada-India free trade negotiations have languished due to a lack of resources and/or political will in Delhi, and India has not joined the Trans-Pacific Partnership. As the economy slowed, the government has taken no major steps.

India Goes to the Polls

2014 National Election

Size of Electorate

815 Million Eligible Voters

Number of Seats in Lok Sabha (Lower Parliament)


Voting Begins

April 7, 2014

Voting Concludes

May 12, 2014

Results Announced

May 16, 2014


Composition of Current Parliament (elected 2009)

Indian National Congress (nation-wide)

201 MPs

Bharatiya Janata Party (nation-wide)

112 MPs

Samajwadi Party (based in Uttar Pradesh)

22 MPs

Bahujan Samaj Party (based in Uttar Pradesh)

21 MPs

Other (split among 34 parties) /Vacant

187 MPs


Dr. Singh’s Prime Ministership has proven problematic in style as well as substance. The press has pilloried Dr. Singh for his alleged weakness and prolonged silences on key policy matters, and his lack of regular comments on the issues facing the country has engendered a spate of jokes among the Delhi political class and the general public alike. Attendees at conferences and meetings have been asked to silence their mobile phones by putting them in “Manmohan Singh mode”. Despite his august past, Dr. Singh is increasingly seen as tired. Respected political historian Ramachandra Guha told an Indian magazine in 2012 that the Prime Minister has “more and more … become a tragic figure in our history”. While historians will debate the veracity of these characterizations, many of those interviewed for this report suggested that the declining Rupee and economic outlook have made the business community ready to turn the page.

The other prominent figure in Indian political life over the past decade has been Sonia Gandhi. The Italian-born Mrs. Gandhi was the wife of the late Prime Minister Rajiv Gandhi—the fourth generation of the great Nehru-Gandhi dynasty. Although naturalized as an Indian citizen in the early 1980s, Ms. Gandhi twice turned down the job of Prime Minister. Despite having campaigned and won as Congress Party leader in the 2004 election, her foreign origins became a major issue in its aftermath. She instead opted to appoint Dr. Singh as Prime Minister and became the major power broker behind the scenes.

In 2014, the dynasty is passing to the fifth generation as her son, Rahul Gandhi, moves to the forefront. Mr. Gandhi’s formal role is as 2014 Campaign Chairman of the Congress Party. He has not been named as the party’s prime ministerial candidate and may ultimately not be, but images of him surrounded by supporters are prominently displayed on billboards, television, and social media. At the same time, Mr. Gandhi is still an unproven figure. His leadership role in the 2012 election in the politically crucial state of Uttar Pradesh, in which the Congress Party placed fourth, left some old hands nervous. Despite these misgivings, as the heir apparent to the great dynasty Rahul Gandhi is the Congress candidate in 2014, and win or lose, will be a key player for some time to come.

A significant challenge facing Mr. Gandhi is that he inherits the status quo in a year when the Indian public seems to keenly want change. The Congress Party-led United Progressive Alliance has run India for 10 years and there, as in most countries, voters grow tired of the same politicians after a time. This challenge is compounded by voters’ rising expectations, the result of two decades of economic growth. Month-by-month, India is building a consumer society, first in the large cities and more recently in smaller centres. Shekhar Gupta, editor-in-chief of the Indian Express newspaper, notes that people’s expectations have gone beyond mere survival; now they want education, health, and a proper job. Slowing economic growth threatens improvement in people’s lifestyles and in turn makes them restive.

Among the new emboldened Indian polity, a complex array of concerns about income inequality is also emerging, which is undoubtedly complicating moves toward greater market liberalization. Extreme displays of wealth, such as Reliance Industries CEO Mukesh Ambani’s construction of a 27-story, US$1 billion private residence in South Mumbai, are fuelling populist anger. In this turbulent environment, the politician best placed to reassure the newly economically enfranchised about their future while promoting “fairness” will have the poll position in the 2014 general election. Despite the daily advertisements in the major papers featuring Dr. Singh and Mrs. Gandhi trumpeting their achievements since 2004 – from kilometers of road built to the amount of FDI attracted – Congress does not appear to be connecting with the current zeitgeist. Now, as always, voters are likely to ask “What have you done for me lately?” This said, Indian elections are notoriously unpredictable and Mr. Gandhi will be boosted by Congress’s possession of the largest membership and best voter turnout operation in the country.

