Consumer sentiments high on expectations

Consumer sentiments in India improved quite well during January and February 2023. The Index of Consumer Sentiments (ICS) rose by 4.2 per cent in January and then by another 5.1 per cent in February. As a result, the ICS gained a handsome 9.5 per cent in the first two months of the year. With this, it more than recovered the ground it lost in November and December when the ICS had shed about 2.5 per cent.

Data available till March 12 shows that consumer sentiments have continued to improve, albeit at a slightly slower pace in the current month. The 30-day moving average of the ICS, as of March 12, was 1.2 per cent higher than it was as of February 28. The month of March seems headed towards a small gain in the ICS although the gain so far is somewhat noisy.

The past two weeks have seen some volatility in the ICS. During the week ended March 5, the ICS shed 3.8 per cent. Part of this fall was towards the end of February and part of it in early March. But, the following week that ended on March 12 saw the ICS gain most of the lost ground as it increased by 3.3 per cent. While weekly estimates of the ICS provide a sense of direction and also throw light on the intra-month movements of consumer sentiments, they can also be quite noisy. Studying the somewhat longer trend can be more illuminating.

We see a fairly remarkable improvement in the Indian consumer sentiments during the first 10 weeks of 2023. The 30-day moving average of the ICS as of March 12 stands 9.9 per cent higher than its level in December 2022.

The improvement in the ICS in these 10 weeks is more pronounced in urban India than in rural regions. Rural consumers have also expressed an improvement in their sentiments, but it is the urbanites who shone during these 10 weeks.

The urban ICS increased by 15.2 per cent during the first 10 weeks of 2023. The rural ICS also grew well during the same period. However, its growth rate was half of the urban growth rate. The rural ICS grew by 7.6 per cent.

Growth in urban sentiments outpaced rural sentiments in February. Urban ICS increased by 6.4 per cent while rural ICS grew by 5.2 per cent in the month. The big gap between rural and urban consumer sentiments, however, emerged in the first 12 days of March. Compared to the February levels, the 30-day moving average of the ICS as of March 12 for urban India increased by 4.5 per cent but that for rural India fell by 2.1 per cent. The cumulative impact of this was an over seven percentage points’ gap between urban and rural growth rates in the February estimate of the ICS and its 30-day moving average around mid-March.

The relative gain in urban sentiments in recent times is across the two broad components of the ICS — the Index of Current Economic Conditions (ICC) and the forward-looking Index of Consumer Expectations (ICE).

In February 2023, the all-India ICC grew by 3.2 per cent. While the urban ICC moved up by 3.1 per cent, the rural ICC rose more, by 3.8 per cent. The divergence increased substantially in the first 12 days of March when the ICC for urban India shot up by 4 per cent while that for rural India declined by 2.6 per cent. The net impact was stagnation in the ICC at the all-India level.

These divergences are similarly stark in the ICE. In February, the ICE for urban India grew by 8.6 per cent while that for rural India grew at a much lower 6.1 per cent. Comparing the 30-day moving average as of March 12 to the February levels, the ICE for urban India was up by 4.8 per cent while that for rural India fell by 1.7 per cent. The net impact was a 0.7 per cent increase in the all-India ICE, which was driven entirely by urban India.

The relatively better sentiments in urban India compared to rural in February is in line with the labour data for the same month. Urban India saw an increase in the labour participation rate and a fall in unemployment. As a result, the employment rate increased from 34.3 per cent in January to 35 per cent in February. This is the highest employment rate in urban India since August 2020.

In rural India, the labour participation rate fell from 41 per cent in January to 40.9 per cent in February and the unemployment rate increased from 6.5 per cent to 7.2 per cent in the same months. As a result, the employment rate fell from 38.3 per cent in January to 38 per cent in February.

We also know that consumer inflation has been consistently higher in rural India than in urban India since January 2022. In February 2023, urban inflation was lower at 6.1 per cent compared to 6.7 per cent in rural India. This is not how the two regions have panned inflation in the preceding four fiscal years.

Sustained higher inflation and an increase in the unemployment rate in rural India could have contributed to the lower growth in consumer sentiments in the region. It may be important to watch the trajectory of rural consumer sentiments in the coming weeks since in the first two weeks, rural India has seen a fall in both current conditions and in consumer expectations. Urban India, in the meanwhile, is high on expectations.