International Trade Committee on Dec. 11th, 2012

[The Chair, Conservative, Rob Merrifield]

That would be a growing business, I'm sure.

[Ed Holder, Conservative, London West, ON]

I'm just thinking that might be worthwhile.

Gentlemen, thank you both.

[The Chair, Conservative, Rob Merrifield]

Thank you.

Thank you very much. We appreciate your testimony and your coming forward.

We will now suspend as we bring forward the next panel. We have a teleconference to set up, and we will have one witness here in the room.

[The Chair, Conservative, Rob Merrifield]

Let's call our meeting back to order.

I will introduce our witnesses. First, from the Canadian Federation of Agriculture, we have Ron Bonnett, president.

It's good to have you with us. You are not new to committees. I'm not so sure you've been to this committee that often, but it's good to have you here.

We also have, from Canaccord Genuity, Mr. Mahajan.

Are we coming through? Can you hear us all right?

[Sachin Mahajan, Managing Director, Mergers and Acquisitions, Canaccord Genuity Corp.]

Yes, absolutely.

Can you hear me?

[The Chair, Conservative, Rob Merrifield]

We're good.

With that, we will start with you, Mr. Bonnett. The floor is yours, sir.

[Ron Bonnett, President, Canadian Federation of Agriculture]

Thanks for the opportunity to make a presentation to you on behalf of the Canadian Federation of Agriculture.

Today we're talking in particular about the possibility of an India-Canada agreement. I think that's part of an overall initiative of trying to open up trade agreements around the world. Actually, I met some of you in Japan recently at the talks there.

For those of you who may not know, the Canadian Federation of Agriculture is a general farm organization representing commodity organizations and general farm organizations from right across the country and representing over 200,000 farmers. Because we represent a number of commodities in a number of different provinces, a lot of the comments I'll be making will not necessarily be commodity-specific in detail, but will give some general areas of interest as we move ahead with discussing India and our trading relationship.

At present, India is the sixth-largest agriculture market for Canadian exports. In the last five years, on average, Canada has exported $503 million and has imported $245 million in agriculture and agrifood products to and from India. Our top exports were peas, chickpeas, lentils, frozen fish, whey, and mustard seeds. Imports included rice, cereal flours—but that is not wheat—tea, oilseeds, and food products. Canada's trading relationship has grown steadily over the last decade, with exports increasing by close to 300%.

The Indian market continues to present tremendous potential for Canadian agriculture. According to the 2011 Indian census, the current population of India is 1.21 billion people. The country added 181 million more people in the last decade, making India one of the fastest-growing markets in the world.

A recent study performed by the India-based National Council of Applied Economic Research predicts that the percentage of middle-class consumers in the country's total population will increase from the current level of 13.1% to 20.3% by 2015-16 and to 37.2% by 2025-26. This growing middle class will create a new and diversified demand for food and food products and increased market access opportunities for Canadian producers.

When assessing the market, it must be recognized that India is one of the top producers of cereals and vegetable products in the world and is a net exporter of agricultural products. Over 50% of the Indian population relies on agriculture for their livelihood. Food self-sufficiency and increased productivity are central policies of the Indian government. As a result, domestic agriculture supplies some 97% of consumption.

While views differ on whether India can sustain this policy, Indian producers are faced with land and input constraints and the need to increase production levels. Already the demand for oilseeds and pulses regularly exceeds production, and imports are required to cover that shortfall.

To ensure a successful trade agreement for Canadian agriculture, it is imperative that negotiators understand both the domestic Indian agricultural policies and the import and export regulations. The Indian market is complex and sometimes difficult to navigate.

The government plays an active role in agriculture and tightly controls domestic production and trade. Depending on the commodity, policies could include setting minimum support prices, state trading, establishing import tariff rate quotas, dictating import regulations, granting export quotas, and issuing export subsidies.

According to the World Trade Organization's 2011 trade policy review, the average tariff protection for agricultural products in 2010-11 was 33.2%, considerably higher than manufactured products at 8.9%. Applied tariffs vary between commodities and the situation in the domestic market. For example, imports of fresh and frozen chicken cuts were subject to a 100% applied tariff, largely to protect the domestic industry. In contrast, tariff rates have been temporarily eliminated for pulses and have been reduced to an average of 9.7% for vegetable oils, to address demand and inflation.