While Mr. Gandhi is not yet exciting voters, two political figures who do appear to be capturing the nation’s mood in the months before the election are (1) Narendra Modi, the 2014 Prime Ministerial candidate for the main opposition, the Bharatiya Janata Party (BJP); and (2) Arvind Kejriwal, anti-corruption activist, former Chief Minister of Delhi, and the leader of the Aam Aadmi (Common Man) Party (AAP).

The Talented Mr. Modi

Narendra Modi has been Chief Minister (Premier) of the northwestern State of Gujarat since 2001, and he is arguably the shrewdest politician in India. Sensing the public’s desire for good government, he has delivered largely efficient and honest public administration in his state. Mr. Modi has built an institutional machinery in Gujarat that has allowed him to monitor the status of key projects and stay close to the mood and concerns of people, an approach summed up by his oft-heard slogan: “less government, more governance”. In a society where many Indians feel that nobody listens to them, having a type of “direct” feedback loop with the voters has proven politically powerful.

A reputation for good government, maintaining of a supportive business climate, and an aggressive pursuit of investment has delivered high rates of economic growth and significant human and infrastructure development in his state. Mr. Modi thinks big and has sought to back this up with the creation of a financial centre (the Gujarat International Finance Tec-City –GIFT) and the build-out of major energy and other infrastructure assets. When Tata Motors ran into local opposition in the State of West Bengal over its proposed auto assembly plant for the famous Tata Nano, Mr. Modi successfully wooed the investment to Gujarat and trumpeted its arrival with billboards all over the state. Given his “promoter-in-chief” disposition, the Chief Minister has hardly been shy about trumpeting “the Gujarat Miracle” around the country, and the branding has worked. More than one Mumbai taxi driver will tell you in detail how everyone has water and sewer connections in Gujarat. Based on his reputation for economic competence, Mr. Modi is attracting support for the BJP in regions of the country where they have never had a base.

Mr. Modi has been aided in this effort by his strong charisma, keen sense of political symbolism, and a willingness to go for the political kill. For example, in January, a senior Congress Party official unwisely dismissed the humbly-born Mr. Modi as being a mere “tea seller” (chaiwalla), and at one point the future Prime Ministerial candidate did indeed run a tea stall with his brother at a bus station. Sensing an opportunity to connect with voters, Mr. Modi embraced his past. In early February, he held an interactive town hall meeting at which he sipped tea and took questions from people at 1,000 tea stalls in 300 cities across the country—a nimble display of political jiu-jitsu.  

Based on discussions in Mumbai and Delhi, it appears that the business community is overwhelmingly supporting Mr. Modi’s candidacy. He is regarded as the most business-friendly candidate and the most likely to deliver the next generation of structural reforms that India so desperately needs. Some even hope he can take the “Gujarat Miracle” nationwide, but many will merely take competence and strong leadership after what they regard as a period of drift. In addition, many of India’s top CEOs reportedly feel under attack as the UPA government has grown steadily more populist over the last five years.

These strengths, though, do not assure a Modi victory. Several caveats must be considered.  First, Gujarat is very different from the rest of India and it is uncertain how its “otherness” might play with voters in the country’s other regions. The state has one of the deepest entrepreneurial and trading traditions in India, setting it apart from more dirigiste states. It also has one of the largest and oldest diasporas in the world, stretching from southern Africa to the United Kingdom to North America. This link has already proven important for Canada. According to a senior government official, an estimated 30% of Indians living in Canada have roots in Gujarat. This will inevitably shape the state’s politics as well as the national government’s foreign policy. Canada has embraced its connection, serving as one of the key sponsors of “Vibrant Gujarat”, the state’s bi-annual economic and investment promotion conference. In addition, numerous Canadian Ministers and officials have called on Mr. Modi over the years, giving our country strong links to the Chief Minister and his team.

