Consumer sentiments rise slowly

The slow and steady pace of recovery of consumer sentiments observed in India since January 2022 continued into April. The Index of Consumer Sentiments (ICS) rose by 3 per cent during the month. This is similar to the low single-digit increases in the index seen since January 2022. In fact, it is a tad slower than the monthly increases of the recent past. The index had risen by 4 per cent in January, 5 per cent in February, 3.7 per cent in March and a lower 3 per cent in April.

It is good to see a steady im­provement in consumer sen­timents month after month, but it is somewhat disquieting that the rate of improvement has been rather small and that it is getting smaller.

It is a relief that in April this year, there was no new calamity like in the past two Aprils. But, the traditional kind of insidious challenges have raised their heads. Rising inflation, creeping borrowing rates and elevated unemployment rates are weighing in on household sentiments. Perhaps, these old demons are dampening the somewhat sprightly household spirits.

Wounds of pandemic-induced lockdowns on households are healing. Average household incomes have repaired to their pre-lockdown levels. They are just a shade brighter than they were two years ago. The healing is tender, yet. Scars of the economic shock remain. Perceptions of households regarding their current incomes and prospects of future incomes remain muted compared to the perceptions before the lockdown shock.
 

As incomes revert to pre-pandemic levels and then start rising beyond those levels, it is important that household perceptions of their own incomes and prospects also improve. This is important for a sustained economic recovery. It is in this context that the new challenges become important. Assuming that there are no new economic shocks, going forward, it will be the trajectories of consumer prices, interest rates and employment that would determine household perceptions and, therefore, consumer sentiments. As the Russia-Ukraine war keeps commodity prices high and central banks react to the prospect of higher inflation, in the coming months, the expectation is that inflation will remain high, int­erest rates will rise and employment growth will remain muted. It is likely, therefore, that growth in consumer sentiments may be restricted to the current low single-digit levels.

While inflation, interest rates and employment are believed to influence consumer sentiments, what is measured to gauge sentiments is something more direct. It is household perceptions regarding their current and prospective incomes, their propensity to spend on non-essentials and their perceptions regarding the future. The index of consumer sentim­ents bundles these perceptions regarding current and future wellbeing.

The ICS compri­ses two broad components — the In­dex of Current Economic Con­ditions (ICC) and the Index of Consumer Expectations (ICE).

The recovery in ICS since January 2022 is driven largely by the ICC. It is an improvement in the perception of households regarding their current incomes and their propensity to spend on non-essentials that is driving up consumer sentiments. These are the two factors that form the ICC. Household perceptions regarding the future have been improving as well but not at the same pace. Factors such as household perceptions regarding their future incomes or economic prospects in the short and long terms have not improved similarly. These are the factors that go into the computation of the ICE.

During the first four months of 2022, the ICC grew by 24 per cent. In contrast, the ICE grew by a much lesser 12 per cent.

With the economy recovering and as incomes are res­tored, an increasing proportion of households is recognising this recovery of their current incomes. In April 2022, 12.2 per cent of the households reported an increase in incomes compared to a year ago. This is close to the average proportion of households rep­orting an increase in income in recent months. The proportion of households reporting higher income since February 2022 has bumped up to a significantly higher level than the levels seen before. Similarly, there is a fall in the proportion of households that report a fall in their incomes.

Until recently, this improvement in household incomes seen in the data, however, did not translate into a corresponding increase in the propensity of households to spend on non-essentials. April 2022 finally changed this. The proportion of households that considered this to be a better time to buy consumer durables increased from 10.5 per cent in March 2022 to 12.2 per cent in April 2022. This change in mood is important in strengthening the recovery process.

It is important now for the ICE to catch up. The ICE is de­rived from three questions — perceptions regarding the households’ income over the next year, perception regarding the performance of the economy over the next one year and separately, the economy’s performance over the next five years. Of these, households are quite sanguine regarding their own incomes: 12.7 per cent households believe that their incomes next year would be better than today, although only 12.2 per cent believe that incomes have improved over the past one year.

The problem lies in the confidence in the economy. Only 11.2 per cent believe it will do better over the next year and only 11.6 per cent believe it will do consistently well during the next five years. It could be that the fear of rising inflation, interest rates and unemployment rates is affecting their confidence in the Indian economy.

The writer is MD & CEO, CMIE P Ltd