Karnataka’s plan to fix prices for Uber-Ola cabs is going to boomerang badly

The Karnataka government has had a continuous tug-of-war with the cab aggregators with limited success.

There’s ridiculous and then, there’s this! In a long list of antagonist policy decisions taken against cab-aggregators by Indian state governments, the latest one by the Karnataka government takes the cake. In a policy that plans to emulate the pricing structure of the city’s autos, the Karnataka government plans to fix prices for all taxis in the state.

In the new fare structure, all taxis will be categorised into three segments based on the purchase value of the vehicle and the prices will be fixed for each segment. Details are provided in the infographic below:

FA Hayek, the great Austrian economist, had said: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” This policy proposal not only betrays their lack of understanding of basic economics, but also reflects the hubris of the government in imagining that they have the necessary information about all the different preferences of people and the differing conditions under which they operate to fix prices in such a precise manner that can optimise social welfare.

The Horror Of Fixing Prices

The transport department has decided to discard all nuance and sophistication and reduced the complex pricing algorithm which takes into account traffic conditions, time of day, demand and supply, route complications and a whole other host of factors into a simple black and white fare structure.

Prices act as an incentive and as a signal. If price controls (placing limits within which the price can move) were bad enough in distorting the market mechanism, fixing prices is many shades worse. There will be shortages and excesses in the market as price signals no longer work.

So, if you want a cab during peak-hour traffic or when it is raining, the probability of finding one reduces to zero. There is no incentive for drivers to go through peak hour traffic or unfavourable weather conditions when the compensation is the same as in normal conditions. Clearly, the cost of undertaking the ride during peak hours is many times greater – longer wait times will mean both increased fuel usage and lesser number of rides undertaken. It harms drivers by not compensating them adequately and for consumers, fixing prices will mean reduced probability of finding a cab, longer wait times, higher cancellations and greater uncertainty.

Conversely, even if there is greater supply and not enough demand, the cab aggregators cannot charge a price lower than what is fixed by the government. In fact, back of the envelope calculations reveal that the new pricing structure is higher than regular fares charged at non-peak hours. Given that drivers now get a higher price than the cost of driving during “slow-hours”, there will be a glut of taxis available when people do not need it.

Like the autos, the rules have mandated a 10 percent surcharge on night-time rides, which is highly presumptive of people’s preferences. In fact, many drivers might prefer the low-traffic scenario in the night times, which is more profitable as it is.

This is the point of the pricing mechanism – it sends a signal or information to drivers about when they should make themselves available and to consumers about when they should travel or which mode of transportation they should choose. The price system is a delicate dance between demand and supply and magically encapsulates millions of pieces of information within it.

The Nightmare Of Implementation

There is also an arrogance in imagining that they have the necessary state capacity to implement such a move. The Karnataka government has had a continuous tug-of-war with the cab aggregators with limited success. Even before Covid, they had banned pooled or shared cabs, outlawed two-wheeler taxis (which was allowed later in 2021), banned surge-pricing, revoked their license for non-compliance, including the installation of GPS and panic buttons, as well as the display of driver details. The cab aggregators continued operating in the same way that they always had and perhaps these regulations only created conditions for political manoeuvring and negotiations.

With such a modest history of success in regulating the cab-aggregators, how will this new price system be monitored, implemented and enforced? In fact, since this seems to draw inspiration from the price fixing for autos, we have to look no further than its shoddy implementation. The fare meter in autos is mostly a joke – a relic on display and of no functional use.

Either the fare meter is ignored and a price is quoted off-hand by the drivers or there is a premium demanded on top of the metred price. Rain, traffic  or remote destinations automatically attract a heavy premium. Price fixing has simply not worked. Perhaps, that is what is envisaged – an Uber pulls up and demands 50 rupees more than the quoted price and customers have to haggle.

What Needs To Be Done? 

If we discard the political economy of making these laws to favour a narrow set of interest groups and look at ways to genuinely improve cab availability and prices, there are a number of things we could do. Allow taxis to charge dynamically and equally importantly, according to the time spent on the road.

Market conditions are dynamic – demand varies according to various factors, but supply, however, is fixed. Even in peak hours, the number of cab drivers does not magically increase. This can change – remove the rule which distinguished commercial yellow boards and personal white boards for cars.

For dynamic pricing to work, we need genuine dynamic supply as well and therefore, get rid of commercial licences for cabs. Allow ordinary car owners to earn extra when they are free by driving their car in peak hour traffic to ferry passengers – this will be genuine gig work. This is how Uber works in most countries of the world. Once registered and basic safety checks are done, people can earn extra by adding to the supply.

Allow for shared rides as well – both commercial and personal. While the entire world is trying to encourage carpooling for environmental and traffic easement, the Karnataka government has disallowed both commercial car sharing and app services such as quick ride.

The allure of fixing prices is understandable, but ignoring the weight of evidence and basic economic principles is unforgivable. Prices work. Don’t interfere with it.

Anupam Manur is a Professor of Economics at the Takshashila Institution, an independent think tank and school of public policy. Views are personal, and do not represent the stand of this publication.