Of course, no one knows in detail how a Modi election victory would affect the economy.  Economic confidence, though, would almost certainly increase. One prominent business advisor has already argued that India will see at least 6% growth in the third and fourth quarters of 2014 if Mr. Modi wins. In other words, he would add more than 1% to the country’s output simply by holding office, an effect Goldman Sachs is calling the “Modi-fication” of the Indian economy. Of course, delivering good governance and growth in Gujarat, a state of 50 million people, is radically different from trying to do so for all of  India’s 1.2 billion people. That said, Mr. Modi is no stranger to the ways of the capital, having spent significant time in Delhi as a BJP operative and advisor, and this foundation would serve him well as Prime Minister.

For all of his pluses on the economic side, Mr. Modi is a highly controversial figure in many parts of India, inspiring fear and rage. He, like most BJP members, is a Hindu nationalist. This ideology went from abstraction to harsh reality during the 2002 riots in Gujarat, which left an estimated 2,000 Muslims dead and 200,000 homeless. Various Commissions of Inquiry have absolved Mr. Modi of responsibility for the riots, which were sparked after 58 Hindu passengers were incinerated in a train in a Muslim town. Many, however, do not accept these findings, arguing that Mr. Modi not only failed to stop the riots, but actually encouraged them. As enraged Hindu supporters began to attack Muslim neighbourhoods, American journalist Robert Kaplan, among others, reported that Mr. Modi responded to the violence by citing Newton’s third law, “every action has an equal and opposite reaction”.

The riots have politically haunted Mr. Modi ever since. It is a hard leap for the 15% of the Indian electorate that are Muslim to back Mr. Modi, and there are also many pan-Indian Hindus who reject the BJPs ethnic particularism. In the 2014 campaign, Mr. Modi is trying to pivot to the centre and minimize the number of votes that he is automatically throwing away by being a Hindu nationalist. As he recently told members of his own party, “toilets have to come before temples”. As Mr. Kaplan observed after a 2010 visit with Mr. Modi:

As the influence of an economically burgeoning India now seeps both westward and eastward, it can do so only as a force of communal coexistence made possible by being … the world’s largest democracy. Mercifully, the forces of Indian democracy have already survived more than 60 years of turmoil. … These forces appear sufficiently grounded to either reject a Modi at the national level or to neuter his worst impulses as he moves … to New Delhi. … India has been an idea since Gandhi’s Salt March of 1930. Modi’s managerial genius will either be fitted to the service of that idea or he will stay where he is. Hindus elsewhere in India are less communal-minded than those in Gujarat, and that will be his dilemma.

Only the final vote tally will reveal whether the talented Mr. Modi has transformed himself enough to win the confidence of the country. Assuming it wins the most seats, the BJP and prospective coalition partners will then engage in a complex internal process of forming a government. Some analysts suggest that if the BJP wins fewer than 170 seats in the 543-seat Parliament, the coalition will dump him in favour of a less controversial Prime Minister and coalition leader. If the BJP wins 200 seats, however, Mr. Modi will certainly be Prime Minister. Where his threshold of success rests within this 30-seat spread is unclear.


Man of the Streets

Arvind Kejriwal could not be more unlike Mr. Modi. He will not become Prime Minister after the 2014 vote, and his AAP Party will not lead a governing coalition. Mr. Kejriwal casts himself as the true inheritor of Mahatma Gandhi’s legacy, including in his style of dress and political ideology. The party has been growing by leaps and bounds in recent months, first emerging from a popular anti-corruption movement. Its foundations, however, go much deeper to a broader disgust with the present political system. One prominent Delhi analyst interviewed explained that there have been four groups powering the AAP’s rise, each with their own vision of the moment and what it stands for. The AAP has been, in American parlance, an Obama 2008 or Tea Party 2010-type of “change we can believe in” movement. If (or as) the movement falters, these politically motivated constituencies will be up for grabs.

