Rural stress

Consumer sentiments in August are muted. July 2022 had recorded a handsome increase of 6.7 per cent in consumer sentiments after several months of deceleration. But, sentiments suffered a serious setback in the last week of July and then again in the first week of August. Most of the souring of sentiments emanated from rural India. It is likely that the principal reason for this is the behaviour of the southwest monsoon.

Rains were erratic in June and they have continued to play truant through the season. By late August, while the quantum of precipitation was adequate, its geographical distribution was skewed sufficiently to cause substantial anxiety regarding the kharif crop in 2022. Till August 17, cumulative precipitation was 9.5 per cent above normal. But Uttar Pradesh, Bihar, Jharkhand and Bengal suffered over 36 per cent deficiency in rains. This Gangetic belt is largely agrarian and agriculture here is largely rain-dependent. By August 17, more than half of the southwest monsoon season and more than half of the kharif sowing season was over. A meaningful recovery in kharif crop prospects therefore seems remote. Deficient rains and the receding prospects of a healthy kharif crop may have therefore contributed to depressed sentiments in August.

After its smart recovery in July, consumer sentiments are seen retreating a bit in August. The Index of Consumer Sentiments (ICS) stood at 73.1 (base 100 in September-December 2015) in July 2022. By August 21, it dropped to 70.7. This was a substantial 3.2 per cent lower than the ICS’s level in July. We notice this fall using the 30-day moving average (30-DMA) ICS. The 30-DMA provides a reasonable advance indication of the direction of the ICS during a month a week or ten days before the end of the month.

It is possible that the last few days of August may not show a further deterioration in the month-on-month growth in the ICS because the last week of July had seen a sharp fall. But, that would be a mere statistical observation. The ICS needs to cover lost ground in the next ten days to ensure that it does not post a contraction during August. If it fails to rally adequately, August would turn out to be the first month in 2022 to register a fall in consumer sentiments.

Rains, agriculture and rural India are not the only reasons for the weakness in the ICS in August. The 30-DMA ICS on August 21 for rural India was 3.4 per cent lower than the July 2022 level. At the same time the 30-DMA ICS for urban India was also 1.7 per cent below its July 2022 level.

While both, rural and urban consumer sentiments are down in August so far, there is a small difference in the composition of their fall. Both show a worsening of their expectations for the future. The Index of Consumer Expectation (ICE) of rural India as of August 21 was 2.1 per cent lower than it was in July 2022. The ICE for urban India was down by 2.8 per cent by the same comparison. 

This could be the first time in 2022 that the urban ICE shrinks during a month. Between January and July 2022, the urban ICE has grown at 4 per cent per month, on an average. The lowest increase was of 1.7 per cent in June. The likely fall of around 2.8 per cent is therefore quite a reversal in expectations. Urban expectations started falling from around July 25. All three components – expected income of the household after a year, performance of the financial and business conditions in the next 12 months and performance of the financial and business conditions in the next five years – have reversed their respective rising trend seen till then.

Between July 25 and August 22, urban expectations on the long-term have worsened the most. The proportion of households that believe that the financial and business conditions of the country would improve over the next five years fell from 11.7 per cent to 8.8 per cent. At the same time, households who believe that conditions over this period would worsen, increased from 27.8 per cent to 30.1 per cent. There is greater optimism on a one-year time horizon. But, even here there is a fall in expectations. Those who believe that conditions would improve fell from 15.2 per cent to 12.4 per cent and those who believe that conditions would worsen rose from 32.2 per cent to 33.5 per cent.

This negativity in urban households is also seen in expectations of their own incomes over a year. Those who believe that their incomes would increase fell from 14.3 per cent to 12.7 per cent between July 25 and August 22, and those who expect it to worsen increased from 29 per cent to 29.9 per cent.

While rural India sees a lower fall in ICE, it sees a much larger fall in its Index of Current Economic Conditions (ICC). Rural ICC as of August 21 was a substantial 5.4 per cent lower than its level in July 2022. Possibly, farmers are seeing an immediate hit of the poor prospects of a kharif crop this year.

Agriculture has been the saviour during the pandemic period. It has performed well and it has absorbed much of the excess labour released from non-farm sectors. 2022 could turn out to be somewhat different.