Low expectations cast shadow on the ensuing festive season

Consumer sentiment has been deteriorating steadily in August. The BSE-CMIE-UMich Index of Consumer Sentiment has slipped during each of the four weeks of the month by about one per cent compared to the preceding week. This steady deterioration has taken the index to its lowest level so far, during the current fiscal year.

With just four days before the month closes, it is now reasonably clear that the month will post a decline in the index of consumer sentiment compared to July. This would be a fall for the second consecutive month in the index.

It is likely that the month's index would be the lowest in its short history of 20 months.

Consumer sentiment have been worsening since a brief rise during April and May this year. Large scale farm loan waivers (or effective promises to do so) and government interventions to shore up prices of select agricultural commodities had helped improved sentiment. But, the effect was evidently short-lived. 

The litany of woes have been piling up. Agitations have continued in Maharashtra. Other problems include the erratic temporal progress and spatial spread of monsoon showers, shutting of abattoirs in Bihar, floods in the east and dry spells in the UP, Punjab, Haryana, MP, parts of Maharashtra and southern states, uncertainties and inconveniences caused by GST, continued political uncertainty in Tamil Nadu and the breakdown of law and order in Haryana. The cumulative effect has played a role in keeping consumer sentiment depressed.

Prime Minister Narendra Modi's independence day speech, which is usually very inspiring, failed to offset the effects of the rising tide of bad news.

The flow of good news has been exceptionally low. Even equity markets failed to enthuse. For the sake of records, August witnessed popular indices touch new peaks early in the month, and later the RBI cut interest rates. But, the markets as a whole were spooked by yet another round of low earnings and board room problems in traditionally-admired companies yet again. Returns during August are likely to be barely positive, if at all.

For the larger set of households the news of RBI's rate cut is in fact bad news because deposit rates have been cut by many large banks.

Households in general feel that their economic conditions worsened in August compared to their conditions in July. The average index of current economic conditions for the first four weeks of August was about 3 per cent lower than its level in the corresponding weeks of July. Weekly indices do not average to the monthly index because the monthly indices are adjusted for non-response which is not possible in the weekly indices. Nevertheless, the weekly growth rates do tell us the direction of the trend fairly accurately. Weekly indices are very useful in foretelling the possibly monthly values. Currently, they seem to tell us that August was not a very good month for consumer sentiment.

Urban indices have fallen a lot more than the rural ones. The current economic conditions index for urban India is likely to show a fall of about 4 per cent in August. This would be a sharp fall. The corresponding rural index is seen falling by a lesser 2.5 per cent.

Perhaps, the most important takeaway from the preliminary understanding of August is that urban India has dropped its expectations from the future. We see a possible 4.5 to 5 per cent fall in the index of consumer expectations in urban India during the month. This is not good. Hopes on the future, expectations that things will improve in the near future, are critically important in enabling the turnaround.

Households spend more when they believe that the future is bright or at least it would be better than today. Expectations of increased household spending because of the Pay Commission Awards could be misplaced. Increased household income is not an adequate condition for increased household spending. Expectation of sustained high income is also important. It is worrisome that these expectations are falling.

In urban India, there are sufficient reasons to justify the reduced expectations. Reduced interest rates on deposits is just one. Sustained low labour participation rates is another. Now, the urban unemployment rate is also rising steadily.

The festive seasons is upon us already. A sharp fall in consumer expectations around now would not be good news for consumer goods companies.

 

Every Tuesday, Business Standard brings you CMIE’s Consumer Sentiments Index and Unemployment Rate, the only weekly estimates of such data. The sample size is bigger than that surveyed by the National Sample Survey Organisation. To read earlier reports on the weekly numbers, click on the dates:

November 21, November 28, December 4, December 11, December 18, December 25, January 1, January 8, January 15 , January 22, January 29, February 4 , February 12, February 19, February 27, March 5, March 13, March 19, March 26, April 02, April 10, April 17, April 23, May 1, May 8, May 15, May 21, May 28, June 4, June 11, June 18, June 25, July 2, July 10, July 16, July 23, July 30, August 7, August 14, August 21

Methodology

Consumer sentiment indices and unemployment rate are generated from CMIE's Consumer Pyramids survey machinery. The weekly estimates are based on a sample size of about 6,500 households and about 17,000 individuals who are more than 14 years of age. The sample changes every week but repeats after 16 weeks with a scheduled replenishment and enhancement every year. The overall sample size run over a wave of 16 weeks is 158,624 households. The sample design is of multi-stratrification to select primary sampling units and simple random selection of the ultimate sampling units, which are the households.

The Consumer Sentiment index is based on responses to five questions on the lines of the Surveys of Consumers conducted by University of Michigan in the US. The five questions seek a household's views on its well-being compared to a year earlier, its expectation of its well-being a year later, its view regarding the economic conditions in the coming one year, its view regarding the general trend of the economy over the next five years, and finally its view whether this is a good time to buy consumer durables.

The unemployment rate is computed on a current daily basis. A person is considered unemployed if she states that she is unemployed, is willing to work and is actively looking for a job. Labour force is the sum of all unemployed and employed persons above the age of 14 years. The unemployment rate is the ratio of the unemployed to the total labour force.

All estimations are made using Thomas Lumley's R package, survey. For full details on methodology, please visit CMIE India Unemployment data and CMIE India Consumer Sentiment.

The creation of these indices and their public dissemination is supported by BSE. University of Michigan is a partner in the creation of the consumer sentiment indices.