Consumer sentiments weaken in Dec, pose challenge to recovery of economy

Consumer sentiments seem to have weakened in India during December 2021. Trends seen in the weekly estimates and also in the 30-day moving averages of the index of consumer sentiments during December suggest that the month is likely to register a fall in consumer sentiments compared to November. This would be the first month to record a fall in sentiments since June 2021.

Consumer sentiments have been improving in each of the five months since July 2021. In the process, the sentiments recovered from the fall during the second wave of Covid-19 spanning April, May and June 2021. The Index of Consumer Sentiments (base 100 in September-December 2015) was at 56.6 in March 2021. Then, following the second wave of Covid-related restrictions, it fell to 47.7 by June 2021. The recovery was quick as the index had touched 58.2 by September 2021. Losses of the quarter of June 2021 were recovered in the quarter of September 2021. But the precipitous fall in sentiments suffered during the first wave of Covid-19 still remains largely uncovered.

Now, further recovery in consumer sentiments has slowed down during the current quarter that ends this week. The index rose by 2.1 per cent in October and then by 1.2 per cent in November. Nevertheless, even the slowed down growth helped the index cross 60 for the first time since April 2020. The index was at 60.1 in November 2021. In December, it is seen losing ground. It is sliding back.

The weekly consumer sentiments index had peaked at 61.9 in the week ended November 21. It fell a bit in the week ended November 28 to 61.5. Nevertheless, the month ended in the green with a growth of 1.2 per cent. But the fall in the last week of November was apparently just a precursor to a much bigger fall that came in the first week of December. The index fell 10.9 per cent to 54.8. This was its worst weekly fall in over a year. In the following three weeks, it recovered a bit but the recovery has not been very convincing. There was a correction in the second week of December but it was followed by falls in the next two weeks.

At 55.1, the weekly index of consumer sentiments for the week ended December 26 was lower than it was in any week of November and in most weeks of October. December is not looking good on consumer sentiments. We can see this in the weekly data and also in the 30-day moving average data.

On December 25, 2021, the 30-day moving average of the index of consumer sentiments was at 57.1. This was 4.7 per cent lower than it was at the end of November 2021. It seems unlikely that this fall will be recovered in the last six days of the month.

Assuming that there is no recovery and also that there is no further deterioration in consumer sentiments during the last few days of December, how does a 4.7 per cent fall in sentiments compare with past records? Quite badly, actually, with all non-Covid-19 influenced observations. If we exclude the months of March, April and May of 2020 and May 2021, then a 4.7 per cent fall would be among the worst monthly falls. In less than a week we will know the extent of the dent in consumer sentiments in December. But a substantial dent is almost certain.

The fall in consumer sentiments in December after five months of an impressive rise raises some questions regarding the recovery of the Indian economy. Will the weakening of the recovery of consumer sentiments in the third quarter of 2021-22 stall the recovery of the Indian economy?

It appears that the impact of this slowing or deterioration on the Indian economy will be mild. This would be because of the substantial gains made during October and November 2021. The proportion of households that reported an improvement in their incomes rose to an average of 9.4 per cent during these months. During the quarter ended September 2021, it was much lower at 5.8 per cent. And, in the quarter ended December 2020, it was 5.4 per cent. In comparison, the quarter ended December 2021 is likely to end with a proportion of over 8.5 per cent. Similarly, the proportion of households that report a decline in income has fallen.

The proportion of households that believe that this is a good time to buy consumer durables is likely to end at 5.7 per cent in the quarter ending in December 2021. This would be better than the 3.8 per cent pencilled in the quarter of September 2021, but it would be lower than the 7.1 per cent recorded in the quarter of December 2020.

In 2021, the growth in the proportion of households reporting an improvement in incomes has not translated into a proportionate increase in households reporting an inclination to buy consumer durables. The expectation was that as incomes grow further and the growth becomes more credible, consumers will start to loosen their purse strings. But the poor performance of incomes in December may derail that progression. This derailment poses a challenge to India’s economic recovery process.