P Chidambaram wants buoyant growth to continue whereas Y V Reddy has signalled higher interest rates so as to rein in incipient inflation. In itself, this is neither unexpected nor entirely negative.

Such differences in perception are not new. Bill Clinton, in his initial years as president, was known to have been worried about what he thought Alan Greenspan was doing to "my recovery".

Politicians will always give primacy to growth and job creation, until of course such growth is negated by serious inflationary pressures with their own political fallout.

The current dharma of central bankers is to give primacy to fighting inflation though it is arguable that central bankers in developing countries should worry about growth a little more than do those in mature economies.

It is imperative for poor countries to grow so as to get out of poverty. Chidambaram is not and cannot be oblivious of inflationary pressures. Fairly, recently the Congress party firmly signalled to the government to get a handle on emerging inflationary pressures.

So there is considerable proximity between the aims the two have set before themselves. Nobody can really object to the central bank tweaking rates a little to send signals that liquidity will not remain unfettered if bubbles and capacity shortages emerge, threatening to bring higher inflation in their wake.

On the other hand, nobody wants a repeat of 1996, when severe monetary contraction killed the growth momentum. So some tweaking is all right but any notion that the economy should set itself up for a year or more of steady dear money policy should not be welcomed.

What is the evidence on the ground? Bubbles in the equity and property markets have clearly been emerging but they have been somewhat deflated in the last few months. So some adjustment has already taken place and a little more will be good for everybody.

But that should be it. This is because inflation seems under control if you take away the contribution of high global energy prices. Central banks are mandated to spot incipient inflationary pressures before others do and act to stop them before they do damage. But they have also been known to be over-cautious.

On the other hand, the corporate sector, currently the main engine of growth, seems in fine fettle. It is managing costs and productivity capably and aggressively investing in new capacity. The real shortage that is emerging is in skills and Indian firms should not lose their global competitiveness by having to live with a huge and galloping
salary bill.

Similarly, their costs should not go out of bounds because of rapidly rising interest payments. It is worth recalling that a key component of the emerging competitiveness of the better Indian firms is a long period of declining interest costs.

The RBI's task has not been made any easier by the growing openness of the Indian economy and the partial capital account convertibility already there. During a period of rising global interest rates, it will be impractical for the Indian central bank to allow interest rate differentials, between their rates and ours, to become significantly greater.

If this becomes firmly set, it can lead to money going out of India, to the detriment of the balance of payments and the exchange rate for the rupee. However, a slow and steady depreciation of the rupee and less volatile FII inflow are both desirable.

The limitations of monetary policy in India are highlighted by the fact that a lot of what needs doing to remove bottlenecks and ensure sustainable growth do not come within the ambit of the RBI. The only way to deflate the real estate bubble is to steadily increase the supply of urban land and encourage investment in planned new cities.

Politicians have to do this by removing urban land ceiling laws and ensuring smooth land acquisition through good management of rehabilitation and compensation payment. It is escalating land costs that have caused property prices to skyrocket. To respond to this by raising interest rates on housing loans, thus making decent housing unaffordable to the middle class, is absurd. If anything, bank lending to property developers could be reined in.

The only way to lend stability and ensure the health of the domestic equity market is to vastly increase domestic retail holdings. This has to be done by changing allotment rules so as to favour the small investor.

One of the most unacceptable aspects of the current situation is the way the Indian equity markets jump up and down depending on how global markets are doing or whether FIIs are selling or buying on a particular day. But this is the domain of Sebi, not the RBI.

As for the skills shortage, absolutely nothing can be done in the short run. Senseless impediments in some states in the way of starting educational institutions have to go. Simultaneously, huge initiatives have to be taken in fostering public-private partnerships to create colleges and institutions of higher learning.

The finance minister appears to be at loggerheads with nationalised banks as they seek to raise lending rates in response to the RBI's signal of dear money, continued high credit offtake and the need to raise deposit rates to garner resources to on lend.

What he should really be doing is getting nationalised banks to raise efficiencies, cut costs and lower their spreads. If the leftists, who keep the present government in power, will not allow this, that is where one must look for a solution.

The cardinal aim of policy must be to enable Indian business to become more cost-competitive globally and also to hugely raise investment in infrastructure. If the latter and the confidence of the business in investing in new capacity lead to exceptional credit expansion at a time when the economy is in line to record historically unparallelled growth, then there is no need to raise danger signals.