Professional economists have bound up their science in so many restrictive assumptions about human behaviour, that there are very few left among them who  have not developed a kind of tunnel vision. The Reserve Bank governor, Y V Reddy is a prime example: he has been so obsessed with controlling inflation that he simply does not see the enormous damage that his largely redundant policies are doing to the people of India.

Mr Chidambaram also displayed  elements of tunnel vision last week  when, at a bankers’ meeting, he urged them to bring down interest rates in order to revive flagging demand in the auto and paper industries, but maintained a diplomatic silence on the cause of the slump in demand – the sharp contraction of money supply that followed Mr Reddy’s savage increases in the Cash Reserve Ratio (CRR) in January, April and July.

The damage this has already done to the economy is considerable. But the damage it will do, if the interst rates are not brought down is incalculable. Industrial growth has almost halved in the first five months of the fiscal year  from 13 to 7 per cent. The growth of manufacturing has fallen even more sharply. Consumer durables and construction have been the worst hit.

By July the auto industry had recorded a decline in sales revenue of over 7 per cent against the previous year. The data for August show that the trends identified six months ago in these columns are continuing. These were a fall in sales of two and three wheelers and a substitution of more expensive with cheaper cars.  By June Rs 800 crores of housing loans had gone bad and been sold off to  “asset recovery” companies. More may have gone the same way by now. Enquiries with builders in Delhi suggest that new building starts have ground to halt. Although we do not have firm data yet, I will be very surprised if these trends have not made steel , cement and engineering companies  begin to reappraise their investment and expansion plans.

All this is dwarfed by the turmoil in the external economy. In the year ended September 28, foreign exchange reserves rose by $82 billion  to $247 billion. Most of this increase took place after January and is essentially hot money attracted by high interest rates to a stable, rapidly growing economy.  Facing high interest rates at home, Indian companies have also taken advantage of liberalised external borrowing rules to raise loans abroad at low interest rates  to replace rupee loans. This pushed up the value of the rupee by 14 per cent in a single year, again mostly after January.

The appreciation has slowed the growth of export and doubled the growth of imports. Worst of all, it threatens to cripple the growth of the BPO industry and cause a contraction in garment exports.

Rather than tackle the root of the problem by lowering the CRR and thereby interest rates, the RBI has been frantically trying to treat the symptoms, applying  a bandage here, a poultice there, and a laxative some place else. In August, it stopped external commercial borrowing designed to replace  rupee finance. Last week the government announced tax sops for exporters.

But the torrent of foreign exchange is becoming a flood. Between September 23 and 28, the reserves rose by $11.7 billion and the exchange rate appreciated to under Rs 40 to the dollar. Two billion of this has flowed into the stock market, and is responsible for the crazy rise in the Sensex. In every sense of the word, the Indian economy is becoming dangerously overexposed.

The developing recession and the growing exposure to international speculation is threatening to end the strongest employment boom the country has ever experienced. The 61st round of the National Sample Survey has shown that the slowdown in employment growth after liberalisation caused by the sudden stoppage of sinecure creation by the central and state governments after 1991, has been more than reversed by the high growth that the country has been recording.

Against 1.05 per cent between 1992 and 1999, employment has grown at a frantic 2.93 per cent rate between 1999 and 2005. In a recent paper, using assumptions that are already turning out to be too conservative, former RBI governor Rangarajan has estimated that by 2008, the current blistering rate of growth will end absolute unemployment, as estimated by the NSS .

There is, however, one large fly in the ointment. All, literally all, of the growth in employment is taking place in the unorganised sector. These workers have absolutely no social security. Their entire lives, their capacity to meet health bills, and send their children to school; ultimately their capacity even to feed themselves depends on the plentiful availability of work.

This is particularly true of the non-agricultural unorganised sector which now employs more than 140 million workers. Most of them live in towns and cities and cannot even go back to families in the villages if they lose their jobs. These are the millions whom Mr Reddy's obsession with “price stability” threatens. He and his deputy governors might like to take their vulnerability into account when they meet to decide monetary policy in the coming weeks.