With the majority of the country following a strict vegetarian diet, pulses are a key protein source. India is consistently among the top market for Canadian pulses—for example, chickpeas, lentils, and peas—with sales valued at $632.7 million in 2011.

Pulses have accounted for 98% of Canadian exports to India. Bound tariffs are 50% for peas and 100% for lentils and other pulses. Permanent elimination of import duties for Canadian pulses and a mechanism to address market access issues would be of significant benefit to this important pulse market.

India is also a significant importer of vegetable oil, importing 10.2 million tonnes in 2011-12. While India has not traditionally been a large market for Canadian canola, the elimination of tariffs on canola seed, oil, and meal would greatly assist canola producers in promoting the benefits of canola as an alternative to other vegetable oils and in building a new customer base. The relevant biotech approvals will also be required.

In certain years, market opportunities for wheat have existed. Depending on the production and stock levels, India can both import to cover production shortfalls or export surplus supply. India last imported wheat in 2006-07, when it purchased a million tonnes from Canada.

The government tightly controls the wheat market, setting minimum domestic support prices, issuing public tenders for domestic and import wheat purchases, and controlling export quantities. Given current high levels of stock, the Indian government lifted its four-year export ban in 2011 on Indian wheat and established an export quota. Exports are expected to continue in 2012-13.

While not considered a traditional market for pork, India has a growing tourist industry and an affluent upper class and foreign population, all with the potential to create new niche markets for Canadian pork. The market for imports is currently limited to hotels, restaurants, and institutions as well as importers of processed products. As meat consumption continues to grow and full market access is secured, market opportunities for Canadian livestock will also increase. Pork imports currently face basic tariffs of 30%.

Market access is related not solely to tariffs. Addressing non-tariff barriers related to sanitary and phytosanitary regulations and import measures and establishing a mechanism to discuss future issues are critical outcomes of the negotiations. Without solutions, Canadian agricultural products won't benefit from the liberalization of tariffs. India has, for example, agreed to extend the pulse fumigation derogation granted to Canadian pulses until the end of March 2013.

Canada and India are working to find a more sustainable solution. Ongoing negotiations could be used to address the issue. There are also various sanitary and phytosanitary issues to solve in the poultry and livestock sectors.

In general, Canadian cereals meet the Indian import requirements; however, in the past India has relaxed these measures when imports have been required and tightened them when they have not. Improved transparency and predictability would enhance the attractiveness of the Indian market to Canadian exporters.

The impact of Indian domestic agriculture and trade policies is not limited to India, but it distorts global trade in the respective commodity. One of the contributory factors of volatility in the international sugar market is policy-induced production swings in certain Asian markets, particularly India. Similar to the situation with wheat, India is either an exporter or an importer of sugar, depending on domestic production and stockpiles. Government policies aimed at stimulating domestic production and establishing a pricing stature and relaxing import restrictions or granting export licence all distort the international sugar trade.

Canada doesn't currently export sugar from or import sugar to India, but the U.S. imports a small quantity under a tariff-rate quota.

In conclusion, India's fast-growing market holds future potential for Canadian agricultural producers. Favourable market access conditions, including a mechanism to address non-tariff barriers, and predictable rules of trade would be beneficial to Canadian agricultural producers.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Mahajan, the floor is yours.

[Sachin Mahajan]

Thank you.

I don't really have prepared remarks, but as a typical investment banker, I do have some bullet points that I've jotted down, and I'm happy to have a more interactive discussion on those.

Just quickly on my background, I spent about 23 years of my life in India initially and then the last 13 years or so in Canada. I have had the benefit of studying both in India and here when I did my MBA. I am a managing director in Canaccord Genuity. We're the largest independent investment bank in Canada, but we also have offices globally.

India is one jurisdiction where we don't yet have an office, but we are the only Canadian investment bank to have actually done Indo-Canadian transactions. We started with Birla Minacs back in 2007, which I think was about a $300 million enterprise value transaction. We also did the Algoma and Essar transaction, which was about $1.8 billion.

The trade on the M and A front has been fairly active, but mostly inbound—that is, Indians buying Canadian assets. On the other side, there hasn't been much activity going from the Canadian side in buying Indian assets. A big part of what I do is advise large Canadian corporations on how to do business in Canada. That has been a key part of my role here at Canaccord Genuity, and, before that, at Genuity Capital Markets. I've been doing this for about 12 years now.

