Future imperfect

The Index of Consumer Sentiments inched up 1.1 per cent in June 2022. This was better than the 0.8 per cent growth pencilled in May. But it still reflects the sluggish growth of sentiments that has been prevalent in recent times. Growth slowed from 4-5 per cent in January and February to 3 per cent in March and April, to around 1 per cent in May and June.

The gradual loss of momentum of growth in sentiments can be traced to the deterioration in consumer expectations from the future. Households continue to report an improvement in their current well-being, but they are getting increasingly circumspect regarding the future. This, in a sense, is counter-intuitive.

It is logical to expect that a steady improvement in current economic conditions should translate into an improvement in the outlook for the future. People often project their current experiences into the future. A diversion in the two, therefore, is a strong signal of a guarded or wary household sector.

Between January and June 2022, the Index of Current Economic Conditions (ICC) grew by 28.1 per cent but the Index of Consumer Expectations (ICE) grew at a much slower pace of 13.2 per cent. In four of these six months, the ICC grew at a faster rate than the ICE. In June 2022, the ICC grew by 2.65 per cent but the ICE stagnated at its previous month’s level. So, while the current condition of households is improving, their expectations are not growing similarly.

One of the two components of the ICC is a question on the perception that households have regarding their income in comparison to its level a year ago. In June 2022, 13.3 per cent households said that their incomes were higher than a year ago. This is the highest proportion that said so since the pandemic and its consequent lockdowns that shattered the Indian economy in April 2020. In the preceding four months — February through May 2022 — this proportion had hovered between 12 and 12.8 per cent. The rise to 13.3 per cent in June was aided by a substantial jump in optimism in the urban regions.

About 15.1 per cent of urbanites said that their incomes in June 2022 were higher than a year ago. This ratio was 13 per cent or lower in the preceding months. While urban household spirits were somewhat buoyant, those of rural households were subdued. The proportion of rural households that said their incomes were higher than a year ago declined, albeit just a wee bit, from 12.6 per cent in May to 12.5 per cent in June.

Households felt less optimistic about the future. The proportion of households that felt their income would be higher in a year was less than those that said they had gained over the previous year. While 13.3 per cent of the households said their incomes were higher than a year ago, only 10.2 per cent said their incomes would rise in the coming year. Further, while the proportion of households that reported an improvement in their income rose in June 2022, those that expected their income to rise a year into the future declined in June.

This despondency regarding the future was limited to the rural households. The proportion of rural households that believes their incomes would be higher in a year fell from 12.6 per cent in April to 10.1 per cent in May, to 9 per cent in June 2022. Optimism regarding the business conditions during the coming year in rural India has also declined. Optimism has also declined for economic conditions over the next five years. This decline is again seen over the past three months. In April, 11.6 per cent of rural households expected the economic conditions to improve over the coming five-year period. This proportion fell to 9.7 per cent in May and then to 8 per cent in June.

There was a direct impact of these growing negative perceptions on the decisions of rural households regarding their intentions to purchase consumer durables.

The proportion of households that believed that it was a good time to buy consumer durables fell quite sharply, from 12.6 per cent in May to 11.3 per cent in June 2022.

Urban India is not too sanguine about the future either. While 15.1 per cent reported an improvement in their income over the past year, only 12.7 per cent expected an improvement over the next 12 months. The proportion of households that expect business conditions to improve over the next 12 months declined marginally and was lower at 11.5 per cent. Further, the proportion that expects the economy to improve over the coming five years declined from 11.3 per cent in May to 10.8 per cent in June.

The erosion of optimism in urban India is evidently milder. As a result, it did not have a negative impact on the inclination of urbanites to buy consumer durables. The proportion of households that considered the current times to be better to buy consumer durables than a year ago rose from 14 per cent in May to 14.9 per cent in June. However, the weakening perception regarding the future makes this small gain in urban India somewhat fragile.

Household incomes are improving slowly, but their perception regarding the future is eroding. This erosion impacts their propensity to spend on non-essentials.

The writer is MD & CEO, CMIE P Ltd