'Corporate earnings to grow for next 6 mths'

Q&A - Mahesh Vyas

Mahesh Vyas, MD and CEO of the Centre for Monitoring Indian Economy, a well-known economic think-tank with a large database on economy and industry, tells that economic growth in 2007-08 will be only 8 per cent. He is bullish on corporate earnings and adds that inflation will not play a spoilsport. Excerpts:

There are talks of the economy overheating. What is your opinion?
The economy is doing extremely well and the growth will continue in 2007-08 at a rate of over 8 per cent. New investments continuing at a robust pace will be the key driver of growth. New investments lead to new employment and new spending and they act as an in-built virtuous growth cycle. An interesting fact of the current growth is that it is neither driven by any policy measures nor are there any major reforms. It is a business cycle that is fuelling growth and the business cycle cannot remain bullish forever.

But don't you think high inflation, along with higher interest rates, is hampering corporate earnings and growth prospects?
They are high, but they reflect the growth in the economy. There is genuine demand in the economy. They are not growth spoilers.

Why then is the government so desperate?
It is the job of the government to see that there is no runaway inflation. An average inflation at 7 per cent is not troublesome and it may remain at the current level for one or two months. But I think it will come down in 2007-08 and will average between 5 and 5.5 per cent. The current inflation is not hurting growth. On the contrary, higher prices encourage industries to produce more and the resultant increase in supply can bring the inflation down. According to me, the government's measures are not enough and it should further reduce barriers to imports.

How do you see the prospects for corporate earnings?
I do not see any reason why corporate earnings should not continue to grow as in the recent past. At least for next two quarters, they will be good and may continue even further. The raw material cost, which constitutes 60 per cent of the total costs, has come down due to lower oil prices. The interest rate cost is very small at around 2 per cent and is easily set off with a reduction in raw material cost.

What are the bubbles in the economy?
If you are talking of real estate, it is more of a reality. Prices are not talked high. Deals have taken place at high prices. They are not artificial, though they have risen at a mind-boggling pace. By calling it a bubble, we are giving a bad name to growth.

What then could hamper growth?
It is difficult to find factors. But if I stretch myself, I would say SEZs are worrying me, as they lead to growth based on sops. They are artificial islands that are privileged compared to the areas nearby. Agriculture is an area where there seems to be some confusion. More loans are advanced and investments have started flowing into the sector to ensure that agriculture does not become a drain on growth.

These are good signs. But the confusing part is not enough is done to strengthen new institutions such as commodity exchanges and the FMC. They are good for the economy. By improving them, price discovery of agricultural commodities will only improve. There is need to increase investment to bring in modernisation and transparency in such institutions. By banning futures trading in some commodities, the demand-supply gap cannot be tackled.