Putting a floor price on technology regulations

India is a study in contradictions. On one hand, there is a wide recognition that technology investments are a prerequisite to achieving the goals of flagship programmes such as Start-up India and Digital India, and on the other, states like Karnataka have repeatedly tried to invoke protectionist economic measures to ringfence local political interests in technology-driven markets.

Previously, Karnataka was the epicentre of a tussle between e-commerce marketplaces and policymakers. The local administration was determined to hold such firms liable for payment of Value Added Taxes, despite many other states maintaining that tax administration is not the responsibility of online marketplaces. And more recently, the same government has been considering putting a floor price on taxi rides that are booked online through taxi aggregators like Uber and Ola. It has already put a ceiling price of Rs19.50 per km on such taxi rides.

There are many reasons why this reflects a deep-rooted dissonance between a coherent vision of a market economy and the political impulses that drive decision making.

First, India is unambiguously service sector dependent – the sector accounts for over two-thirds of the growth in gross value added to the economy. Much of the country’s development agenda also depends on the proliferation of services, and the democratisation of its benefits in society. Within the sector, there are both essential services such as health and education, and non-essential services such as e-commerce and taxi services.

And broadly, within both these categories, there are competitive markets wherein plenty of companies compete for a finite market share, there are missing markets wherein government enterprise is sometimes necessary, and there are monopolistic markets that may require price intervention. Therefore, even though it would be easy to regulate while pretending that there is no heterogeneity in the service sector, its growth is premised on a nuanced approach to policymaking, based on clarity of economic principles.

Second, price interventions should be resorted to in case of a market failure. There is no prima facie evidence of market failure in this instance and there is also no attempt to collect supporting evidence to justify any failure. While market failures come in many hues, the state’s Commissioner for Transport and Road Safety has been quoted stating that “unfair trade practices” are causing drivers to “lose out.”

To paraphrase, drivers are no longer getting as much money as they were when they started. This does not exemplify a market failure – it however raises questions of the responsibility of large businesses towards their stakeholders. Embedded in this notion of stakeholder responsibility is the fact that companies must use technology not just to create market efficiency, but also to enhance the welfare of all their stakeholders as part of their core business proposition.

To be clear, companies like Uber maintain that their drivers are not employees. Let us hypothesise that they were employees, in that case, would the Karnataka government intervene if they were being paid above minimum wage and still decided to work? If the answer is yes, clearly, government enterprise is the only sacrosanct business model, and the state government should begin running all sorts of non-essential services with this belief. And if the answer is no, why intervene in this way? Why not instead work with large technology businesses to offer innovative digital solutions that cater to stakeholders at the bottom of the economic pyramid? In this case, solutions could be insurance or credit products for drivers – who would in turn be able to manage the risk of owing a depreciating capital asset (the taxi) better.

Third, no government should be concerned with calculating break-even costs for businesses unless they are running them. The state government is currently undertaking precisely this exercise for taxi aggregators. It’s not clear how the government would estimate establishment or innovation costs that shape the business models of such companies. Indeed, Karnataka may have borrowed a page from the Centre in this context, which is pre-empting break-even costs for digital payments companies.

At least the Union government recognises that removal of economic incentives (by lowering Merchant Discount Rates) from the payments ecosystem means that it must now successfully run its own payments networks and solutions. Is the state government ready to promise round the clock, point to point transport for its citizens?

Young workforce

Fourth, the challenges associated with creating productive jobs, without any sign of a Make in India-led industrial revolution are daunting. Conversely, by 2030, when most countries will have middle-aged or elderly population, India will still be young. According to government data, a third of the country’s total population is 17 years or younger, and most employment is still informal. This young and informal workforce can potentially be mobilised through technology, into more formal and productive economic activity. Female participation in the workforce can also be improved – much in the same way as it was in the US when consumer electronics liberated women from household chores. Both e-commerce platforms and taxi aggregators offer to do just this – by providing digital platforms for entrepreneurs to access global markets and by enhancing mobility to work.

It is incumbent on all policymakers to think deeply about the future of work. While it is inevitable that technological change will lead to continuous regulatory anxiety in the future too, competitive federalism may help navigate such anxieties by throwing up examples of states which embrace change, and prepare their workforce for it. Conversely myopic regulation in states can also become a race to the bottom. Indeed, it would be very ironic that a state like Karnataka, which has reaped the dividends of globalisation, now seems to be turning its back on market principles, if there were no glimpses of this worrying trend in more advanced parts of the global economy.

(The writer is Partner, Koan Advisory Group, New Delhi)

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