Their concern, besides the market having run up too much too soon, is really around what can go wrong. What is the catch they should be thinking about?

Reflecting on this, I could come up with a couple of issues, one for the short term, and some others, which are more structural and longer-term in nature.

Obviously, the easiest thing, which can go wrong is some type of external shock which hits all markets, reducing risk appetite globally and across all asset classes. We could also have some type of an economic event hitting a particular emerging economy and causing contagion across all emerging markets.

While either of the above scenarios will be painful, the pain will be felt across many markets. What investors are looking for are local factors, which can torpedo the India growth story independent of global issues.

From a short-term perspective, the issue I worry about most is inflation.

India is an extremely inflation-sensitive nation; and rising inflation has significant and immediate political consequences. Only natural, when one considers how poor the country really is and the disposable income of the average citizen. What is also undeniable is that inflation is rising, and beginning to cause heartburn across all government agencies. The WPI (wholesale price index) has already crossed 6.5 per cent, and shows no near-term sign of stopping. If we decompose the WPI, we find that the real culprit is primary products (22 per cent weighting), rising at over 9 per cent per annum, followed by manufactures (64 per cent weighting), rising at 5.6 per cent. The only saving grace is the deceleration in FPL (fuel, power and lubricants) inflation as oil prices have come off. If oil prices had remained at $75, we would have seen the WPI number cross 7 per cent. If you look at these numbers on a trend basis, then the worrying conclusion is that for both primary products and manufactures the trend is still accelerating.

Now obviously the RBI is worried, and has hiked the repo rate three times (25 basis points each time) since April 2006. The central bank has also raised the cash reserve ratio by 50 basis points (to 5.5 per cent). The RBI is convinced that money supply growth at over 20 per cent is excessive and the demand side too robust. Unless the inflation numbers start coming off soon, one can expect the RBI to continue tinkering with provisioning, and the capital adequacy and reserve ratios to slow down credit growth and raise borrowing costs across the system.

Given the structural excess demand developing for government securities, we may not see much impact of the RBI measures in terms of rising G-Sec yields, but that does not mean the RBI is having no impact. Investors will be well advised to track rising interest rates across retail and corporate loan products, instead of government bond yields, to judge the impact of the RBI.

The worry I have with this is that it is always difficult for any central bank to fine tune its tightening so that you dampen excesses but don't damage the economy. There is the risk that the RBI will overdo it, and slow the economy more than warranted.

This risk is accentuated by the fact that our inflation worries may be more of a supply side issue (especially rising food prices linked to poor harvests), in which case the RBI may have limited ability to control inflation in the short term. We may get into a scenario where being unable to slow down the relentless march of an accelerating headline WPI number, the RBI is forced to overshoot.

Tightening liquidity and rising rates can hurt growth, as access to affordable credit has been a major growth driver for our economy. Corporate India has embarked on a major debt-funded capex drive, and for the first time we have significant interest rate exposure at the retail level, both of which will be impacted by excessive tightening.

I don't think we are at risk of a sharp slowdown yet, but if rates were to rise by another 250-300 basis points across loan products, we could be in trouble.

Even if the above scenario were to pan out, I think it would be at most a temporary setback, painful, but not damaging or putting to question the long-term structural growth outlook for India.

Two long-term and more structural issues that could put to doubt the whole secular thesis on India are education and employment.

On education, only about 65 per cent of males across the country are literate, 10 per cent have passed the 10th grade and about 5 per cent have a graduate degree; the figures are even lower for women (2001 census/CERG Advisory). By 2010 we will have 460 million people between 5 and 24 (source: CERG Advisory) who will need to be educated and trained. How will the government handle this challenge, when it has failed miserably till date? Unless we see reform in the government response to the education challenge and much greater private sector participation and innovation, we will have a crisis. The beginnings of change and private sector participation are visible, but a lot more needs to be done.

The second issue is employment. By 2010, we will have more than 105 million young adults in the age group of 20-24 looking for work (source: CERG Advisory). For our economy to generate employment of that magnitude, we need to improve our growth mix and ensure that people can move off farms and into light manufacturing and basic services. We cannot afford to have another decade of no organised sector job growth. We need to deliver on the required reforms in labour, agriculture and infrastructure. Again, initial signs are positive, but more needs to be done.

I do believe that India can tackle the above structural issues, given the innovation and drive visible in the private sector, but action is urgently needed if we wish to have a multi-decade growth spurt.