Consumer sentiment's recovery path

Consumer sentiments continue to improve slowly but steadily. Except for one retreat in December, the index has risen in every month since the setback it suffered during the second wave of Covid-19 during April, May and June 2021. The index of consumer sentiments has risen cumulatively by 36.8 per cent between June 2021 and March 2022. It has also risen an apparently impressive 56.6 per cent since its fall to its nadir in May 2020.

The problem is that this recovery is grossly inadequate and the rate of recovery is not only too slow but is also slowing down.  Consumer sentiments fell dramatically by over 60 per cent in three months between February and May 2020. The 56.6 per cent recovery from the nadir still leaves consumer sentiments a substantial 38 per cent short of its pre-Covid level of February 2020.

The 60 per cent fall in consumer sentiments between February and May 2020 translates into a rate of decline of 26.6 per cent per month. In comparison, the rate of recovery has been far too slow. The recovery from the middle of the first wave and just before the beginning of the second wave of Covid-19, i.e. between May 2020 and March 2021, the index of consumer sentiments increased at the rate of just 3.1 per cent per month. Even this miserable rate of improvement in consumer sentiments was interrupted by a rather sharp fall in sentiments in the second wave of Covid-19. 

During the second wave of Covid-19, sentiments fell at the rate of 5.5 per cent per month. While this is not as sharp as the fall in the first wave, it is much sharper than the rate of recovery. As a result, sentiments retreated a lot more in the three months of the second wave than they gained in the three months preceding it. The second wave, in fact, wiped out gains in sentiments made in the six months between September 2020 and March 2021. 

Worse still, the rate of recovery of consumer sentiments has slowed after the second wave of Covid-19. While the rate of recovery in sentiments after the first wave was 3.1 per cent per month, the rate of recovery after the second wave is lower at 2.6 per cent per month.

If the index of consumer sentiments continues to grow at this rate then by the end of this fiscal year, i.e. by March 2023, the index would still be about 15 per cent lower than it was in February 2020, i.e. before the pandemic. This does not bode well for the recovery of the Indian economy. Depressed consumer sentiments will impact consumer spending and therefore, growth in private final consumption expenditure that accounts for about 55 per cent of India’s GDP.

The rate of change in the index of consumer sentiments has been much better during the recent months. In March 2022, the index of consumer sentiments expanded by 3.7 per cent. It had expanded by 5 per cent in February and by 4 per cent in January. The average monthly rate of increase in consumer sentiments works out to 4.23 per cent during the past three months. If we assume that the index of consumer sentiments would continue to grow at this average rate then by March 2023, it would finally cross the pre-Covid levels. If that happens, it would be a three-year recovery process.

The recovery seems to have a simple condition for its success – there should be no economic shocks on the way. Sentiments are quite sensitive to large shocks like lockdowns. At the all-India level, sentiments are quite resilient to smaller disturbances. The all-India index of consumer sentiment has shown relative stability in the face of electoral outcomes or political disturbances. Apparently, electoral outcomes do not seem to change the perceptions of consumers regarding their own immediate or future well-being. 

The relatively better performance of the agricultural sector during the pandemic period is reflected in the rural index of consumer sentiments. The March 2022 index of consumer sentiments was 38 per cent lower than its level in February 2020. However, while the urban index of consumer sentiments fell by 44 per cent during this period, the rural index fell by a much lower 35 per cent. As a result, it would help if agriculture continued to perform well during 2022-23 as well to enable consumer sentiments to recover by the end of the year.

The economic recovery of 2021-22 has been accompanied by high inflation and high unemployment. But, these have not stopped consumer sentiments from rising during this period. Thus, while the risk of higher inflation is elevated and while it is also unlikely that the unemployment rate would recede, their impact on consumer sentiment during 2022-23 may not be significant.

Past data shows that while there is a clear risk of economic shocks and that sustained growth in agriculture helps, there are no known triggers to accelerate the recovery of consumer sentiments. There have been no stimuli recently that could have directly elated household sentiments. The recovery in sentiments therefore seems to be cruising in some kind of an auto-pilot mode. Unhindered, its trajectory is headed towards a recovery to pre-pandemic levels by March 2023.