(Bloomberg) -- A diplomatic fight between Canada and India over the murder of a Sikh leader threatens to put a freeze on growing economic ties between the two countries, which are far wider than the flow of goods being shipped across the Pacific.

India is a relatively small buyer of Canadian commodities, but it’s a huge factor in the education sector — it’s by far the largest source of foreign students attending Canada’s colleges and universities. Meanwhile, the biggest Canadian public pension managers have poured tens of billions of dollars into Indian companies and projects, including renewable energy, infrastructure and banks. 

Three large funds that collectively manage more than C$1.2 trillion ($893 billion) — Canada Pension Plan Investment Board and pension funds for Quebec workers and Ontario school teachers — have opened offices in Mumbai or New Delhi in recent years. 

Canadian Prime Minister Justin Trudeau shocked the country Monday by alleging that India was behind the murder in June of a Sikh separatist leader in a suburb of Vancouver. India denied that it had anything to do with the killing, calling the allegation “absurd.” Both nations expelled one of the other’s diplomats.

Read More: Trudeau’s Murder Claim Threatens to Upend US Courtship of India

The incident exposes a widening rift between two countries that, in financial and economic terms, had been growing closer. Investments between Canada and India rose to C$36.2 billion in 2022, up 37% in four years, according to Statistics Canada data. 

“The financial connections are very strong in both directions,” said Vivek Dehejia, professor of economics at Ottawa’s Carleton University. The diplomatic row is more likely to have a “chilling effect” on investment flows between the two countries than affect trade, he said.

CPPIB, Canada’s largest pension manager, had $21 billion invested in India as of about a year ago, according to its website. One major investment, a 2.7% stake in Mumbai-headquartered Kotak Mahindra Bank Ltd., is worth 96 billion rupees ($1.2 billion). It’s one of about 70 publicly traded Indian companies in which the fund has a stake, according to a fund disclosure document.

Caisse de Depot et Placement du Quebec had C$8 billion invested in India at the end of last year and Ontario Teachers’ Pension Plan said it has more than C$3 billion invested there. Spokespeople for the Caisse and Teachers declined to comment on Tuesday. CPPIB did not respond to a request for comment.

The fate of future investments could be called into question if the fight between the countries escalates. “If the spat really gets protracted and drags on for months, while Canada continues its investigation, I see that could have a dampening effect at the margin,” Dehejia said.

Until recently, the two countries had been in talks on a trade deal. Those have now been put on hold.  

Canada exported C$11.6 billion worth of goods and services to India last year, less than a third of the value of exports to China, according to Statistics Canada. In July, the most recent month for which numbers are available, Canadian goods exports to India were led by commodities — lentils, metallurgical coal and newsprint exports. 

India’s largest goods exports to Canada during the month were smartphones and railway cars. The country ranks 12th on the list of biggest exporters to Canada. 

--With assistance from Erik Hertzberg, Mathieu Dion and Philip J. Heijmans.

©2023 Bloomberg L.P.