A conservative future
George Bush's conservative policy legacy will be tough for successors to change

George Bush may go down in history as a blundering President who destroyed much that was good about America. But there is no doubt that Lady Luck has been unusually kind on him to leave behind a lasting legacy of conservative policy. His nominee, John Roberts has been confirmed as the Chief Justice of United States Supreme.

Since the US system allows the Chief Justice to serve his term till death or voluntary retirement, the 50 year old Roberts will clearly be influencing the direction of American policy making well into the 21st century. Bush got the opportunity to send his hand picked nominee to the Supreme Court after the death of the former incumbent William Rehnquist.

While there is little doubt that Roberts will pursue a conservative agenda in policy making that started during the 1980s under the Ronald Reagan presidency, Bush will get the chance to make an even more important appointment in 2006 when the long serving Chairman of the Federal Reserve, the nation's central bank Alan Greenspan calls it a day. As head of the Federal Reserve since the early 1980s, Greenspan has been following a deeply conservative policy that calls for minimal government intervention.

The third major appointment where George Bush gets an opportunity to leave a lasting conservative imprint is the regulator of the pharma industry, the Federal Drugs Administration (FDA). The FDA has been in the eye of a storm after it was discovered that it had approved the Merck drug, Vioxx, that was harmful for patients. Though there is a temporary nominee holding fort there, there is no doubt in the mind of analysts that Bush will appoint someone who is a friend of big business.

The US media may be concentrating more on the politics behind these appointments and the continuing battle between the neo cons and the liberals for control of the soul of America. Yet, the more important aspect of these Bush appointments lie in the sphere of policy. Greenspan's successor will further consolidate the conservative agenda. The Federal Reserve sets the monetary policies for the country and what Greenspan has done in the last two decades will influence policy well into the future.

Yet another major sector that has seen the Bush stamp of policy is media and communications. Michael Powell, the son of former Secretary of State Colin Powell, is the chief of Federal Communications Commission and to the delight of conservatives, has considerably eased regulatory norms for big media. It will be easier now for large media and communications conglomerates to swallow the small, independent media companies.

The policy agenda for the US that Bush wants to leave behind is fairly clear: less taxes for the better off, more tax breaks for big business, less regulation of industries, less control over monopolies, less money for social welfare and higher spending on defence. Analysts are of the opinion that what is happening in the US now might resemble what happened in Britain after former Prime Minister Margaret Thatcher left her deeply conservative legacy.

Even though the Labour Party is enjoying a third consecutive term in power in the country, the basically conservative nature of policy making has not changed.Have conservative policy approaches permanently displaced the liberal agenda? The answers could be troubling.

EU in crisis
An identity crisis at EU

It continues to be a crisis and angst ridden year for the European Union. Having lost its way after two resounding electoral defeats in France and Netherlands, the EU seems to be in an acute dilemma over the inclusion of Turkey into the 25 member club. There are many within the EU who are unhappy with the human rights and democratic track record of the only big Muslim nation of Europe. Then there are the pragmatists who would rather co-opt Turkey as a committed member of EU in an emerging tri-polar world where the US, EU and China are the big players.

Yet, there seems to be a lack of clarity about the strategic goals of the EU. Will it remain a close economic ally of the US or will it become a serious rival for global markets and opportunities? Should it go euout its way to befriend China to score business points over the US or should it work closely with the US to contain and manage the growing economic clout of China? Should NATO continue to be the driving military force in the new world order or should EU consider a military force that is independent of the US?

The problem with the EU is its composition. On crucial questions that would affect the future of the EU, member states do not agree. On Iraq, Germany and France do not agree with Britain while new member Poland agrees vociferously. On food and agriculture subsidies, the new members from Eastern Europe think differently from old members like France and Germany. Even on labour policies, there are marked differences.

The real challenge for the EU is to remain and project a coherent, united front despite these key differences. Many analysts think that the EU is incapable of doing so and its efforts to emerge as the third pole in the new world order will come a cropper.