I have a sort of compendium of issues that I've come across over the years. I'm sure that at various points in time this committee has probably heard about these issues, some of which Mr. Bonnett has just outlined on the agriculture side. I'd like to point out that I've actually travelled with Viterra several times to India to help them with their strategy in India, and also to Saudi Arabia.

Some of the key issues that we have come up with on that trip, or with other conglomerates when they want to do business with India, have been around trying to protect their dollars. The Canadian corporations have the willingness. They understand that India is integral to the world economic order going forward and that it's getting more and more significant. They do want to be part of it, but one of their key issues is as follows. Let's say that I have a pocket of capital—$100 million or $200 million—and I have board approval. How do I go about making sure that the money can travel to India and that I can invest in certain assets, but also make sure that I have the proper title to those assets? How do I make sure that I can take that money out if there are any issues—whether that's internally within Canada or political issues in India—whenever the economic climate tells me that I need to exit that investment?

There are issues around the legal framework and the arbitration. We all know that the Indian legal system uses English, which is fantastic—so it's different from the Chinese system—but on the other hand, litigation can take years in India.

In the broader sense, in trying to promote trade with India, I think those are two of the more key topics that come out in all of my discussions, whether it's convincing a board or the management team to make the investment in India.

Also, on licensing requirements, we haven't found a one-stop shopping sort of climate, whether it's for an agricultural company or for somebody like McCain or some other company that wants to go to India only to find out that if you want to open a warehouse, these are the 10 different licences you need and here's how you go about getting them.

On the level of India it has been difficult, but on a state level it has been helpful. But that shouldn't be the case. When Canadians want to do business, we want to be open to all of India, and not just to states like Gujarat—which is more proactive and has set up very good standards for dealing with foreign companies—and maybe a couple of states down south. I think it has to be more pervasive, which is hopefully one of the things this agreement will establish.

The other thing that's always been the issue has been the visa requirements. For any C-suite Canadian executive to travel to India, he needs to give his passport and have that passport back to him—I know these are very basic issues, but I think they are fundamental—within two or three days, because he has to travel. This is a multi-billion dollar corporation he's running, and he has to have that passport back.

So we need to make sure that in Canada, in order to get a visa, we have to streamline the processes, as the Chinese have done. I've travelled to China about five times. To get my visa, I go in the morning and in the afternoon I have my visa in my hand. We need to make sure that the Indian consulate works that way.

It's the same thing on the Canadian side. We have to make sure that the Indian business visas are cleared within a matter of two or three days. Significant business people do not have the ability to leave their passports for a week or ten days at the consulate and not get their visas.

The other key issue that always comes up is the idea of the parallel economy in India and the fact that cash is king. It's always been a big impediment. One thing that came up in one visit was that the company wanted to make a significant investment in India, and they wanted to acquire land. That becomes a big issue unless the land is actually owned by the government. If it's private land, it's almost impossible to pay the full price of that land. Nobody is willing to transact, because all you have to give is a cheque in Indian rupees or in Canadian dollars. On the other side is the stated rate for that and the actual rate that the seller is willing to sell at. There's probably a differential of four to five times between those.

This is just one example. I know that people have several other examples. Walmart is going through that issue in India right now. They have spent $25 million on what they call “discussions” with India over the last two or three years to get Walmart into India. Now they're being questioned on why they would spend $25 million on discussions. They are being questioned on that.

But that is a fact of life when dealing with India. It's tough to address, but that's something on the other side of the equation, not on the Canadian side but on the Indian side, that needs to be at least addressed from the government point of view. Then we can have arguments and counter-arguments on that.

On the Indian side, their biggest complaint, from the Indian large conglomerates, has been, every time I've gone there, “Sachin, we've gone to Canada. You showed us great assets. We've made the transactions. We've bought billions of dollars of assets in India. We'd like to see some of that capital come back, whether it's pension plans or whether it's Canadian corporations.”

That is one of the key themes when I go and see the Tatas or the Birlas or the Essar Group: “Hey, we've got a lot of these assets. Why don't the Canadian companies want to come in and start looking at them? M and A means bilateral trade. It shouldn't be a one-way street.”

