All Commentary
Thursday, April 27, 2017

Cronyism Is Preventing India’s Transportation Sector from Growing

When the government rigs the market, everybody loses.

Government crackdowns on private transportation providers in India are something we are all used to today. In the twenty-five years that have passed since the liberalization of the Indian economy by former Prime Minister PV Narasimha Rao, not much has happened in the transportation sector to keep up with the other liberal reforms.

The “license raj system,” a term coined by the last Governor-General C Rajagopalachari referring to India’s system of permits, licenses, and regulations, exists even today.

Under the Seventh Schedule of the Constitution, roads, highways, and waterways were explicitly defined as national entities, and within the jurisdiction of the Union government. Others—except railways— come under the jurisdiction of the various states. Railways are entirely managed by the Union, and other matters such as transportation policies and related laws are concurrent entities.

“Various states have tried to stop the private sector from operating transportation services.”

Should a conflict arise, the Union generally prevailed. Thus, occurrences of such crackdowns are varied, depending on the state or the municipal body.

Most road-related activities are covered under the Motor Vehicles Act of 1988(MVA) and the Central Motor Vehicles Rules of 1989(CMVR). Various states have their own versions of the MVA and the CMVR, most of which were enacted at the same time.

Now, What Have Governments Done?

In the last year, various states have tried to stop private players from operating transportation services.

In 2016, the state of Karnataka tried to revive a decade-old proposal to “nationalize” long distance bus routes across the state, thereby creating a monopoly for the state-run transport corporation KSRTC.

Most states in India have managed to nationalize their transportation system, thus leaving no room for private entities to operate legally. 

In 2016, Karnataka asked ridesharing platforms Ola and Uber to cease operations.

As a result, the private sector exploits loopholes, such as registering their vehicles in another state or bribing the traffic police to let them continue doing “business as usual.”

Last month, the state of Uttar Pradesh cracked down on “illegal” buses operating across the state thanks to the politician-mafia nexus. Meanwhile, Punjab has canceled permits of private entities who exceeded their permitted routes by a mere 20 kilometers.

A 2007 study done at Rutgers University stated that buses carry around 90 percent of the populace. A decade later, that number is bound to have increased even if the number of cars has gone up on the roads—mainly due to an increase in population.

Targeting Buses and Cabs

In 2016, Karnataka asked ridesharing platforms Ola and Uber to cease operations, citing both companies for violating the law. 

The law in question was introduced earlier that year, and sought to “level the playing field” for the technology-based platforms and the older cabs and auto-rickshaws, as well as added several other archaic requirements such as demanding each vehicle don an  illuminated taxi board atop the roof of their car, install a physical fare meter, as well as a complaints and feedback register. Yes, these were the “important” requirements included in the 2016 law.

In spite of already having laws exclusively for ridesharing, the government still went ahead in early 2017 and banned Ola and Uber from offering their popular carpooling services, citing the violations created in the 1980s.

The laws in question, a derivative of the MV Act, defines vehicles picking up multiple passengers en route as “Stage Carriages” and explicitly bans private players—except school buses— from being classified as such.

Furthermore, due to India’s quasi-federal structure, this ban affects the entire state and not just one city.

These laws were passed before the liberalization of the Indian economy, at a time when nobody imagined that someday a person could hail a cab using something as small as a bar of soap.

A glimmer of hope arrived when the central government’s think tank, the NITI Aayog, had come up with several proposals to substantially change the system of issuing by “Eliminating the artificial supply constraints present in the taxi market.”

One would expect that with the advent of ridesharing, the system would have seen a change. However, that is not the case. Even in the instances of Ola and Uber, the ecosystem is highly unionized, with unions calling the shots, striking when they feel they are not getting incentives, and preventing others from working.

Bootleggers and Baptists in the Transport Sector

Bruce Yandle’s 1983 essay Bootleggers and Baptists – The Education of a Regulatory Economist makes clear sense if one observes the transport sector in India.

Ridesharing platforms in India have registered themselves as technology companies, so they are governed under the Information Technology (IT) Act of 2000, which is far less regressive and has fewer restrictions.

However, the “bootleggers” in the scenario, the established players, are actively lobbying to prevent Ola and Uber from operating legally and trying, by hook or by crook, to make it unviable for the newer and more advanced players to enter the sector.

The permit system has ensured that politicians fill their pockets.The “baptists” are the “consumer protection” activists, who will go to any lengths possible to lobby for minimum fares and banning surge pricing and they do this by spreading public hysteria. The bootleggers, who openly carry out their actions, are eulogized by the baptists because they don’t appreciate the competition.

As with the buses, the bootleggers are the employee unions of the state-run transportation undertakings, while the baptists are the same activists, in this case, backed by sections of the progressive media.

Politicians meanwhile take the support of both the bootleggers and the baptists in order to survive the election system.

So How Do We Solve This Problem?

The system has been rigged by politicians to prevent change. Any government that attempts to deregulate the transportation sector will be met with obstacles in the legislature, resulting in a populist opposition winning subsequent elections.

The permit system has ensured that politicians fill their pockets, as well as the government and the private sector. Cronyism at its finest. 

The government has no business doing business.

However, the country is certainly ready for private participation. Ridesharing has solved a lot of problems in cities like Bengaluru and Delhi where the existing transportation system was very weak and continues to be so.

With the advent of Ola Share and Uber Pool, commutes are better, cheaper, and more interactive.

Uber claims that the UberPool platform saves around 9,364,772km of driving and 440,623 liters of fuel, and reduced over 1,037,000kg of carbon dioxide.

What we need is for the existing regulatory structure to be completely reworked. Getting permits must be easy and transparent, and governments must not be so opposed to newer modes of transportation using technology.

Ola and Uber’s two-wheeler taxi services were shown the door in Karnataka, but the latter operates legally in the neighboring state of Telangana while Goa has had them since the 1980s.

Similarly, bus aggregators like Ola Shuttle and ZipGo, which were also shown the door in Karnataka, operate legally in the north Indian state of Haryana.

Only once the states stop indulging the established players through protectionist policies can they succeed.

Tomorrow, if a newer player emerges, then Ola and Uber will surely face the heat, but will they also be offered the same protections from the government that the old permit-based taxis had earlier?

Once the systemic rot being promoted by our archaic laws is broken down, the government can slowly achieve complete deregulation of the sector and let the private sector take over.

Let the markets decide what is good and what is bad, the government has no business doing business.

Transportation is nobody’s charity, and everybody’s business. 

  • Srikanth Ramakrishnan is a Libertarian Hindu who wishes to see a market oriented transport sector in India. He is a Senior Sub-Editor at Swarajya, India's premiere right of centre magazine that advocates Freedom of Enterprise.