Consumer sentiment in India's recovery

The Indian economy has surprised analysts and investors alike with its smart recovery from the severe lockdown during the first quarter of 2020-21. Growth that bounced back from -23.9 per cent in the first quarter to -7.5 per cent now seems poised to return to the positive zone in the third quarter.

The smartest recovery is in corpo­r­ate profits, in the second and third qu­arters. Many supply-side fast freq­u­ency indicators — such as crop pro­d­­­uction, power generation, freight movement and GST collections — pro­­vide evidence of a continuation of the recovery story into the third qu­arter of fiscal 2020-21. On the dem­and side, non-petroleum-non-valua­bles imports grew well in December and January, and two-wheel­er and tractor sales were robust in recent mo­nths. Equity markets are celebrating this recovery in steady strides.

India got this recovery for free. It did not achieve this at the cost of heavy fiscal spending. It did not pay the price of debt or interest to achieve this recovery. It did not require any great investments by the government or the private sector either. This is exceptional. It is now important to consolidate these gains and to ensure that the momentum is maintained.

Sustenance of the recovery is best achieved when households feel posi­t­ive of their well-being. While India’s growth acceleration in the past was co­upled with international trade, its recovery depends largely upon its domestic economy. India’s vast consum­er markets need to feel like spend­in­g beyond their essential require­me­nts for the economy to pick pace be­yond the recovery. Two-wheeler sales have been growing at over 10 per cent compared to a year ago and tractor sales have been growing at over 40 per cent y-o-y. These are robust discretionary spending by consumers. But these reflect spending decisions by a very small segment of the Indian market. What we need is a measure of the sentiments of the household sector as a whole.

CMIE’s Consumer Sentiments In­dex (CSI) is a very use­ful yardstick to measure the mood of households in India. The CSI unveiled the positive mood of the nation when the Pri­me Minister ann­o­u­nced demonetisation in November 2016. The optimism was sustained in Dec­e­mber 2016. But, in January 2017, after the initial per­iod of euphoria, the index fell sharply as demonetisa­tion seemed to fail at its expected effects.

The CSI fell precipitously, by 53 per cent, in April 2020 when the cou­­n­try came under the lockdown. The month-to-month variation in the CSI was rarely more than low-single digits before this. The 53 per cent fall in April 2020 is, therefore, almost a collapse of consumer sentiment. The index fell from 97 in March 2020 to 46 in April 2020. The index has a base of 100 in September-December 2015. Sentiments have recovered very marginally since the April 2020 fall. In January 2020, the index was at 54.

While the GDP has rec­o­vered, household senti­ments have not. The Rese­r­ve Bank of India’s (RBI’s) Consumer Confidence Survey shows a similar trend, although it does not have an estimate for the April 2020 fall. The index was 85.6 in March 2020 and 55.5 in January 2021.

An interesting feature of Indian households is that independent of their current economic conditions, they are systematically optimistic of their future. RBI’s Future Expect­a­t­ions Index for households was more optimistic of the future in January 2021 than it was in March 2020. The index was 115.2 in March 2020 and 117.1 in January 2021. One limitation of RBI’s Consumer Confidence Survey is that it is limited to India’s urban regions with a sample of less than 5,400 households.

CMIE’s CSI is based on a much larger sample and is spread over rural and urban regions. The CSI also sho­ws that urban sentiments are somewhat worse than rural senti­m­ents. The rural CSI was 55.8 in January, while the urban index was lower at 50.3. But both rural and urban Indian households indicate greater confidence in their respective future than their current economic conditions.

The Index of Consumer Expect­a­t­ions is usually about 1.5 per cent hig­her than the Index of Current Econo­mic Conditions. This was true till the lockdown. In April 2020, the Index of Current Economic Cond­itions fell by 55.3 per cent but the Index of Con­sumer Expectations fell by a lesser 51.2 per cent. In May 2020, the former fell by 10.3 per cent but the expectations index fell by a lesser 8.1 per cent.

In April and May 2020, the Index of Consumer Expectations was 6.9 per cent and 9.6 per cent higher than the Index of Current Economic Con­ditions. In July 2020, it was 15.5 per cent higher and since then it has been systematically significantly higher. The average difference has been 11 per cent.

This continued confidence in the future is vitally important to sustain the recovery seen thus far. If households remain hopeful of their future, they are likely to spend and help in the recovery process. But this cannot be taken for granted. It is important to build upon the confidence of households.

Just like the government has now started motivating private enterprises, it is important that it recognises the importance of the households. Just as the animal spirit of private enterprises is important, sentiments of households are also very important to sustain the free recovery ride we have had so far.

The writer is MD & CEO, CMIE P Ltd