Sentiments recovery lags in middle-income households

While the recovery in sentiments in July is impressive, it needs better traction in the critical income groups

cash, currency, notes, funds, investment, shares, growth, profit, loss, tax, money, income, earnings — Solicitor General Tushar Mehta, appearing for the Centre, said he had sought a meeting with the RBI. The Bench said if the RBI reply ‘goes much beyond the query posed by us, there will be a lot of opinions on it’

5 min read Last Updated : Aug 17 2021 | 9:51 AM IST

The index of consumer sentiments (ICS) improved 10.7 per cent in July 2021 over its level in June 2021. However, at 53.01 (base 100 in September-December 2015) it was still just half of its level before the Covid-19 induced lockdowns began in March 2020. In February 2020, the index was at 105.3. The July 2021 index was also lower than its level during each of the five months from December 2020 through April 2021 when it averaged 54.7. The second wave of Covid-19 had dragged the ICS down to around 48 in May and June 2021. July saw a smart but still incomplete bounce-back. Thus, while the recovery in July was impressive, there is still a long way to go before sentiments return to pre-pandemic levels.

The first two weeks of August have not been good. The ICS fell 1.6 per cent in the week ended August 8 and then by 2 per cent in the week ended August 15. Nevertheless, we try to understand the nature of the recovery in sentiments in July, particularly in terms of the differences across income groups.

The recovery of July was broad-based but was more pronounced at the two ends of the income distribution of households. The ICS improved for households with relatively modest income and for the rich. However, the July recovery largely missed the middle middle-income segment, while it was still good for what may be called the lower middle-income households and the upper middle-income households.

Households that earn less than Rs 100,000 a year saw a 46 per cent improvement in sentiments. This segment saw the best recovery during July. These households had suffered the most in May when the second wave struck India. Their ICS fell by 25 per cent in May and then by another 7.5 per cent in June. The recovery in July makes up for all this lost ground. The ICS for this group was 56.4 in July, which was slightly higher than the 55.3 level of April 2021. It is also the highest since March 2020. This group consists of about 54 million households. This number has grown from about 30 million earlier because Covid and lockdowns have pushed down the incomes of many into this bracket of poorer households. They accounted for a little less than 10 per cent of all households earlier but now make for about 17 per cent.

The best recovery in the ICS was in the income group that has the least buying power. But, the next best recovery was in the segment that has the best buying power, the rich.

Households that earn more than a million rupees a year registered a healthy improvement in sentiments in July. Their ICS grew by 16.6 per cent to 63.3. This growth is not anywhere close to the 46 per cent growth in sentiments of the poor. But, it is still a respectable growth. Besides, sentiments of the richer households have recovered the most from the fall induced by the Covid-19 pandemic compared to other income groups. The ICS for this group in July 2021 was 60 per cent of its level in February 2020. For other groups, it was mostly around 50 per cent of their February 2020 level.

This rich group consists of about 3 million households. This number has dropped from about 4 million before the pandemic.

Month-to-month variations in the ICS of the richer households have been volatile. Since January 2021, the variations have ranged from a 25 per cent increase to a 15 per cent fall. The ICS for this income group was still more than 5 per cent below its level in January and nearly 7 per cent below its level in February 2021. This volatility mars the gains made by this group in terms of consumer sentiments.

Lower middle-income households — those with an annual income in the range of Rs 100,000 and Rs 200,000 — had lost substantial ground in the quarter ended June 2021. Their ICS fell from 53.6 in March 2021 to 44.5 in June 2021. In July, the index bounced back to 49.9, implying an increase of 12.1 per cent over the June 2021 level. Although this is a respectable increase in a month, the recovery in sentiments of this group from the pandemic has been unimpressive.

The upper middle-income group — those that earn between half a million and a million rupees — is relatively small with only about 20 million households. They saw a 7.8 per cent improvement in sentiments.

The largest is the middle middle-income group. These are households that earn between Rs 200,000 and Rs 500,000. This group consists of a little over 160 million households. They saw the lowest growth in sentiments during July, a mere 1 per cent increase over June. This big group of households has also seen the least recovery from the fall from pre-pandemic levels.

While the recovery in sentiments in July is impressive, it needs better traction in the critical income groups. The recovery in richer households needs to be less volatile, and the recovery needs to reach middle-income households better.

The writer is MD & CEO, CMIE P Ltd