Home / Opinion / Governments stifling innovation ecosystem

The state, by its nature, is behind the curve when it comes to economic and technological advances in the market. That is as good a reason as any for its staying out of the way, insofar as it is possible. Last week, the Karnataka and Maharashtra governments showed why this is so.

Karnataka teed off by introducing regulation for taxi aggregators like Ola and Uber that banned surge pricing—the higher rates that they charge during peak hours. Maharashtra went one better with proposed rules that would not only ban surge pricing but also fix fares and the rate at which taxi aggregators could expand their fleets. The ostensible reasons were twofold: to protect customers from high fares and to create a level playing field for regular taxis that are capped in number by government diktat.

Leaving aside the lack of consideration of secondary consequences—by reducing profitability and incentives, the regulations are likely to result in a lower quantum of taxi aggregator cabs on the road, hurting customers, not helping them—there is a more fundamental problem here. Other than anti-competitive practices and issues of safety and standards, the government has, or should have, no role in promoting consumer welfare—all too often, a euphemism for price fixing, as in this instance. The rapid success of Ola and Uber clearly shows that there is capacity to absorb their rates; when that is no longer the case, demand will drop and they will reorient their pricing. This is a process best left to the market. Nor does the state have a role to play in protecting certain players from fair competition.

This over-regulation is not a one-off. Last month, the central government’s otherwise unexceptionable move to allow foreign direct investment (FDI) in e-commerce was ring-fenced with caveats to make it deeply problematic. And late last year, the Maharashtra government ignored the Union ministry of road transport’s recommendations on how to regulate the taxi trade—a pragmatic set of guidelines for dealing with app-based taxi services—to lump aggregators with conventional taxis and impose a cap on fleet size.

At the heart of this is a lack of clarity on how to deal with new business models based on the technological leap of the past two decades—whether it’s the evolution of retail or the advent of the sharing economy.

To be fair, this is not a problem confined to Indian governments, state or central. Other countries are struggling with the same issues; the resistance Uber is facing from taxi unions and political lobbies in various parts of the US is a case in point. There are understandable reasons for this resistance. Speaking of the economic history of technology, Joel Mokyr wrote in a 1997 paper that “a complex system which struggles to change against built-in inertia is more likely to change in sudden bursts than in slow, continuous fashion". We are experiencing one of those bursts now—and the flipside to that is a resistance to such change by those whose livelihoods will be disrupted by it and by administrations that are, by their nature, reactive.

But ultimately, such advances, the resultant economic progress and the disruption they cause are all inevitable. Mobile computing technology, cloud services, electronic payment systems, big data—the building blocks of the new economy—cannot be regulated away.

And if handled right, they have the potential to create public good that far outweighs their disruptive effects on old business models. The Reserve Bank of India has shown on multiple occasions that it is possible to assess and incorporate such technological advances effectively. In 2013, for instance, it had taken a cautionary stance on the use of virtual currencies such as bitcoins, warning against the risks—but after re-evaluation, spoke positively of the underlying technical concepts last year and their potential to transform the functioning of financial markets and payment systems. Then there is its drive for financial inclusion; in 2015, it granted in-principle approval to 11 entities to set up payments banks, enabling outreach through mobile devices to customers who cannot access traditional services. And its examination of peer-to-peer lending is an example of the sort of measured approach that involves understanding before regulating.

Various administrations in India would do well to follow suit. The focus must be on how to mitigate the impact on those affected—whether by liberalizing FDI in brick-and-mortar retail or revisiting the norms that regulate conventional taxi services. Hobbling new business models is no answer.

Is the move to interfere in pricing of taxi aggregators justified? Tell us at

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