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Modi faces challenges to upstage China as India economic growth hits 15-month low

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 neighboring China.

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

Even though the rate is faster than in China which posted 6.7 percent in the second quarter of 2016 and the Philippines which saw 7 percent growth in the same period, the pace of economic expansion is still behind New Delhi's 8 percent 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.

A supporter takes a picture of a map of India made of flowers with a picture of BJP leader Narendra Modi on it at the party's headquarters.
Getty Images
A supporter takes a picture of a map of India made of flowers with a picture of BJP leader Narendra Modi on it at the party's headquarters.

"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 percent 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 percent from a year earlier.

The economy also got a lift from private spending, which rose 6.7 percent on-year in the latest quarter, although the pace was slower than the 6.9 percent 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 percent. For the 8.5 to 10 percent growth that India is hoping for, industry growth will need to recover, he said.

DBS economist Radhika Rao told CNBC's "Squawk Box" private consumption hadn't fared as well as expected due to weak rural demand, "but the urban part of the story is still doing well".

She is expecting a turnaround in consumption going forward as a good monsoon and higher public sector wages help.

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