Sentiments recovering in January

Consumer sentiments had fallen in December 2021 after five consecutive months of increases. The index of consumer sentiments fell to 57.6 (base: 100 in September-December 2015) in December 2021 after having risen from 47.7 in June to 60.3 in November. At 60.3, the index was at its highest in November 2021 since its fall in April 2020 following the Covid-induced lockdown. It had risen by an impressive 26.4 per cent between June and November 2021. The fall in December was surprising and was substantial at 4.5 per cent.

Now, trends seen in the intra-month fast-frequency data for January 2022 indicate that the index of consumer sentiments is recovering somewhat hesitatingly from that December 2021 fall. The average weekly index of consumer sentiments in the three weeks that ended on January 9, 16 and 23 was 59.9. And, as of January 23, 2022, the 30-day moving average of the index of consumer sentiments reached 61. The 30-day moving average has surpassed the November peak. A recovery in the index of consumer sentiments therefore seems to be underway. But, the recovery seems more hesitant than robust.

Weekly indices show that consumer sentiments had dropped early in December and had stayed low through all four weeks of the month. The recovery from that fall was first seen in the week ended January 2. The index climbed by a substantial 6.9 per cent to 58.9 from 55.1 in the preceding week. This week contained much of the last week of December. So, it is possible that the recovery began towards the end of December and then continued into January.

We call the recovery seen in the early data of January as hesitant because after that 6.9 per cent increase in the week ended January 2, the weekly growth rate fell to 2.1 per cent in the next week and then, it fell by 3 per cent erasing much of the gains made in the preceding two weeks. In the latest week ended January 23, it rose by 4.9 per cent. The index reached 61.2 during this week. While the level of the index in the latest week ended January 23 and also the 30-day moving average are impressive at 61.2 and 61 respectively, the week-to-week variations reflect some uncertainty of the January recovery.

The index of consumer sentiments in January is expected to cross its December level of 57.6. It could possibly cross its peak level of 60.3 reached in November. But, it may be a struggle for it to reach the level suggested by the trend seen from June to November which should be well above 61. The index still has a long way to go before it reaches its pre-Covid levels of around 108.

The index of consumer sentiments reflects the views of households with respect to their current economic conditions and also their expectations of the future. Traditionally, in India, the index of consumer expectations has been systematically higher than the index of current economic conditions. This indicates that people in India are generally more positive and hopeful of the future than their assessment of their own conditions compared to the recent past. Perhaps, the higher value of the index of consumer expectations compared to the index of current conditions reflects a combination of greater hope on the future and also a non-acceptance of the current standard of living.

We wonder if the latter was the case because the relative importance of the index of consumer expectations compared to the index of current economic conditions increased several folds in the period of the Covid pandemic.

Between March 2018 and March 2020, on an average, the index of consumer expectations was, on an average, 0.94 per cent higher than the index of current economic conditions. The deviation range between the two indices was from -2 per cent to 2.8 per cent. Between April 2020 and December 2021, the index of consumer sentiments was, on an average 11.04 per cent higher than the index of current economic conditions. The range was from 7 per cent to 20 per cent. What could have made households repose relatively greater hopes on the future than their devastated conditions during times of high risk and uncertainty?

Possibly, living conditions had deteriorated so badly during Covid that it was inconceivable that they would continue to remain so bad in the future. The hope of households on the future expressed in consumer sentiments was possibly more of a strong rejection of current conditions than a reasonable anticipation of a bright future. It would of course, have been much worse if the current hardships had led to despondency. 

Early results of January show that it is the index of current economic conditions that is leading the recovery. This is a positive sign. The average of the indices for the first three weeks of January shows the index of consumer sentiments growing by 3.9 per cent in January 2022 over December 2021. The index of current economic conditions has risen by 6.3 per cent and the index of consumer expectations has growtn by a modest 2.5 per cent. Nevertheless, the index of consumer expectations is higher at 60.9 compared to the index of current economic conditions which was at 58.2.

A faster improvement in current economic conditions with a slightly higher confidence in the future as is seen in the weekly sentiments data for January 2022 is a good development. Its stride needs to be bigger and a little more confident.