They were very concerned with the whole net benefits test. When I was in India a couple of weeks ago, one of the biggest concerns they had was what this net benefits test would mean for an Indian company trying to acquire oil sands, for example, or assets within the oil sands, or a services company.

At that time, I sort of told them, look, this has more to do with NOCs, with state-owned entities, and it would probably be on a case-by-case basis. Every transaction, whether it's done by Indians or down from the U.S. to Canada, has the same level of scrutiny. Hopefully this will only be limited to the state-owned corporations and not private investors. I think that's the spirit of the remarks that were made by Prime Minister Harper on Friday or Thursday.

Another point I have on my list here is that when I went down with the Toronto Stock Exchange a year and a half ago and met with many Indian corporations and the Securities and Exchange Board of India, the key issue that came out of that related to the listing of Indian companies in Canada. There is no ability for an Indian incorporated entity to actually raise capital on the Canadian capital markets. They are just not allowed.

So if there is an Indian company with Indian assets, but it has a Mauritius holding company, that company can list on the Toronto Stock Exchange, but an Indian company with Indian assets domiciled in India has to list on the Indian Stock Exchange before it lists on the Canadian Stock Exchange. This to me, from a capital markets perspective, is the single biggest issue that needs to be addressed. I think we need to have more robust capital markets.

That speaks to a lot of capital raising, because Canada has been great at taking assets all over the world—they could be in very remote locations such as Mongolia, Africa, South America—and people come to Canada for mining companies and for oil and gas companies and list them. The Indians are not able to to do that. Even all the Indian companies were baffled by that part of the legislation in India.

[The Chair, Conservative, Rob Merrifield]

I'm going to slow you down there, because our time is tight. We will move on to the question and answer portion, and we'll allow you to answer some more when we get into that.

We'll start our questions and answers with Mr. Morin.

The floor is yours.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Mr. Mahajan, do the hurdles you were talking about among the different states in India just happen to be there, or are they part of the economic structure of India, like all the economic and political structures?

[Sachin Mahajan]

They are obviously not, because I've seen that in a state like Gujarat, the chief minister will gladly take a meeting with one of our large corporations. He'll sit down there and instruct his deputy ministers at the meeting to ensure that these licences are done. The deputy ministers follow up immediately. So if it can be done in a state like Gujarat, I'm sure it's not enshrined in the legal system. It's more the way business has generally been done in India, and it's just that certain states are more lubricated now in terms of doing that and more efficient in doing that. I would like to see that be more pervasive. Why can't the other 24 states do the same thing?

I've heard good things about two or three other states, but there are 20 others that could probably do the same thing and haven't.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Can India's national government influence the different states? Does it have some sort of influence over its different states in a negotiation?

[Sachin Mahajan]

It can, as much as our federal government can have on Quebec, for example, or on British Columbia. There are certain subjects that are state subjects and other subjects that are federal. There is an ability, but it is limited, because at the end of the day, you have to work in that particular territory or state that you are going to. The federal government might help in the initial licensing, but you will need ongoing support.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Having lived here for years, you can see that even here it is not that easy, so I wonder how it is in India.

[Sachin Mahajan]

That is true. Here are some of the experiences of Indian counterparts working in Quebec, for example. They have had no issues in getting licences or getting approvals. It's a very streamlined process. Under all our securities laws, for example, if they want to acquire a company or they want to acquire land, it's very easy. It's simple, whether it's here or whether it's in New Brunswick or in British Columbia. I think generally it's simpler. I'm talking about licensing, not about the actual net benefit or those issues. Those may be localized. I'm simply talking about establishing a business presence in this country.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

For example, in Quebec a few months ago they announced the construction of a big plant. The deal is between Quebec incorporated farmers and India's largest farmer co-op.

[Sachin Mahajan]

Yes, it's IFFCO.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Apparently, the deal is fantastic. I didn't hear anything against it.

I'll ask Mr. Bonnett a question.

I don't want to criticize the nature of India. It's not a mature industrial country like Japan or Korea. In agriculture, how do you see possibly expanding our share of the market to other things, like perishable produce, let's say, with no supply chain? There's not really a huge middle class of consumers with wages much higher than.... It's not like what we call a middle class.

