Consumer sentiments expected to stay sluggish

Growth in consumer sentiments had slowed down in March 2023. After having registered growth rates of 4-5 per cent during January and February, consumer sentiments inched up by a slower 1.2 per cent in March. Data for the first three weeks of April suggests that the growth in consumer sentiments may be 2-3 per cent higher than in March. The 30-day moving average consumer sentiments index as of April 23 was 2.8 per cent higher than its level in March. While this looks like a distinct improvement, the growth is, however, quite low compared to the performance in January and February. And, as we will see later, the growth is not entirely convincing.

Average monthly growth in consumer sentiments during April 2022 through March 2023 was 2.68 per cent. There were no severe shocks during this period. Yet, the month-to-month change in consumer sentiments was somewhat volatile. The changes varied from -1.7 per cent in November to 7.1 per cent in September. The expected growth in April 2023 would be in the vicinity of the average monthly growth seen in 2022-23.

The expected growth in consumer sentiments in April implies that there is no acceleration in consumer sentiments as it seemed in early 2023. Given that consumer sentiments as measured by CMIE’s Index of Consumer Sentiments (ICS) are still lower than their pre-pandemic levels, it can be argued that consumer sentiments are growing at a rather slow pace.

The slow and unsteady growth in consumer sentiments implies that the recovery of the ICS to pre-pandemic levels is still several months away. In March 2023, the ICS was at 89.18. It has a base of 100 in September-December 2015. The ICS was at 105.3 in February 2020, just before Covid-19 restrictions tanked it. The March 2023 ICS was 15.3 per cent short of that pre-Covid level. If the ICS continues to grow at the 2.68 per cent per month that it has been growing on an average in the past 12 months, consumer sentiments will revert to pre-Covid levels by September-October 2023. That would be just in time for the festival season in India.

Challenges to consumer sentiments reaching there are the El Nino playing truant with monsoon this year and the continued sluggishness of private investments in India. The 2023 calendar is full of state elections and that may lead to some excess cash transfers to the electorate, which could possibly help lift consumption. But, this is unlikely to help lift consumer sentiments.

One-off cash transfers can be expected to increase consumption of some kinds of foods and liquor. It is money that is quickly consumed without much lasting effect. Households are unlikely to perceive these cash transfers as an increase in income. It is also unlikely that these cash transfers will motivate households to save or buy consumer durables. If households do not see an increase in income or perceive an increase in future income or the propensity to consume consumer durables then sentiments do not improve.

Monies are made during elections by goods and services providers as well. This can lead to an increase in income for some and also in their propensity to buy consumer durables. Arguably, these intermediaries are a small sliver of beneficiaries from elections compared to the larger electorate. Elections therefore could help lift sentiments only marginally and this is unlikely to offset the effects of El Nino if the effects are as severe as they threaten to be.

It is more likely that elections and El Nino will add to the volatility of consumer sentiments. And, lack of pick-up in private investments may keep the growth in consumer sentiments similar or a tad lower than about 2.7 per cent per month.

Performance of the ICS during April is a good indicator of the trends to be expected in 2023. This is the month before elections in Karnataka. The 224 seats in the state will be contested in an election whose outcome, by most reports, is not foretold. The contest can be expected to be intense. Karnataka is not a small state. Yet, the ICS has remained sluggish so far.

The ICS fell 0.19 per cent in the week ended April 9 and then by 4.8 per cent in the week ended April 16. The 2.8 per cent growth seen in the 30-day moving average of the ICS as of April 23 reflects the elevated position of the ICS as of the end of March. As this effect wanes, the fall of the first two weeks will dominate the month’s index. This could make the April ICS look smaller than it seems to be now.

A strong turnaround in consumer sentiments of the kind seen in January and February 2023 is important for the Indian economy to post stronger growth. A strong turnaround in the ICS suggests that households have what it takes to spend on non-essentials like consumer durables. Decisions to spend on these reflect not only an income effect but also an intangible confidence that future incomes are dependable and the future of the economic environment is conducive for sustained growth.

Propping up income through distress-time or election-time transfers cannot improve sentiments. Perhaps, the only means of correcting consumer sentiments strongly is to spur employment-generating investments. So far, there are no signs of this picking up.