The year 2011 witnessed sluggish global economic activity, weakened confidence of investors and a trend of growing downside risks. The global economic growth for 2011 and 2012 is expected to plateau at 4%. Economic analysts predict the Indian GDP growth to slow down to 6.9% for the 2011-12 fiscal.

Corresponding to the economic growth demand, crude oil prices after averaging to $97 per bbl in 2008 declined to $ 61 during 2009 and rose to $79 per barrel during 2010. Year 2010 and 2011 witnessed a marginally stronger demand for oil and oil commodities, especially in the non-OECD countries.

In India, oil prices have moved in tandem with the trends in the international market. However, the sector experienced a challenging year with the growing import for oil and oil commodities coupled with the weakened rupee against the dollar.

The government of India deregulated the petrol prices in 2010 resulting in several revisions in prices. Nevertheless, marketing companies still set the prices at levels that are more reflective of consumer concerns, political constraints and are not fully linked to the market. In spite of periodical price revisions, there is an under-recovery to oil companies across all the sensitive petroleum products. As on February 1, 2012, it is estimated that public sector oil marketing companies are incurring daily under-recovery of R470 crore on the sale of diesel, PDS kerosene and domestic LPG.

In the gas sector, the government has continued to exercise its control on pricing. The government has reaffirmed its intent to determine the marketing priorities for natural gas with a pricing formula stipulated by the it and an allocation policy impacted by the falling production in Reliance?s KG-D6 gas block.

Taxes and duties continue to dominate the pricing structure for petrol and diesel. In respect of petrol and diesel, the excise duty, sales tax and custom duty accumulate to around 45% and 25% of the final selling price, respectively.

The extant policy of the government and the fiscal framework causes significant distortions as it undermines the financial strength of the national oil companies, dissuades much needed investment in the energy sector and mitigates the operation of a market-based environment. The deregulation of the prices is therefore critical. This will, in turn, require restructuring the tax structure which today constitutes between 25-45% of the selling price of the transportation fuels. However, the challenging task before the government remains that of matching the expectations of the public and the loss-making national oil companies. Any deregulation of prices on diesel, kerosene and domestic LPG will result in a political scuffle, both from within the government and the Opposition.

The inclusion of natural gas and liquefied natural gas in the category of ?declared goods? is much hoped, keeping in view the Prime Minister?s letter to the empowered committee of state finance ministers. This could result in a lower sales tax rate on industrial goods, as against the present prevalent rate that varies from state to state and ranges between 12.5% and 20%.

The industry, in parallel, awaits reforms towards the development of city gas distribution projects, the creation of a natural gas grid and the incorporation of natural gas in the proposed GST reform. In addition, the Finance Act, 2010, clarified tax holiday in relation to production of natural gas for the blocks licensed under NELP-VIII and denied for the blocks licensed under NELP-IX in the run up to the Direct Taxes Code (DTC) originally proposed to be implemented with effect from April 1, 2012. DTC seeks to replace the profit-linked incentives by investment-linked incentive, which is effectively accelerated write off of the capital expenditure. The delay in the DTC roll out and the sunset to the tax holiday creates a vacuum and it is hoped that the government will ensure that the gap is covered by either extending the tax holidays or early introduction of the proposed terms of the DTC.

From the perspective of non-resident oil field service providers, the scope of the services covered under deemed basis of taxation needs to be clarified to settle the ongoing controversy regarding the taxability as ?fee for technical services? at the rate of 10% vis-?-vis at the rate of 4% under the presumptive basis of taxation.

Looking at the volatile trend of crude oil prices and under-recoveries made by oil marketing companies, the energy policy will need to continue to provide fiscal stimulus to the supplementary effort for induction of energy efficiency programmes and expansion of renewable sector. Energy efficiency is expected to yield significant lowering of petroleum requirement per capita of GDP.

The cumulative impact of the reform in the energy sector can help attract billions of dollars in investment, market efficiency and competitiveness, creation of skilled and semi-skilled employment and deliver the much needed energy for driving the overall economy to a double digit growth trajectory.

The author is is partner, BMR Advisors. The views expressed are personal