Canadian institutional investments in India could cool down if escalation between the two countries continues, according to a trade and investment lawyer.

John Boscariol, a partner with McCarthy Tétrault LLP, says Prime Minister Justin Trudeau’s serious allegations last week, accusing the government of India for being involved in the fatal shooting of a Sikh leader in Surrey, B.C. in June, could have long-term ramifications on the business relationship between the two countries. But for now, he sees cooler heads prevailing in the investment world.

“I’m hoping that things are calming down, but the pattern still seems to be on an escalation trajectory. I think the next couple of weeks are probably going to determine what direction this is going in and we’ll have a clearer idea. I think the fear is that that escalation will continue.”

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India is an attractive investment target, according to Boscariol, who also acts as the head of his firm’s international trade and investment law group. Thanks to its cheaper labour costs and consumer demand for competitive products, the country has become an emerging target for Canadian institutional investors. The dispute and its potential resolution will be critical for how India is viewed by investors around the world, he adds.

“On the investment side, the rest of the world is watching. . . . Actions taken against Canadian investors will reflect on the reputation of India as an investment destination. Not only will that impact Canadian investors, that’ll send a message to U.S. investors, U.K. investors, European Union investors as well. I do think India will be quite careful on how that proceeds.”

Boscariol says the dispute hasn’t yet made the Indian market undesirable for institutional investors, but if the rapid escalation continues between the two governments, it could follow the path of how investments into China and Russia are viewed today.

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Canadian institutional investors, including some of the largest Canadian pension funds, have allocated a significant amount of capital into India this year. Most recently, the Canada Pension Plan Investment Board invested in an Indian real estate fund, while the Caisse de dépôt et placement du Québec and the Ontario Municipal Employees’ Retirement System invested in solar roofing and infrastructure funds, respectively.

Since Trudeau’s initial allegation against the Indian government, Canada confirmed it would postpone a trade mission that had been planned for October. In addition, political pressure has been increasing through the dismissal of diplomats from both governments in each country. Travel warnings have also been issued between both sides of the dispute. And India, for its part, has suspended visa processing services.

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