Why unemployment could be the cost of war against corruption

Six weeks after the demonetisation move, expectations seem to be giving way to doubts, even despair

The post-demonetisation euphoria seems to have evaporated. It’s taken six weeks to ride the roller-coaster of soaring expectations of a better tomorrow to doubts, even despair. We have less than a week to go before the period of pain is scheduled to end, but there are no signs of sufficient cash in banks. It is understood that the liquidity crunch will continue for much longer, so despondency is setting in. Anxieties are rising and the sentiment is falling.
 
During the week ended December 25, consumer sentiment fell for a second straight week. In these two weeks of decline, the Index of Consumer Sentiment shed its entire 10 per cent gain made over the four weeks after demonetisation. As of the Christmas week of December 25, the BSE-CMIE-UMich Index of Consumer Sentiment stood at 98.6, lower than the 98.8 seen in the week off the demonetisation announcement.
 
While the overall fall in sentiment in the six weeks since demonetisation is small, the trajectories of this fall have been quite different in rural India and urban India.
 
Urban India saw the index rising for just three weeks, and began shedding this gain, initially marginally and then substantially by over five per cent in the fifth week and two per cent in the sixth week. At the end of the sixth week, consumer sentiment in urban India was 2.2 per cent lower than that in the demonetisation week.
 
Households have not taken kindly to the government’s December 19 announcements placing restrictions on depositing old currencies in banks. There also was confusion regarding the immunity of political parties on the source of their cash. Most importantly, households seem peeved with banks for not being able to provide adequate liquidity. There have been stories of people going back from banks empty-handed or with much less cash than expected.
 
Rural India’s behaviour has been a lot more volatile. Consumer sentiment shot up faster and sustained the enthusiasm a little longer. In the first three weeks, it rose by 9.7 per cent, against 6.3 per cent in urban India. Further, in the fourth week, the sentiment started to fall in urban India but continued to rise in rural India.
 
The sentiment decisively turned negative in rural India only in the fifth week, dropping 11 per cent. This drop is more than twice the fall in urban India in the same week. Soon after this sharp turn for the negative, the government moved to assuage the ruffled rural sentiment by allowing cooperative banks to deposit Rs 8,000 crore of demonetised currency with RBI. This paved the way for these banks to get new currency notes and lend to farmers. The move could have played a small role for sentiment in rural India which rose by one per cent in the sixth week, which ended December 25.
 
This, however, could be only a small respite, as recent announcements seem to suggest sustained pain ahead.
 
By the end of the sixth week after demonetisation, the prime minister announced that “notebandi” was only the beginning of a long battle against corruption and a lot more (pain?) was in store. Several government officials made it amply clear that liquidity would not be restored by December 30.
 
Loss of liquidity has had a direct impact on consumer spending. Now, this impact will last longer than the 50-day period of pain announced in the beginning. Sustained loss of liquidity, compressed demand and the prime minister’s announcement of a sustained war against corruption could easily hurt investment sentiment. This will have a direct bearing on employment.
 
The BSE-CMIE measure of unemployment has already started rising gradually. Urban unemployment reached 7.4 per cent in the week ended December 25. Though this is the highest since the demonetisation week, it is still substantially lower than the average urban unemployment of 10.2 per cent from January through September 2016. But, it is higher than the average urban unemployment rate of 7 per cent during October and November 2016. Similarly, rural unemployment is higher than it was during the past two months, though it is lower than in the earlier months. These are probably early warning signals that this war against corruption has a very high collateral damage.

CONSUMER SENTIMENT NOW LOWER THAN THAT IN THE DEMONETISATION WEEK



Sentiment gauge



UNEMPLOYMENT RATE DOWN MARGINALLY



Unemployment gauge


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
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.