Reforming Japan
More reforms needed

Having won a decisive mandate from voters in the recent elections, Prime Minister Junichiro Koizumi may yet find that winning mandates is easier than implementing them. Though he won the elections with a campaign to reform Japan's postal system - which is also the largest de facto bank cum pension fund of Japan - Koizumi has a daunting policy change agenda. For the last decade and half, Japan has become the sick man of Europe as the economy has virtually stagnated (See chart).

While there may be many individual policy changes that cry out for attention, the fundamental reform that Koizumi needs to initiate is making Japan more competitive in the WTO era. For close 53to 15 years, the cosy networks established within corporate Japan and the banking system in the country has saved hundreds of companies that would not have survived without repeated bailouts. Nissan is a classic example of this malaise; more than $ 6 billion have been spent bailing it out and the company's future is still bleak.

What the weak companies and subsidiaries have done is to divert the attention of the larger and more successful Japanese companies who need to focus more on global competition. The dilemma is: Should Toyota, Honda and Suzuki invoke some sense of Japanese honour and do their best to save Nissan from going down under or should they be concentrating on consolidating their positions in mature markets and increasing market shares in emerging markets? The same dilemma is faced by Japanese companies across all major sectors. Perhaps the famed MITI can change its policy approach and start once again identifying the sectors in which Japanese companies can be major global players.

Once the lost cases are left to die a natural death and Japanese companies restructure their operations to become more competitive without bailout packages, there is little doubt that consumer and investor confidence and GDP growth rates will get a leg up. By showing clear signs of growth and revival, the Japanese economy has the best opportunity in one decade to break out of stagnation. It needs a brave Koizumi to do the needful.

It's answer time now...
The Fringe Benefit Tax will not just breed corruption, it reflects an anti-people streak

Two recent judicial orders emanating from Tamil Nadu have once again highlighted the controversial and deeply unpopular character of the Fringe Benefit Tax imposed by the Finance Minister during the last Budget. On September 14, 2005, the Madras High Court restrained the imposition of FBT on Kumbhat & Co, a firm of Chartered Accountants. On September 24, 2005, the Madurai Bench of the Madras High Court accepted a petition of the Tamil Nadu Chamber of Commerce and Industry and stayed the imposition of the FBT.

Both have sent notices to the Union Finance Ministry. The two Madras High Court orders are not isolated cases. There have been reports of people filing petitions in courts all over the country. Alarmed by the spate of these court cases, the Finance Ministry is planning to send the whole issue to the Supreme Court for a clear direction on the validity of FBT.

Whatever the outcome of these legal battles, there is little doubt the FBT is a hugely unpopular move by the government. To recap some of the details: medical expense reimbursements enjoyed by employees will be taxable; Leave Travel Allowances will be taxable; telephone calls made from an employee's residence will be taxable; education allowances for children will be taxable and entertainment expenses borne by companies and individuals for promoting business will be taxable.

According to a chartered accountant, "the FBT will be a nightmare for employees and accounts departments of companies; a headache for chartered accountants who will be burdened with silly and cumbersome calculations; and a windfall for the corrupt". A majority of tax lawyers and chartered accountants have repeatedly called this tax 'unconstitutional' and an assault on the freedom of tax payers.

The tax regime will definitely lead to stupid situations. For example, part of the bills paid by a CEO for taking two foreign partners out for lunch will be taxable. Now, who will decide what component was taxable and what was not? For that matter, who ate the fettuccini and who drank the white wine? Look at the case of a senior editor or a manager who travels frequently and stays in hotels and eats outside during the course of her natural duties. Who will decide and calculate which component of these travels, stay and eating expenses were for official work and which for 'personal benefit'?

Quite clearly, the corrupt and the fixers will have a field day fixing the system while the honest will be penalised. More than the increase in the tax burden, the FBT is also reflective of a mentality that is not healthy for healthy growth of markets. Since 1991, businessmen and tax payers have often heaved a sigh of relief as successive finance ministers have made brave attempts to simplify the tax regime and adopt a less adversarial stance towards them.

