India's impossible inflation
Prices rocket because of an imperfect market. A solution? Empower consumers using technology to let competition flourish

The Indian economic story has been marked in the last decade by outstanding success. The stock exchanges have outperformed leading indices worldwide, the demographics are favourable and the IT outsourcing sector continues to boom. Inflation presents an aberrant thread running through this story. Aberrant because it works not on the basis of how much money consumers have, but on the basis of how little consumers know.

If we look at the numbers, Indian inflation was historically at its lowest in the last 10 years when the economic boom was at its peak. This year, with growth set at 9.4%, as per the IMF's 8 July forecast, India will likely suffer from double-digit inflation. By contrast, in 2008, growth was a healthy 9%, while inflation was only 6.4%. A bad monsoon last year has been repeatedly blamed for this upsurge, but grain lies rotting in government warehouses.

India's problems are unique, because it is possibly the most inefficient market in the world. Two historical phenomena are to blame for this.

First, changes in the Indian economy in the early part of the 20th century led to the value of labour, innovation and management plummeting and the value of capital rising disproportionately high. This imbalance continues to this day. Our employment laws are a joke, our scientists staff the top 40% of Nasa, but research lags at home and corporate governance is in its infancy, to put it politely.

Second, Gandhi's freedom movement and Nehru's socialist politics have made profit a dirty word. Although the government's economic liberalisation efforts helped some, Indian capital still continues to be in the unique position of being both extremely powerful, and strongly despised. This is not a good combination, and as a result corruption flourishes, healthy competition is nipped in the bud and middlemen work at the expense of the disorganised producer and the consumer.

A workable solution to this problem is to empower the consumer with knowledge. In 2002, an Indian conglomerate started an experimental internet portal. This portal worked at bringing transparency to the supply side of Indian commodities. By logging in, farmers could check current prices of commodities, and arrive at a good deal.

It is impossible to adequately convey the importance of this knowledge to a western readership. It can mean the difference between starvation and prosperity. A lack of regulation, entrenched purchasing cartels and chronically low social capital means that if not forced, middlemen will give the worst possible deal to the farmer. On the flipside, if not forced, shopkeepers, grocers and retail outlets will and do give the worst possible deal to the Indian consumer. Commodities are largely unbranded, retail is a "mom and pop" sector and consumers are woefully ill-informed. The consumer purchasing groceries or vegetables simply has to take the word of the vendor that he is paying a fair price.

On 25 June, for example, the price of diesel increased by two rupees in India. Diesel is important because most of our commodities are transported by road in diesel-burning vehicles. A 0.9% increase in inflation in wholesale prices was expected. Prices of commodities have instead gone up within two weeks by 15%. Prices of vegetables have gone up by between 35% and 100%. This is sheer carpetbagging opportunism by retailers.

Experience tells us that were the price of diesel to drop tomorrow, these increases would not be reversed. Price increases in India defy the laws of physics. The trick is to curb the initial upswing itself. Much like the portal for farmers, we need an internet portal for the Indian consumer as well: one that allows retailers and grocers to text in prices they can offer for unbranded commodities and vegetables, and arranges these prices by city/town and by five-mile areas within cities. This portal would need to be designed to be lightweight, so that it is accessible to the many Indian consumers with low internet bandwidth, and it should also be able to respond by text message to standard price enquiries by consumers.

A consumer setting out for his monthly grocery shop will check and home in on the shop offering the best deal, within his five-mile radius. Similarly, the weekly vegetable shopping trip could become less uncertain. Such a portal would allow true competition to flourish and would reduce opportunism. It would not be difficult to administer in a country where nearly every urban adult has a mobile and where chip-makers run text-based competitions more complex than this.