Recent policy announcements in the US, eurozone and UK on the one hand, and India on the other, manifest two marked differences in the conduct of monetary policy:

• Both the US Fed and the European Central Bank have intervened aggressively in the money markets in recent months in the wake of the credit crisis. The objective was to bring the credit premium, that is, the difference between the 91-day risk-free rate and the three-month LIBOR, down to its normal level, clearly evidencing their concern with the level of interest rates rather than the supply of money. In fact, during the course of the Fed's aggressive rate cutting, there was no reference to the money supply at all. In contrast, our monetary policy seems to still focus on money supply growth.

• Again, these central banks are as willing to cut interest rates and pump money in the system, as they are to act in the opposite direction when circumstances are different. The Fed seems to aim at minimising the sum of squares of the inflation gap (difference between targeted and actual inflation) and the output gap (difference between optimum and actual output), suggesting equal importance to both. In our case, while the central bank is quite willing and happy to tighten money, in general, it is far more reticent in opening the tap or dropping interest rates.

I have, on several occasions, contrasted the difference between our monetary aggregates -- broad money, bank deposits, bank credit, and so on -- as a percentage of nominal GDP, and the corresponding ratios for most other Asian economies: our ratios are generally much lower.

In this connection, I recently came across some interesting statistics comparing US GDP growth with credit expansion: the ratio of credit generated per dollar of GDP growth was fairly stable at around 1.5 for several decades after 1950. It started growing rapidly in the 1990s and was as high as 4.5 last year! In our case, the credit growth has been consistently below the growth in GDP.

For example, in the last fiscal year, GDP grew by Rs 493,000 crore (Rs 4930 billion), while bank credit grew by just Rs 416,000 crore (Rs 4160 billion). The figures are not very different for the previous two years, but credit growth as a percentage of GDP growth was even lower in 2003-04. One does not know whether the central bank or its advisors compare such data but it would be interesting for them to do so. Arguably, the comparison with the US is not valid, but surely this cannot be the case with reference to the other Asian economies? Any bets on what the comparison would show?

The issue regarding credit growth is all the more important in the context of the monetary policy statement's emphasis on "credit quality as well as credit delivery, in particular, for employment-intensive sectors". One would have thought that the central bank should have expressed satisfaction at the deceleration in credit growth from 30 per cent to 22 per cent on a year-on-year basis, which was its objective.

But obviously circumstances seem to have changed. As for the employment-intensive sectors, a few that readily come to mind include construction, garments, gems and jewellery, leather, handicraft, and so on. All these sectors are suffering from either very high real interest rates and/or an uneconomic exchange rate. In fact, the very viability of many units in these sectors is now in question.

For example, jewellery manufacturing firms in SEEPZ, Mumbai, employ 35,000 semi-literate persons. The firms' exports have dropped by 25 per cent between July and November, 2007, as compared to the corresponding period in 2006 (from $1.2 bn to $900 mn). To my mind, for banks to increase their exposure to such employment-intensive sectors when both the time and external values of the rupee are uneconomic, would lead to dilution of the overall quality of credit, increasing the probability of generating non-performing assets.

Critics of "lazy bankers" also point to the increase in the SLR portfolio of the banks, even as credit growth has slowed. Such criticism needs to be tempered by the fact that, until early 2007, most banks did not need to add to their portfolio of such securities even when deposits were growing. Once, however, the ratio came to about 28 per cent or so, banks had to resume investing in SLR securities. The ratio now, at about 29 per cent, is not very different from what it was a year back (28 per cent).

But coming back to monetary policy, the RBI is obviously constrained by the priorities of Delhi. As the finance minister said in Davos recently, "I will not be politically in trouble if my growth rate slows down to 8.5 to 8 per cent. I will be in greater trouble if my inflation rises to 6 per cent this year." What seems to be missing from the numbers is that each output gap of 1 per cent means Rs 50,000 crore (Rs 500 billion) of lost output -- and, even more importantly, the non-creation of millions of reasonably paid jobs, adding to potential recruits to Naxalism.