[Ron Bonnett]

I think this is where some of the change is taking place in Indian society. A middle class is starting to rise in India. When you take 1.2 billion people, a very small percentage creates a fairly substantial number of people. I think what we have to start focusing on is targeting some of those high-value markets where Canadian product could be given a premium price.

I think in order to make it work, we have to have a rules-based system. I think it's fair to say, from some of the experience with trading in agricultural commodities in India, that it's been more about politics than about having a clear set of rules and an understanding of what is going to take place. I think that is core: having predictability when you start gearing up to supply a market. I think that would be critical, to build that predictability into any outcome of negotiations coming out of the Canada-India deal.

[The Chair, Conservative, Rob Merrifield]

That time is gone.

We'll move on to Mr. Shory. The floor is yours, sir.

[Devinder Shory, Conservative, Calgary Northeast, AB]

Thank you, Mr. Chair.

Thank you, witnesses, for being available.

Mr. Mahajan, my focus will be on your testimony, because we have one thing in common to start with. I was also in India. I spent a few years of my initial life in India, and you did the same thing. We understand the culture. We understand the hurdles you mentioned. Your focus was all on challenges, and definitely challenges are there.

I'm also a little familiar with one of the comments you made on land transfer. I agree that in general the land price is different from that for registration purposes, but at the same time, if any company, for example, your company, wants to get that transfer at exactly the same price you pay, you can have that registration as well. It is available there.

When we talk about all the challenges that are there...part of the testimony in our committee was that:

Despite some very real challenges in doing business in India's business climate, it would be wrong to paint them as insurmountable.

I'd like you to make a comment on this.

[Sachin Mahajan]

I'll start with my conclusion. My conclusion, which I've written down here, says exactly that. People have always debated whether India needs Canada more or whether Canada needs India more. I'm Canadian, but I'm going to tell you that we represent less than one percent of the trade with India. They do not see us as a big trading partner, but we need to recognize India as a big trading partner. If we stand back and just lay out all the issues without finding the solutions for them, Canada will be the one to suffer, not India. India is growing at an exponential pace.

Canada needs to diversify its base from the U.S., and maybe even from China. I think India is the next explosive economy, and we have to be part of it. They need what we have, but they will find it somewhere else if we don't give it to them.

You are 100% correct. I am 100% in agreement with you on that. There's no doubt in my mind, and that is why I think this is a critical piece of legislation. We need to get this right and work on it. I'll keep on pushing. Every single time I take a large Canadian conglomerate to India, I always have tough questions to answer, but the fact is they are tough questions, and we will surely get there soon.

[Devinder Shory, Conservative, Calgary Northeast, AB]

Regarding the regulation of the Indian market, if you noticed, I was part of the Prime Minister's delegation this time as well. When we were in India, the Prime Minister clearly said, as you did, that we have what India needs and we recognize that it is a market with great potential. It was very clear. It was said in the meeting. It was said in public. When the Prime Minister addressed 400-plus delegates or representatives of companies, he said the same thing: that we do realize India is a potential market.

During those days, actually, I read the Canadian papers. One of the statements made by, I believe, Rahul Gandhi talked about FDI. I have been noticing that in India's parliament, even though they have a minority government, the talk is there. I believe that gives us hope that they will come up with some regulations, some laws at some time, or they will make some policy adjustments for multinationals and all these retailers. We talked about Walmart, and even though there is a concern, the government, their prime minister, their parliament, have been constantly talking about opening the markets, and they've been talking about foreign investments as well.

Do you think there is hope?

[Sachin Mahajan]

There's no question in my mind.

I don't know when you were in India, but perhaps you remember that Pepsi tried to enter India way back in the seventies, I believe. They were thrown out. The first store that KFC opened was actually stoned. When Walmart tried to open up its stores, it was ridiculed in Maharashtra. IKEA stated the set of rules it would operate under. Today Coke and Pepsi have, I think, about a 90% market share, and they're growing. They are one of the biggest markets. There are KFCs in every single town in India. McDonalds is everywhere. I forgot about McDonalds, but they're everywhere.

I think at the end of the day, people will find a way to work. If people could find a way to work in the Soviet Union and open up all the capitalist businesses in that era, I'm sure in India it will be a no-brainer, given that it's a very entrepreneurial society. They will accept us with open arms.