The first drivers of the AAP’s rise are the populists who, while motivated by the anti-corruption message, would in no small way like to reverse the reforms of the 1990s and make India more closed to the world. The idea of economic self-sufficiency (or autarky) has a powerful following in Indian public life, and globalization has many critics across the landscape. A number of prominent leftist intellectuals have recently thrown their weight behind the AAP. Some have done so for economic reasons, while others, such as Kamal Mitra Chenoy, a well-known communist and university professor, wrote in the Business Standard in mid-January, he was supporting the AAP because of its linkages to social movements.

The second group driving the movement’s rise have been those seeking better governance, particularly in urban areas. The Indian Government is incapable of delivering even the most basic services in large parts of the country, and what they do deliver is often of very poor quality. In the cities, it is striking that most who are middle class (or are aspiring to be so) sacrifice to put their children in private schools. Many public schools are breathtakingly poor with, in the worst cases, teachers who are barely literate and hired through the patronage of local political bosses. While there is a nascent movement to improve public education, most parents have neither the time nor the drive for the hard and uncertain path toward creating public education. In the new India, everyone is on their own and competing against everyone else. Consequently, parents send their children to the best private school that they can afford. While it may not be outstanding, it will be better than the public offering.

Another key preoccupation of this second group is citizen security. Crime is rising, especially against women, and the high-profile gang rape of a young woman on a Delhi bus in 2012 was a key turning point. Outraged and terrified citizens began demanding change, whether greater security on the streets, better policing, or an end to fear.

The third group who have been attracted to the AAP are from the small and micro-scale trading classes. The face of government seen by these small business owners is the corrupt local official, the police and assorted “inspectors”. These merchants are tired of bureaucracy, rent seeking and petty regulation. In the AAPs populist messaging, this group is attracted to the prospect of greater freedom from the state in their daily lives. Many small business owners are attracted to Mr. Modi for similar reasons: he comes across as a strong leader capable of putting things right.

The fourth and final group that has fuelled the AAP’s rise in recent months are discontented urban youth. More than 500 million of India’s 1.2 billion people are below the age of 25 and, according to the Delhi analyst mentioned above, the country has to produce 1 million new jobs per month in order to accommodate those entering the labour force. This has proven  a very high bar. According to the Times of India, between 2000 and 2012, the number of jobs created nationwide grew by a mere 2% per year, and most were in construction and the low-paying service sector. This weak labour market has led to a growing gap between the rising expectations of India’s large youth population and their economic realities. The Delhi analyst commented that India is lucky that it is a large, decentralized country. Although there are regularly protests and small rebellions around the country, they have yet to fully coalesce as a single movement. The AAP would like to overcome the realities of regionalism, but they remain a long way from their aspirations. The analyst added that, if India had the same portion of its population in Delhi as Egypt does in Cairo, the country would see its own “Tahrir Square” every day.

The idealism of the AAP has now come face-to-face with the reality of governing, giving many, especially in the business community, pause about the movement. In early December 2013, the party won the state-level election in Delhi and Mr. Kejriwal was sworn in as Chief Minister on December 28. So began what one Mumbai daily termed his 49-day “comedy of errors”. Mr. Kejriwal unilaterally cut power rates by half for households, accusing big utility Reliance Energy of corruption in “overcharging” consumers. He additionally overturned that state’s previously announced support for foreign investment in multi-brand retail. Ever the street politician, he led a protest in Central Delhi against the police that threatened to disrupt Republic Day, India’s national holiday. His Justice Minister, moreover, led “raids” against households containing foreigners without a warrant. Finally, Mr. Kejriwal threatened to resign if the state assembly did not pass his anti-corruption bill. They demurred, and he made good on his threat on February 14.