Numerous studies conducted by Indian as well as global research outfits have shown that when the tax regime is too retrograde or repressive, the first reaction of tax payers is to evade taxes if they can. Since Indian tax officials are not saints, it is inevitable some will help tax payers avoid paying these complicated taxes. When the marginal rate of income tax was a fantastic 97%, tax avoidance too was the highest.

In any case, middle class Indians have been contributing their mite in the forms of cess and taxes. They pay Rupee one for every litre of petrol bought by them to build national highways. They pay a 2% surcharge on income tax as an education cess. This retrograde step is more like the old repressive era where all businessmen were considered crooks and 'inspector raj' was more the rule than exception. Surely that is not what you actually think, Mr. P. Chidambaram?

India's Persian blunder
Biofuels are a way out for oil starved India

You can consider it to be India's most audacious foreign policy gamble. Or you could slam it as India tamely selling out to Uncle Sam. You can even consider it to be a historical paradigm shift in India's world view. Whichever way, India's decision to vote along with the USA against Iran in the ongoing nuclear controversy in the International Atomic Energy Agency (IAEA) is radical and is bound to have far reaching consequences. India's vote becomes even more controversial because China and Russia abstained from voting against Iran.

The knives were immediately out for policy makers in India with CPI (M) General Secretary Prakash Karat slamming at Prime Minister Manmohan Singh for selling out Indian interests to appease the United States. In fact, numerous analysts have pointed out how India has seriously jeopardised the future of iranits energy security by going against Iran at a time when energy shortages threaten to cripple growth. Their contention: by not bowing to US pressure, China seems to have ensured that it will walk away with the best deals on oil and gas with the Iranians. Even before this vote, Chinese energy companies have bagged rights for the richest oil and gas fields while Indian companies like ONGC and GAIL have struggled. Of immediate concern was the the $ 5.5 billion LNG gas pipeline deal where Pakistan is also involved.

Iran did react negatively and it's official spokesperson announced that "Iran was surprised by the decision of old friend India". The spokesperson also announced that the country will review all deals with nations that have voted against Iran.

If the gains that would accrue to India by voting against Iran were immense, one could have shrugged and opined that realpolitik must score over emotions in global affairs. Yet, the US has not proved to be a reliable ally of any third world country throughout the 20th century. Pakistan is testimony to how the US can drop allies at the drop of a hat. Quite clearly, the vote might be a historic blunder.

Regulating food
A new law on food but...

This is one (Indian) law that does not use the word 'inspector'; we have used 'officer' instead, says D. P. Singh, secretary, food processing industries. He was responding to a question on whether the new Food Law on Trade will lead to the resurgence of another era of 'license - inspector raj'. Mandatory licensing, registration of food businesses and 'danda' wielding food inspectors operating under food safety commissioners, have invited widespread skepticism from the industry.

Such irritants in the Food Safety and Standards Bill, 2005, (tabled in the Lok Sabha recently, but not passed) dampen an otherwise worthy attempt to fuel growth in the food processing sector. As Gokul Patnaik, former chairman, Agricultural and Processed Food Products Exports Developments Authority (APEDA) opines, "The authority simply loses its shine with nineteen members, too many out of which are government officials".

The roles of multiple committees like the Central Advisory Committee, Scientific Committee and Scientific Panels (in addition to the Food Authority) need to be clearly demarcated, so that unnecessary confusion and delays can be avoided. Also, with FDI in retail seeming a not-so-far reality, "Holding every director of a company responsible for implementation, may act as a deterrent for companies to get into organised food retailing", says Patnaik.

However, the bigger issue is that of implementation and enforcement, with ill-equipped government laboratories and a not so well trained man power. This was evident from the amazingly different results of tests carried out in various labs during the 'cola - pesticides' controversy. A new law yes, but there still is a long way to go before the food is on the table.