updated 11/12/2010 1:09:03 PM ET 2010-11-12T18:09:03

Canada and India have formally launched negotiations for a comprehensive free trade agreement, leaders from both countries announced Friday.

Canadian Prime Minister Stephen Harper and his Indian counterpart, Manmohan Singh, made the announcement on the sidelines of the G-20 summit in South Korea, culminating years of preliminary trade agreements and exploratory talks.

"This will be of enormous benefit to both of our countries, and obviously of particular interest to the Indo-Canadian business community," Harper told reporters. "This is a key milestone in our relationship. It demonstrates our increasing co-operation."

The two governments commissioned a study earlier this year that found a broad free-trade pact would increase each country's annual output by about US$5.9 billion, and would boost bilateral trade by 50 percent.

Two-way trade between the two countries was worth US$4.1 billion in 2009, the highest ever — but still low compared to Canada's other trade relationships. Canadian investment in India stood at just US$596 million in 2009.

Canada's relationship with India, which is fast becoming the world's third largest economy, has not always been so cordial. Canada had been reluctant to get too close to a country engaging in nuclear activity. But the two countries signed a nuclear agreement in June_a pact Singh called "a sea change that has come about in our relationship."

Still, Canada shouldn't expect an easy negotiation, said International trade expert Daniel Schwanen with the Centre for International Governance Innovation based in Waterloo, Ontario.

India is a much sought-after trade partner, and Canada needs to be ready to fully open its borders without strings attached, he said.

And since Canada usually wants to include side-agreements while negotiating free trade agreements to preserve environmental and labor standards, while India prefers trade deals without those constraints, this may prove to tricky during these talks, he said.

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