December 7, 2011

A fair auto fare

Several cities in India are in the process of building Mass Rapid Transport Systems. Delhi already has a Metro. Mumbai is building one to supplement the local trains. Ahmedabad has a Bus Rapid Transport (BRT) system, and Bangalore, too, is in the process of getting a Metro. However, one thing that connects all these systems is that they are “sparse”, in the sense that large parts of the city are beyond walking distance from the nearest public transport station.

An efficient local taxi or auto rickshaw system, thus, is of paramount importance to ferry passengers to and from the stations. In the absence of this system, passengers would be forced to use private vehicles to reach the nearest station and that might dissuade them from using public transport. Auto rickshaws also perform an important role in reducing private cars on the roads and repressing the demand for parking space in busy areas.

Image: Okkamocha

World over, auto rickshaws and taxis are regulated by the local governments by setting a fare structure, usually in the form of rupees per kilometre, and by issuing licenses to control the number of auto rickshaws on the streets. The former provides the customers a sense of certainty about how much their journey would potentially cost, and saves them valuable time which would otherwise be spent at the beginning of a journey bargaining for the fare. The latter ensures that the profits of auto rickshaw drivers — rather, license owners, rather — are protected.

Unfortunately the system in most cities in India is broken, and most notably so in Chennai. The government-mandated meter is never switched on, and the passenger has to negotiate the fare upfront before boarding. Residents of the city consider the system to be highly overpriced, and a significant section doesn’t even venture to travel by it. In Bangalore and Mumbai, rickshaws refuse to ply to areas from where they are unlikely to get onward passengers, and in a number of cities, it is rumoured that the number of autos on the road far exceeds the number of licenses issued.

Auto rickshaw regulation in Chennai has failed to such an extent that authorities haven’t even bothered to increase the official fares for over five years now, a period over which fares in Bangalore have gone up by 50 percent. Drivers also mention high rickshaw rentals (most drivers don’t own their vehicles) to justify the high price they quote. While this suggests that there might be a shortage in the number of licenses issued, the real issue seems to be one of utilisation.

Look around at any busy intersection or auto rickshaw stand in Chennai, and you are likely to see a large number of empty auto rickshaws, many more than you would in any other major Indian city. Walk on a busy road, and you are likely to see several empty auto rickshaws stop by you, in the hope that you will hail them. These scenes give an impression that there are actually too many rickshaws in the city.

This is a strong indication that the free market — which the Chennai auto rickshaw market can be approximated to, given the failure in regulation — has failed. Prices seem to have settled into some sort of a local optimum at a level which is much higher than the market clearing price, the price at which quantity demanded equals quantity supplied. Drivers are willing to supply more at this price, but the demand is not there.

The logical reaction to this would be for drivers to drop their prices, but it appears the market is too inelastic for that to work. In other words, if auto rickshaw drivers across Chennai were to drop their prices, the resulting increase in demand would not compensate enough for the diminished margins: else the market wouldn’t have settled at current levels. There is also the problem that this is a decentralised market, and a coordinated effort would be necessary to spur demand.

As it stands however, the underlying problem here is one of perception. Auto rickshaws in Chennai are simply deemed to be “too expensive”, and large sections of the local population don’t even try to travel by them. Those that do are typically people who are indifferent to small changes in price. So we have this sort of Nash equilibrium where prices are high and utilisation is low.

What we need is an effort to nudge utilisation upwards, which would lead to a virtuous cycle of lower fares and greater demand. However, this needs to be a coordinated, city-wide effort, and needs to be backed up by efforts with driver unions to try and reduce their fares. It is not an easy road from here, but improving auto rickshaw efficiency will be an important step in improving the traffic efficiency of Chennai.

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