Mr. Kejriwal’s has already been named the AAP candidate for Prime Minister. His early attacks have focused on populist anger about income inequality. Mr. Ambani of Reliance Industries and his 27-story home are being presented as “Exhibit A” for what ails India.  Mr. Kejriwal argues that Mr. Ambani has really been running the country for the past decade and would continue to do so if Mr. Modi wins. At the Confederation of Indian Industry, the counterpart organization of the Canadian Council of Chief Executives in India, Mr. Kejriwal tried to offer words of assurance about his intentions, but with little success. He told the group that he was not against “capitalism”, just “crony capitalism”. Mr. Kejriwal’s definition of “crony”, of course, remains ambiguous. Likewise, the AAP is the X factor in the elections. They are expected to hurt the BJP more than Congress, but the political winds are ever shifting.


Implications and Opportunities for Canadian Business

There are a number of implications and opportunities for Canadian firms present or interested in India.

  1. Forward economic momentum creates tremendous opportunities, but also risks: While the economy has slowed, 5% growth per annum in a country of 1.2 billion people means massive demand for new goods and services. The country will need energy, automobiles, housing, roads, water systems, insurance, banking, and information technology. If they have patience and invest in navigating the complexities, Canadian firms are well positioned to service many of these needs.

  2. The prospect of better governance is good for Canada and its firms: India’s economy will most likely benefit from having a new generation of leaders at the top, Canada should have a constructive relationship with either Congress or BJP-led coalitions. Our relationship with Dr. Singh’s government has been constructive and this would be expected to continue under a Gandhi-led government. If Mr. Gandhi is triumphant, the markets may react negatively. Yet, the Gandhi family are shrewd operators, suggesting that he may come strongly out of the gate and push through a reform package in an effort to build his credibility. Prioritizing the passage of insurance reform legislation could be a good early advocacy priority for the next Canadian High Commissioner.

    If Mr. Modi becomes Prime Minister, he will likely benefit from a certain short-term confidence bounce, which would be good for the economy. Canada’s close relationship with Mr. Modi will also serve Canadian interests. India is a country where long-term relationships matter. Our positive position contrasts sharply with that of the United States. The U.S. Government denied Mr. Modi a visa to visit America in 2005 over his role in the 2002 riots. Watching the opinion polls, in February 2014, the U.S. sought to put its relationship with Mr. Modi back on track by dispatching then-Ambassador Nancy Powell to meet with him. Mr. Modi cast the meeting as a triumph in his great American standoff. Canada would likely be the “preferred North Americans” under a Modi government.

  3. Focus on building out relationships at the state level: The Modi experience underscores the value of Canadian firms building out relationships at the state level. Just like Premiers matter and play a huge role in the economy, so do Chief Ministers. They can be more accessible than many federal cabinet ministers and, in the case of the best among them, often go on to bigger posts.

  4. Infrastructure could yield tremendous payoff: One of the key constraints on India’s economic development is hindered by inadequate infrastructure. Roads are incredibly crowded and poorly built, making already horrendous traffic even worse. In Mumbai, the metro rail system is so packed that dozens of paying customers die or are injured each year by falling off of trains. Some public-private partnerships are developing to address these deficiencies. In February 2014, Mumbai’s first monorail opened, as did its stunning new peacock-inspired international airport. Some big American firms, for example, received contracts to work on the airport, but the process was not always easy. If one is clear-eyed about the risks, there are tremendous opportunities for participating in profitable infrastructure projects in India.

  5. India needs energy; Canada has energy: In most conversations about areas for increasing commercial linkages between Canada and India, energy is repeatedly mentioned. Even at 4.9% growth, India’s demand curve will continue to soar. The North American oil and gas revolution has been a game changer globally, and it is now economically viable to ship Canadian East Coast LNG to India. In addition, there are new LNG terminals planned or opened in the States of Kerala and Maharashtra, giving them the capacity to receive imports from Canada. Our country could also see opportunities for western oil and gas if our internal infrastructure challenges are overcome. There are further big opportunities on the services side as India seeks best-in-class energy expertise. On the renewable side, hydropower is an area of interest and opportunity for utilities on both sides.

