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

While auto-rickshaws and city-taxis have been the most common for-hire-vehicles (FHVs) in Indian cities for decades, they are also notorious for bargaining over fares, refusing rides and providing poor quality of service. Private dispatch services that emerged in the mid-2000s provided a better experience: air-conditioned, professionally chauffeured vehicles, that could be conveniently booked over telephone.

By the late 2000s, the market was shifting yet again. The arrival of improved mobile internet technology and smartphones to a market of what was then 27 million subscribers brought in phase three in the FHV evolution: on-demand or app-based, taxi-aggregator services.

On the front end, the experience for commuters was slick compared to the “old” days of calling to book a cab or hailing it off the street. Commuters could now book a taxi, and, in some cases, an auto-rickshaw, in real-time at the press of a button on their smartphones.

On the back end, these companies didn’t own any vehicles or employ any drivers, but aggregated existing taxis. With an asset-light model and billions in investment, they scaled rapidly, disrupting the traditional and dispatch markets and sparking controversial debates on the framework regulating all FHVs in India.

They also set the stage for further changes to India’s urban transport landscape.

Phase 3: On-Demand Services

Also known as ride-sourcing or ride-hailing services, on-demand taxi aggregators connect commuters to the nearest driver via an app. The app allows riders to book a ride, displays the vehicle’s estimated time of arrival, calculates a fare  based on distance, duration, and demand, and bills the rider electronically. By digitally matching supply and demand in real time, these services claim to optimize waiting time for riders and idle time for drivers.

In 2010 and 2011, homegrown companies Ola and TaxiForSure launched services for the first time in India. In 2013, San Francisco-based Uber followed. They quickly acquired customers by offering price discounts and attracted drivers through performance-based incentives.

Commuters with smartphones welcomed these services. Policymakers, on the other hand, struggled to fit these companies under existing regulatory formats, due to three core issues with the model:

1. Aggregation, not ownership: On-demand enterprises neither own nor maintain cars and consider drivers independent contractors, not employees. Uber has argued, in both Indian and international markets, that they are a “technology intermediary,” or platform, not a taxi company, and therefore should not be governed under existing transport laws, like those that apply to taxi companies, but regulated more like online marketplaces such as Flipkart or Amazon.
2. Permit considerations: Unlike international markets, vehicles attached to on-demand platforms are commercial vehicles, requiring permits under India’s Motor Vehicles Act. In India, a cap on such commercial permits since 1997 pushed companies to instead attach vehicles with tourist taxi permits, creating confusion.
3. Fares: On-demand services deploy a dynamic pricing model which quickly undercut the government-regulated fares of taxis. The sudden influx of new drivers with air conditioned cars offering rides at competitive, unregulated prices, changed the dynamics of the FHV market. In cities like Mumbai, taxi and auto-rickshaw unions took to the streets asking state governments to regulate the new competitors.

The structural differences from past models created friction. Then, in 2014, the rape of a 27-year-old passenger by an Uber driver in Delhi, opened Pandora’s box. On-demand platforms became the focal point of fierce public debates and regulatory scrutiny, as the Ministry of Home Affairs advised all states to ban app-based taxis. Companies had to consider: If they did not own vehicles and employ drivers, with whom did liability lie for infractions that jeopardize passenger safety? What was their protocol for conducting driver background checks?

The need to protect passengers and create a level playing field for all FHV services led state governments to revisit the existing regulatory framework. In January 2015, Delhi modified its radio taxi licensing rules to incorporate app-based aggregators, and Kolkata’s Salt Lake City became the first jurisdiction to provide a provisional license to on-demand services. In 2016, Karnataka and Maharashtra also released draft rules to protect consumer interests and regulate surge pricing.

However, such attempts to retrofit regulations for new innovations were shortsighted. The Motor Vehicles Act, on which these state laws were based, saw public, private and commercial vehicles as separate categories, requiring different regulations. But on-demand technology blurred that divide. Such categorizations were further challenged by app-based shared services, like OlaShare and UberPool, where multiple commuters share rides by booking only a seat or two rather than the entire vehicle.

The necessity of a new statutory category led to the national Motor Vehicles Amendment Bill of 2016, which defined an aggregator as a “digital intermediary or market place for a passenger to connect with a driver for the purpose of transportation.” The Bill, anticipated to be passed by the upper house of parliament in mid-2018, will bring aggregators, radio taxis and traditional taxis under a uniform, fair and transparent regulatory framework.

Phase 4 and Beyond

Today, Ola operates in more than 100 Indian cities and Uber in 29, with nearly 850,000 drivers across both platforms. The concept of technology-supported aggregation has spread to buses and even motorbikes. But the impact of such models remains unclear. Advocates of on-demand models argue that these services turn underutilized vehicles into shared assets, increase access to transport and mitigate reliance on personal vehicles.

However, large portions of India’s urban population still lack access to this technology. Smartphone usership is increasing, but is not ubiquitous. Some studies conducted in international markets also suggest that on-demand taxis exacerbate congestion and pollution, and compete with public transit. There are also concerns about reduced wages and drivers having to work unhealthy hours to meet their targets.

It is clear that policymakers need to consider the negative externalities of on-demand services and their impact on the entire transport ecosystem to leverage the benefits of new models while carefully regulating them to meet standards. But it is also clear that these new services have opened the doors to innovation in the transport sector by introducing new players to the market and demonstrating how services can be customized to better meet people’s needs. 2016 alone has seen large capital investments in a range of companies providing carpooling, on-demand shuttle, and trip planning services.

Indeed, this drive toward more customization can be thought of as a fourth phase of FHVs. Characterized as “mobility-as-a-service,” several companies have piloted peer-to-peer services, integrated public transport, and combined mobility services that include public and private sector services. Helsinki’s Whim is the poster-child for this movement: an app that can access all modes of transport, allow the user to choose the most suitable combination of modes and pay electronically for the entire journey.

This phase is only just beginning in India and promises many changes yet to come. Despite having the second-largest market of smartphone users in the world – growing from 27 million in 2012 to 300 million today – the ecosystem for mobility-related apps is still emerging with plenty of room for innovation.

The technological capacity to develop a connected, multi-modal transit system, integrated across public, private and shared modes, with seamless payment options is near. But the realization of that vision depends on the Indian government moving beyond its strictly regulatory role and becoming an active partner to this developing mobility ecosystem – having learned the lessons of the last century of transport regulation and being ready for the next.

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

Jyot Chadha is the Global Lead for New Sustainable Mobility at WRI Ross Center for Sustainable Cities.