Once upon a time in India it was very difficult to catch hold of an auto or taxi (Kaali Peeli). With growing clout of unions the situation worsened. Even if you managed to get a Kaali Peeli they would not agree with the destination, throw tantrums and in some cases, even over charge you. Government couldn’t take action against them because of strong unions which would blackmail the government with threats of going on mass strike and disrupting the city transportation. The government couldn’t cancel their permits (which are a must for all Kaali Peeli) as they were limited in number and the shortage of such vehicles was already looming large, with respect to the growing population. Just to give a perspective, there are 32,000 taxis on road in Mumbai, for a population of more than 20 million.
Basically Kaali Peelis, with their permits and highly political unions started calling the shots – one strike and they could manage increase in fares.
The issue of shortage of taxis was present across the globe and all the regulatory bodies were facing similar problem for which they had no solution.
Then Uber happened and it changed the way we (mainly urban population) travel. Indian companies, lead by Ola, copied the same model (ok, more or less similar) here and it was an instant hit. Kaali Peelis had become such a pain for customers that they took to these new age startups as fish to water. Many clones came in the market, backed by investor’s money they provided steep discounts and mobility experience improved. Even Uber started it India operations and since then it has been no looking back for the industry. Most of the companies have launched affordable versions of their service and some have extended the platform to include autos with valid permits to join the community. The discounts have stopped or reduced but that smooth (not very smooth, still 10X better than Kaali Peelis) experience has stayed.
The most important thing about these new services – ride sharing, car pooling and e-hailing – was they were not dependant on the number of permits issued by the regulatory bodies for functioning as Kaali Peelis. These were all tourist permit vehicles which were allowed to do intra-city operations. In fact, India was one of the first few countries to come up with guidelines for such startups, working in the local public transport domain.
So as to summarize:
There was a problem – Acute shortage of Kaali Peelis and there was a demand from over growing population for local transport options
For which government had no solution – Simply because government cannot keep up on releasing permits to fulfill this demand for various reasons
And startups provided the much needed respite – By leveraging the tourist permit vehicles, creating a technology platform for connecting the drivers with the customers, investing in infrastructure for cashless transactions, accurate location services and uniform experience
Basically, the startups filled the gap and provided host of other services as well (breakfast on board, internet connected taxis, etc).
And government had no business in this. The vehicles servicing the customers here were not the regular Kaali Peelis, which are a function of local government controlled public transport. Perhaps, this is the reason why government didn’t think of interfering when the new companies were providing steep discounts (Ola still serving at 6/KM) at almost half the standard rate. Almost all the startups came in with free rides (one or even more), referral programs and such other offers which kept increasing the competition and even made few companies to bow out of the race (TaxiForSure got acquired by Ola). But the customers never complained – in a highly competitive market, they were the king and they never complained.
That is, till surge pricing came in!
Surge pricing is when customers are informed in advance that they would be charged at twice or thrice or much more than that for the ride they are about to book. The 2X, 3X or even the lately observed 6X surge is shown to the customer. These startups do not own the vehicle and are dependent on the drivers or the vehicle owners to provide the service. They claim that the prices are surged to attract drivers in a particular area to provide services, especially when the demand exceeds the supply. So if the number of taxis available in a particular area is less, than these startups will activate surge pricing which might attract the drivers to start providing services that particular location. Uber clarified on Twitter that the increased revenue from surge pricing is passed on to the drivers.
Morally, surge pricing might sound like a bad idea. But in reality, it isn’t.
No one is getting robbed here. Customers who are willing to pay for these services are free to do so and those who are not can either look at what competitors are offering or may even use the good old Kaali Peelis. The increased fares are shown to the customers in advance and there are no hidden costs. If the surge prices are not justified, soon, some other solution provider will rule the market – just like these startups have displaced Kaali Peelis from the market.
And these startups are not alone. We pay for the increased flight rates across the airline industry. Not many tickets are sold at the same price and the cost varies a lot. Similarly, we are fine with paying extra charges for the Tatkal Railway tickets –same seats, but extra cost for ensuring a seat late in the day. Historically, we have been paying almost 2X the price for late night movie tickets as compared to early morning shows. All of them follow the same supply–demand principle.
First Bangalore and now the Delhi government have tried to interfere by bringing a ban on surge pricing. This is wrong precedent, which might get some votes from the lower middle class but can prove detrimental for the society in the long run. The drivers attracted by surge pricing might not provide services at that moment when someone needs it – rendering Kaali Peeli as the last option, which ideally, many would like to avoid – hence the protest against surge pricing instead of the boycott. People want these services to continue, though few would continue to complain about the surge prices. The only solution which government can provide is increasing the number of Kaali Peelis by releasing more permits or by improving the government owned buses, trains and metros.
Source – Business Standard & Delhi Government Website
It’s not that Arvind Kejriwal doesn’t understand this basic economics – it’s just that the votes and claps matter to him more than the business sanity. I hope other states do not imitate this step and make it difficult for the mobility startups to do their business. Imagine the populations being served by this startups coming back to using the old public transport system, do you think the system will be able to take that load? These startups are providing an interim solution to the crippling infrastructure and can be the torch bearers for our aim to reduce the pollution. On the contrary, by promoting their services government can keep a check on vehicle ownership and limit the investments in public transportation. A city in Florida has started subsidizing Uber rides and is focusing on building infrastructure rather than providing bus services.
While such a public-private-partnership looks like a far-fetched dream for India, the least we can do is keeping such services free from government regulation!