Why India is not the new China

Why India is not the new China

India's economy grew at its slowest pace in 15 months in the April to June quarter, highlighting the challenges faced by Prime Minister Narendra Modi's government to cement the country's position as a driver of global growth amid a slowdown in neighbouring China.

The South Asian country logged 7.1 per cent gross domestic product (GDP) growth in the first quarter of the current fiscal year, down from 7.9 per cent in the preceding quarter, data released late on Wednesday showed.

Even though the rate is still faster than in China which posted 6.7 per cent in the second quarter of 2016, the pace of economic expansion is still behind New Delhi's 8 per cent average growth target.

Despite the South Asian nation's pace of growth, investors shouldn't expect the country to displace China as it is a smaller economy, said Mizuho Bank's senior economist, Vishnu Varathan.

"There's no way India would displace China even if we would agree the speedometer says that India is faster," he told CNBC's "The Rundown" on Thursday.

India's economic growth is also uneven with the industrial sector weighed down, in part, by excess capacity in China which is spilling over as refiners and miners cut capital expenditure, he added.

Gross fixed capital formation declined by 3.1 per cent from a year earlier in the June quarter, hardly evidence of an economy firing on all cylinders.

Growth during the June quarter was driven by government spending, which rose 18.8 per cent from a year earlier.

The economy also got a lift from private spending, which rose 6.7 per cent on-year in the latest quarter, although the pace was slower than the 6.9 per cent expansion in the same period a year ago.

It's less clear if the boost from households would persist. Private consumption growth would face limitations as oil prices bottom out, spurring inflation, said Varathan.

Furthermore, private consumption would just support growth at 7 to 7.5 per cent. For the 8.5 to 10 per cent growth that India is hoping for, industry growth will need to recover, he said.

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