US may not dip back into recession: Yale President

Here is a verbatim transcript of an exclusive interview with Nandan Nilekani and Richard Levin on CNBC-TV18. Also watch the accompanying video.

Q: One of the positives that one has noticed is the fact that there is a clear policy now that has been articulated especially as far as disinvestment is concerned by the government. The government is articulating and communicating very clearly. Does that give you a sense of confidence?

Nilekani: I have not seen the details but I think it is wonderful that there is a policy. My general experience is that the government is very decisive and personally as someone who has been a new member of the government. The last 100 days, I have got fantastic support from the Prime Minister (PM) and the Finance Minister (FM) and all the colleagues.

Q: Let me ask about the state of the global recovery and especially with regard to the US. There are three scenarios that economists are talking about. Can you to put on your economist's hat at this point of time? The most optimistic is the goldie lock scenario where you grow at about 4-5% for the next five years and then go down to about 2.5%. The next is that you continue in the fiscal expansion mode and see a growth of about 2%. The third is the worst case scenarios: you see a double dip recession once again. Which side of the camp are you?

Levin: I will be in the middle. I think the dangers of a serious second dip are receding. I wasn’t quite confident of it six months ago, but I do think that there are some signs of revival of consumer spending in the economy. Inflation has not become problematic, in fact, it doesn’t look likely. Therefore, there has been sluggish growth over a couple of years. I don’t see rapid growth because there is still so much deleveraging for the system to do and real estate assets are still deeply depressed. We have not seen the bottom yet of commercial real estate market although we have probably seen the bottom of residential real estate market. So it is a mixed scenario. We could have more decisively recovered a year ago. I was talking about the need for truly massive stimulus in the US economy. We have got a stimulus package that was partly a tax cut that had no effect at all because the money was used for savings rather than spending.

Q: Do you think there will be a need for another stimulus package?

Levin: Unemployment will head above 10%. That is for certain. The big problem is that the stimulus packages taken a long time to get into action. A lot of it meant for capital projects which take a long time to work on, to get going and so probably 30-40% spending part of the money has been spent. About 60-70% has not yet been spent.

Q: Have you been moved beyond securing the symptoms and getting down to the cause at this point in time? Are we going to see these problems, reassessing things if we have not addressed the root cause?

Levin: We have to have a financial sector reform. We need to have a new or sensible set of regulations partly by changing structure but partly just by implementing sound policy. Here is where India shines, if you look at the policies of the Reserve Bank of India (RBI) in the period leading upto the crisis versus US monetary authorities, the RBI remembered the things that we used to get taught in our money and banking courses in the old days which is you have to watch capital ratios. You have to watch reserve requirements, not just the interest rates. In America, we have got into this crazy mode of thinking the only intermediate monetary policy which matters the interest rates and that is the only thing which we direct against inflation but that is not just right. We need to worry about the real economy and we need to use multiple instruments to get your objective and you should be have countercyclical reserve requirements, countercyclical capital requirements which India have and it served you well, you did not have a financial crisis.

Q: We don’t have a financial crisis and just the report put out by PricewaterhouseCoopers (PwC) says that the most of Indian CEOs at this point in time are confident that we are in a recovery mode and that we will complete the recovery by July next year. To your mind what will be the key challenges that Indian companies will have to negotiate at this point in time. One of the risks, of course, is the exchange rate volatility. However, that is a sort of short-term risk. What are the other risks to your mind that Indian companies at this point in the global context will have to negotiate?

Nilekani: I am speaking as an outsider to the Indian corporate sector at the moment.  However, I think that going by the fact that the global thing is still going to be slow, it means that the model of having a lot of demand from the global market is not going to happen. Therefore, I think it will require a lot more inward focus and India will be where the thing is going to be for many companies both in technology as well as in non-technology. So this is actually a good time for the focus on India and the challenges we have in India.

Q: What do you think needs to be top priority in terms of the action agenda because you have spoken about that in your book but now that you are sitting in the planning commission, it is a very different story.

Nilekani: I am not the spokesperson on policies. So I am not the right person to answer some of these questions.

Q: But to your mind, what do you think needs to be top of the agenda at this point in time?

Nilekani: I used to get up every morning thinking about how to give a billion Indians a number. I don’t think about anything else and I really don’t have a comment on that. I tend to be one of these one track mind kind of a person.