Consumer sentiments improve, but still too low

Consumer sentiments improved in January 2023. The Index of Consumer Sentiments (ICS) reached 83.9 (base 100 during September-December 2015), which is the highest since sentiments were hit severely by the Covid-19 induced lockdowns. The ICS, however, continues to remain lower than its pre-pandemic level. The ICS was at 105.3 in February 2020. It had dropped substantially by nearly 8 per cent in March 2020 itself before shedding a massive 53 per cent in April 2020. The ICS dropped early upon the advent of Covid restrictions and then massively as the restrictions became pervasive.

The recovery in consumer sentiments from the pandemic has been the slowest among all economic indicators. While most production indicators recovered rapidly from the pandemic shock, household well-being in general and their perceptions regarding their own future have still not recovered fully. The recovery is very slow and still incomplete. The Reserve Bank of India’s (RBI) consumer confidence survey suggests the recovery has been very slow but seems complete.

CMIE’s consumer sentiment indices are based on responses from urban and rural regions of India. The monthly indices are typically based on responses from about 44,000 households, of which about 28,500 are from urban India and the remaining 15,500 from rural India. The RBI survey is based on responses from about 6,000 respondents from 19 cities.

CMIE’s Consumer Pyramids Household Survey shows that the consumer sentiments index is still a substantial 20 per cent lower than it was in February 2020, the month just preceding the onset of the Covid-19 induced mobility restrictions. And, the deficit in urban areas is a bit worse — at 23 per cent — than in rural areas.

Answers to five questions go into the making of the Index of Consumer Sentiments. Three years after the Covid-19 shock each of them show that households continue to remain stressed and continue to have largely pessimistic views regarding their future. Before we discuss these five indicators it may be useful to understand the analytical framework. For each of the five questions, households answer conditions being either better than a year ago, worse than a year ago or same as a year ago. What matters is the percentage of households that respond with “better” after netting out the “worse”.

Before the pandemic about 31 per cent of households stated that, financially, they were doing better than a year ago and another 8 per cent said they were doing worse. Therefore, on a net basis, 22 per cent of the households reported that they were doing better than a year ago. In January 2023, 21 per cent of households said that they were doing better but 23 per cent said that they were doing worse. As a result, on a net basis, the proportion of households that were financially worse off exceeded those that stated that they were better off, by 2 per cent.

While this is a huge improvement over the record during the period after the onset of the pandemic, it is still in the negative zone.

Before the pandemic, a similar 27 per cent of households on a net basis were optimistic about their financial conditions a year into the future. In January 2023, on a net basis 6 per cent of the households were pessimistic about their financial condition one year into the future. Less than 18 per cent expect an improvement and almost 24 per cent expect a worsening of their financial well-being a year into the future. This, again, is a major improvement over much worse times during the peak of the pandemic. But a full recovery in future expectations is still quite far.

One component of the ICS that is of particular interest to industry is the following question – Is this a good time to buy consumer durables like vehicles, refrigerators, etc. compared to a year ago, or is this a worse time or is it the same? Answers to this question give us an idea of the proportion of households that are inclined to increase their discretionary spending.

What matters most is the change in direction that the answers take. Before the pandemic, on a net basis households thought it was a better time to buy durables and the trend was of a rising proportion of households stating that it was a better time. This was good for industry and it reflected the growing affluence and indulgence of Indian households. Then, when the pandemic struck, the trend reversed and the proportion of households that believed it was a worse time rose very sharply. But the trend reversed quickly because of the precipitous nature of the fall. On a net basis, even now, more households believe it is a worse time to buy durables. But the proportion of such households is dropping. Negativity regarding discretionary spending is declining. It was at its lowest since the pandemic struck in April 2020.

Two questions in the ICS relate to the economic and business environment. One has a one-year horizon and the other has a five-year horizon. On a net basis, more households are pessimistic about the future economic and business environment. All five indicators are in the negative on a net basis in this manner.

Consumer sentiments are improving almost steadily. But there is still a not-so-small distance to cover before they revert to the pre-pandemic times.
The writer is MD & CEO, CMIE