  6. Agriculture: Unlocking the Great Potential: Agriculture employs more than half of the Indian population, and farmers tend to be small holders with poor access to efficiency-enhancing technologies. While the Indian Government has made recent moves toward schemes that provide farmers with greater predictability, the country nonetheless has a long way to go to professionalize the sector and improve yields. Some, like McKinsey, envision India as a future agricultural superpower. To get there, it will need international partners at each stage, whether in production, storage, distribution, or standards. If the Indian Government moves seriously to improve its agricultural sector, Canadian firms can play a substantial role in that transformation.



India is at a major turning point in its post-independence history. The gratitude that much of the population showed the Nehru-Gandhi family in the decades after 1947 has given way to an impatience for a better life. For the many economic elites, Mr. Modi is attractive because he projects the image of a man who will take a firm hand against the disorder and poor governance that is, in their view, holding the country back from reaching its full potential. The challenge is that real reform can threaten the interests of powerful people. Mr. Modi knows this. Throughout the campaign, he is therefore projecting dynamism and promising economic growth without getting too specific as to how this will be achieved. If he wins the election, one can only hope that Mr. Modi will bring the fortitude for real change that he has claimed to show in Gujarat.

In the case of Mr. Gandhi, one sees a leader who is relying on the old machine to carry the day yet again. He was born with the presumption of one day becoming Prime Minister. Yet, after so many generations in power, the heirs can lose the fire in the belly and political instincts needed to triumph in a hard-fought Indian election campaign. Mr. Gandhi’s challenge is compounded by being effectively viewed as the incumbent candidate. This is a tough position to be in when the electorate seems to desperately want change. His key advantage in countering this trend is that Mr. Modi’s record on Hindu nationalism is unacceptable for many voters. If Mr. Gandhi does pull off a win, he will lean heavily on his advisors in governing as he is not known for having a hands-on style or deep set of policy ideas.

Whoever wins the election will face a deeply challenging world. The halcyon days of easy-to-attract portfolio investments that flooded emerging markets are very likely over for the time being. India’s future growth will have to be earned through capital investments, innovation, and productivity growth. In succeeding on this path, the country will have to fight its autarkic instincts and build more globally competitive firms while opening its domestic markets.

Any reform agenda will engender comparisons with China. The frequent lament in the West that India is an economic laggard compared to China misses the point. One of the central dynamics that will determine Asia’s future is how Delhi and Beijing balance their relationship both as commercial partners and strategic rivals. India’s relationship with the United States is also deeply interwoven in the China question. An India fearful of its giant eastern neighbour may be more amendable to addressing America’s bilateral economic concerns in hopes of retaining U.S. engagement as a guarantor of its security.

Canada and India enjoy numerous historical, demographic, and economic synergies. Given its distance from Canada and its sheer size, India is nonetheless a country where a widespread and effective on-the-ground presence matters greatly. Stewart Beck, Canada’s present High Commissioner, has shown leadership and creativity in advancing Canada’s interests over the past few years. As he transitions out of this role, the government’s choice of its next top diplomat in Delhi becomes crucial to the outlook for Canada’s commercial interests in India. Let us hope that they choose well. India’s election and its structural economic problems will not make the job any easier in the years ahead.


About the Author

Eric Miller is Vice President of Policy, Innovation, and Competitiveness at the Canadian Council of Chief Executives, which represents the CEOs of 150 of Canada’s leading companies.

Mr. Miller has extensive international experience, having represented Industry Canada in Washington, DC, advised governments in Asia-Pacific and Latin America on trade and economic policy, and worked for the Inter-American Development Bank, a leading international financial institution. Mr. Miller has testified before the U.S. Congress on global competitiveness metrics and represented a coalition of developing countries seeking enhanced voting weight at the International Monetary Fund.

He prepared this study based a trip to India in January-February 2014 and a previous visit in October 2012.

A native of rural Nova Scotia, Mr. Miller holds a Masters Degree in International Affairs from Carleton University and a Graduate Diploma from the Bologna Center of the Johns Hopkins School of Advanced International Studies. He lives in Ottawa with his wife Arica Young and their daughter Chloethiel Miller.


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