India’s urban transport sector has seen tremendous change in the last 15 years. This series examines the evolution of for-hire vehicles (FHVs), the regulatory response to it and its place in the mobility network of the future.

Street-hail vehicles dominated the taxi and FHV market generally for the greater part of the 20^th century. However, public opinion turned against traditional services in the 1990s, resulting in policy shifts that arguably led to a deterioration of the sector and lower-quality service. This opened the doors to private dispatch services to provide a better experience. These two phases in India’s FHV market are fundamental to understanding how the current regulatory framework evolved and why it is proving so controversial to regulate app-based services today.

Phase 1: Street-Hail

Street-hail vehicles were the first FHVs in India and continue to operate to this day. Primarily, these include individually owned and operated city taxis and auto-rickshaws that can be hailed-off the street, from a designated stand or, more recently, via the web or mobile services.

Taxis were first introduced to India in 1911 to compliment horse-drawn wagons. Auto-rickshaws hit Indian streets in 1959. Institutionalized under the Motor Vehicles Act of 1988, city taxis and auto-rickshaws are qualified to operate commercially and provide point-to-point transport services for a regulated fee. Each state sets rules for issuing permits, pricing mechanisms, driver requirements and vehicle guidelines. Such extensive regulation was premised on customers’ inability to assess the quality of drivers and their vehicles before trips and the efficiency of controlling prices. As explored in part three of this series, this premise is challenged today by app-based services that allow customers to view driver ratings and real-time pricing before hailing a ride via the internet.

Auto-rickshaws and city taxis were well-received in India, given the lack of adequate mass transit networks and low personal vehicle ownership. They provided a vital service to all urban dwellers, connecting commuters to the nearest mass transit station and facilitating daily trips to work and to markets.

However, as personal vehicle ownership grew in the 1990s and 2000s, several Indian cities began to reconsider street-hail vehicles, due to high levels of congestion and air pollution. Led by Delhi, several cities instituted a cap on the total number of permits that could be issued to private taxis and auto-rickshaws.

Permit caps have been used extensively around the world to balance supply and demand, protect driver income, and ensure quality service for commuters. Bruce Schaller, former deputy commissioner for New York City’s Department of Transport, writes that “decades of experience with taxi regulation have shown the need to retain more extensive regulations, including numerical controls and fare regulation, for ‘flag’ service (e.g., taxi stands and street hail) to prevent oversupply, fare gouging and chaotic street conditions.”

However, in many Indian cities, permit caps led to a deteriorating street-hail experience. The price of permits skyrocketed on the black market to 600 times the government price, while drivers struggled to make a living due to exorbitant hikes in daily vehicle rents. Commuters found it increasingly difficult to hail vehicles off the street in low-density or non-lucrative areas of the city, as bargaining, overcharging and refusing trips became commonplace.

Phase 2: Dispatch Services

Discontent among some commuters, combined with growing demand for reliable transport services in India’s fast-growing cities, created a business opportunity.

The turn of the century brought mobile phones to urban India. Drivers could now be contacted while they were on the road. By the mid-2000s, several companies were operating large fleets of centrally organized taxis in major cities. Mega Cabs pioneered the model in Delhi in 2001, after which Meru Cabs, Easy Cabs and Tab Cab entered the market. These companies could access capital in ways that individual taxi owners could not. At the peak of the model, Meru Cabs, Mega Cabs and Easy Cabs operated 22,000 cabs across 20 cities.

Commuters could now call one number and book a ride anywhere in the city. An air-conditioned car (or auto-rickshaw would arrive at their doorstep within a stipulated time. Overnight, dispatch taxi services, or “radio taxis,” became known for their reliability and quality of service. Drivers were less likely to refuse trips or bargain over fares, which street-hail services had become notorious for. Dispatch services began to corner the market for those that could afford their services and for longer trips such as to the airport or train station.

As the dispatch market grew, state governments regarded these services as a new “luxury” segment of FHVs. The other category under the luxury segment, “tourist taxis,” were earmarked for package rental services for inter- and intra-city travel, but not for point-to-point services. The perceived need for dispatch services, that the street-hail and tourist taxi market could not fulfill, led to the relatively non-controversial introduction of new regulations.

New “radio taxi” rules were first launched by Chandigarh, Delhi and Maharashtra in 2006. They brought changes in three areas. First, a company was now required to be the provider of the service, not an individual. Second, the manner of how a taxi could be hailed was expanded to include booking by phone or website. And third, a higher quality vehicle type, including air-conditioning, was required. Apart from these, not much changed. Dispatch services were still required to ply at government-approved rates and vehicles and drivers had to be compliant with the Motor Vehicles Act.

The introduction of these rules had a major effect on the market, however. They opened the doors for private investment in transit, previously the domain of public agencies and individual permit holders only. Market reports estimated that the dispatch taxi market was worth at least $2 billion, an opportunity that private investors responded to quickly. Meru Cabs raised $75 million alone, and the number of competitors in each city exploded.

However, the bulk of this funding was earmarked to increase the size of company fleets, rather than to improve responsiveness or other aspects of the user experience. Meanwhile, the market was shifting again with the advent of smartphones and the gig-economy, which was about to revolutionize how users access transit options everywhere.

Part three of the series will explore in-depth the rise of Ola, Uber and other ride-hailing apps, and what lies beyond for India’s for-hire vehicle sector.

Jyot Chadha is the Director for Urban Innovation at WRI India Sustainable Cities.

Ojas Shetty is a Research Consultant with the Urban Innovation team at WRI India Sustainable Cities.