Divergent consumer sentiments

The Index of Consumer Sentiments shrunk by 0.9% in December 2022 after having declined by 1.7% in November

Consumer sentiments have soured a bit in recent times. And, the gap between sentiments of the rich and the poor has widened in significant ways.

The Index of Consumer Sentiments (ICS) shrunk by 0.9 per cent in December 2022 after having declined by 1.7 per cent in November. The ICS has therefore shed 2.6 per cent after its festive season peak in October 2022. 

Regular observers of consumer sentiment indices may note that the November ICS has been revised from a fall of 0.2 per cent estimated earlier to a much steeper fall of 1.7 per cent. Also, the October estimate has been revised from a 4.6 per cent increase in the ICS to a better, 6.1 per cent increase. These are revisions that happen at the end of every Wave of CMIE’s Consumer Pyramids Household Survey. Revisions are usually small. This time they were larger than usual.

The fall in consumer sentiments during November and December has been across rural and urban regions and across perceptions regarding current well-being and also regarding future expectations. The cumulative fall over these two months was steeper in urban regions (-3.5 per cent) compared to rural regions (-2.2 per cent). And, the fall in perception on the current economic well-being was sharper (-6.6 per cent) compared to future expectations (-1.1 per cent). Pessimism continues to remain pervasive, but Indians retain some hope on their future.

Consumer sentiments continue to remain lower than their pre-pandemic levels. It remains one of the few indicators of the Indian economy that has not recovered fully, yet. This is seen in CMIE’s Index of Consumer Sentiments and also in RBI’s Consumer Confidence Index. Consumer sentiments, or confidence, are important because they reflect the propensity of households to spend, and household spending contributes to well over half of India’s GDP. Private final consumption expenditure (PFCE), which comprises largely, though not entirely, the spending by households, accounts for 57 per cent of India’s GDP.

This poses a conundrum. How does the PFCE continue to grow even as consumer sentiments remain subdued? PFCE, in 2021-22 was 1.4 per cent higher than its level in 2019-20 but the ICS was down by a massive 46 per cent. This divergent trend is seen continuing into 2022-23.

Part of the answer to that lies in the disparity in the recovery of the ICS of households of different income groups. Sentiments of richer households are recovering better than the sentiments of poorer households. No income group has recovered to pre-pandemic levels, yet. So, the conundrum still holds. The disparities only explain part of the mystery. We study the consumer sentiments of five income groups with the following annual incomes – the lowest earn less than Rs.100,000 (i.e. roughly PPP USD 3.2 per person) ; the lower middle-income group earns between Rs.100,000 and Rs.200,000 (PPP USD 3.6-6.3 pp) ; the middle-income group earns between Rs.200,000 and Rs.500,000 (PPP USD 6.3-15.8 pp); the upper middle-income group earns between Rs.500,000 and Rs.1 million (PPP USD 5.8-31.7 pp) and the rich earn more than Rs.1 million (PPP USD 31.7 pp).

Post the festive season, i.e. between October and December 2022, the ICS for the lowest fell by 2 per cent while that for the rich jumped up by 9.2 per cent. While this is stark, it is based on the two far ends of the income spectrum where monthly estimates tend to get a bit volatile because of the reduced sample. Therefore, when it comes to income groups, we prefer to study the four-month moving average which effectively uses the full sample of the CPHS and the estimates are far more robust.

The first finding we report from this transformed series is that the gap in consumer sentiments between the richest and the poorest income groups has narrowed in the last six months because sentiments of the poorest have accelerated. This is good because it reflects a big increase in the proportion of households reporting an increase in their income – from 11 per cent during May-August 2022 to nearly 18 per cent during September-December 2022.

The gap between the rich and the poor is significant when we compare the sentiments of those that earn annually between Rs.100,000 and Rs.200,000 and those that earn between Rs.500,000 and Rs.1 million. The latter (upper middle classes) have seen their consumer sentiments soar by 39 per cent since May 2022. On the other hand, sentiments of the former (lower middle class households) rose by only 21 per cent.

The upper middle-class households have displayed the fastest increase in consumer sentiments. This group comprises over 20 million households. It is likely that the PFCE growth we see is largely located among them. The lower middle-income bracket comprises of a much larger 140 million households. Their sentiments have also improved, by 21 per cent between May and December 2022.  In May 2022, both groups had similar ICS levels. By December 2022, ICS of the upper middle class households was 18 per cent higher than the ICS of the lower middle income group of households. Disparities have increased.

In December 2022, 4-month moving average ICS of the upper middle-income group of households was 15.8 per cent lower than its level in March 2020. All other income groups are more than 20 per cent lower than their March 2020 level.

It appears that the 20 million upper middle-income households are driving a large part of the PFCE growth in India. That leaves a large upside potential in the remaining over-300 million households.