An analysis of consumer confidence in Indian households during the pandemic
Date : 23/04/2024
Remember, Red, hope is a good thing, maybe the best of things, and no good thing ever dies…”. This dialogue by the character Andy Dufresne (played by Tim Robbins) in a cult classic Hollywood movie – The Shawshank Redemption – provides a glimmer of hope in times of extreme adversities. Hope is indeed a necessary commodity during testing times like the Covid-19 and is a measure of confidence. But, has this confidence been shaken during the second virulent wave of the Covid-19 pandemic? Some numbers narrate an interesting story in this regard.
The Reserve Bank of India (RBI) captures the confidence of households using a bi-monthly survey named the Consumer Confidence Survey (CCS) through five parameters: economic condition, employment scenario, general price levels, income, and spending of the households. The last round of CCS conducted in July 2021 across 5,384 households in 13 major cities highlighted a significant drop in consumer confidence. Current confidence measured using the current situation index (CSI) and future (expected) confidence estimated using the futures expectations index (FEI) attained historical lows at 48.6 and 104.0, showing a marginal improvement over the May 2021 figures, but much lower compared to the March 2021 figures of 53.1 and 108.8, respectively. A value below 100 displays aggregate pessimism.
A telephonic survey was conducted at a time when many states imposed localized lockdowns. A look at the parameters capturing consumer confidence gives a better picture. Perceptions capture the views on a parameter compared to a year ago, whether it has increased, decreased, or remained the same. Expectations/outlook captures the view on how the households foresee the parameters to evolve over the next year. A value below 0 indicates an aggregate pessimism about that factor. The confidence is primarily shaken for the perceptions and outlook on the economic conditions and employment scenarios. They have deteriorated compared to the March 2021 surveys. Though a larger number of households perceive a decline in income in July compared to May, a majority of them have a positive outlook over the next year. This can be attributed to their optimistic outlook on employment. 87.9 percent of households perceive an increase in inflation, and 79.7 percent expect it to increase over the next year. Similar figures for price perceptions and outlook are 93.1 and 71.3. Though the overall spending on essentials has increased compared to May, it is still lower than the March levels. The numbers are similar for their outlook on these parameters. It is the spending on non-essentials that has taken a serious hit since the first lockdown and has not recovered since. The numbers have worsened for the July survey compared to the May one. Almost 65 percent of households perceive a decline in non-essential spending in July 2021, while 41 percent of them still carry this pessimistic outlook.
Figure 1 – Current Situations Index and Future Expectations Index
Source: Consumer Confidence Surveys, RBI
Figure 2 – Perceptions and Expectations on Economic Conditions, Employment, Price Levels and Inflation
Source: Consumer Confidence Surveys, RBI
Figure 3 – Perceptions and Expectations on Income, Overall Spending, Spending on essentials and non-essentials
Source: Consumer Confidence Surveys, RBI
Table 1 – Summary of Net Responses in CCS (July 2021)
Source: Consumer Confidence Survey (July 2021), RBI
Is Covid the only culprit for low confidence?
Covid-19 has been the major contributor to the pessimistic attitude towards the economy. The second wave has been more dangerous, leading to more daily cases and daily deaths. Lack of ICU beds, oxygen cylinders, and incompetent handling of the situation have been a few reasons cited for this second wave. Contact-intensive jobs and informal sectors which employ a larger share of the population have taken a severe hit. However, the consumer confidence graphs paint a slightly different picture.
Figure 4 - Covid-19 daily cases and daily deaths
Source: Our World in Data
Figure 1 shows that the FEI has been below its pre-covid average of 120 since July 2019, while the CSI had never ventured back into the aggregate optimistic territory (above 100) since May 2017, except for March 2019 when it reached 104.6. This indicates that a larger number of respondents have perceived a decline in their current situation compared to a year earlier, since 2017. The aggregate CSI and FEI largely mimic the trajectory of perceptions and outlook on the economy. Though almost 50 percent more households expected a rise in their incomes since 2017, almost 80 percent more expected a rise in their spending and 70 percent more expected prices/inflation to increase over the same period. Thus, the households have perceived a persistent decline in the real income since 2017. Inflation perceptions and expectations given by the IESH have hardened gradually over the past few years. Median inflation perceptions reached a double-digit mark for the first time since September 2014.
In order to understand the reason behind this decline in consumer confidence, it is important to investigate the evolution of various macroeconomic factors over the last four years. Employment remains one of the primary drivers of confidence, as it gives a sense of entitlement and satisfaction. The unemployment rate in urban India has declined from a double-digit mark in 2016 to less than 5% till mid-2017, but it has followed an upward trajectory since then. An appalling finding in this context is a significant downward trajectory of the labour force participation rate (LFPR) from the highs of 45% in January 2016 to around 37% in July 2021. Though there was a temporary spike (dip) in the unemployment rate (LFPR) during the two months of the nation-wide lockdown (April-May 2020), LFPR has still not touched its pre-covid highs. A study by the World Bank shows a significant decline in the female LFPR in India from 30.27% in 1990 to 20.8% in 2019. The number since the onslaught of Covid-19 would be more dismal.
Figure 5 – Unemployment rate and Labour Force Participation Rate (Urban India)
Source: CMIE
Growth rates of Gross Value Added (GVA) also throw some light on the decline in consumer confidence. The last time the year-on-year growth rate touched the 8% mark was in September 2016. Since then, it has followed a gradual downward trajectory with annual growth rates of 6.2%, 5.9%, and 4.1% in FY18, FY19, and FY20, respectively, before the pandemic-led lockdown caused a 22.4% decline in Q1FY21. This decline was observed in the mining, manufacturing, and construction sectors, the largest employers in urban India. The construction sector was the most affected sector during Q1FY21, with almost a 50% year-on-year decline. The private final consumption expenditure (PFCE), which constitutes between 55 to 60 percent of the GDP, declined by 30% in Q1FY21 and grew by a meagre 2.63% in Q4FY21, despite a low base of 1.96%.
Figure 6 – Growth rates in GVA (Aggregate, Mining, Construction, and Manufacturing)
Source: CSO
To this end, headline CPI inflation in urban areas was mainly driven by the volatile headline components of food and fuel inflation. The major component of core inflation, the housing index, remained stable over the last five years. Fuel inflation has been steadily increasing due to a rise in the crude oil prices, which touched $ 74.6 by 12th July 2021 from around 40$ a barrel a year earlier. It was reduced to $ 70 per Barrel in the first week of August. Despite lower crude oil prices since 2016, petrol and diesel prices have remained high in India. A study by Srivastava et al. (2021) shows an incomplete pass-through of the benefits of a decline in crude oil prices to the final consumers.
Figure 7 – CPI-Urban Inflation (Overall, Food, Fuel, and Housing)
Source: RBI DBIE
Is Andy Dufresne right?
More than half of Q1FY22 was marred with a severe crisis in terms of a more contagious and more lethal virus, with local lockdowns imposed in many parts of the nation. To a certain extent, this period also exposed the lack of competency in handling a healthcare crisis of a global magnitude. Covid-19 pandemic dealt a severe blow to consumer confidence, which was already treading a slightly pessimistic path. Can this confidence reverse its trajectory on an upward path? Certain indicators provide formidable support on both sides of the argument.
CPI inflation, which crossed its upper threshold of 6% in May and June 2021, has reduced to 5.59% in July.[1] Despite the easing of lockdown restrictions, they expect supply-side bottlenecks to persist in addition to higher prices of petroleum products. High input prices, higher taxes, and elevated fuel prices are some factors that they consider would play an important role in the coming months. The inflation figures for July 2021 released on the 12th of August, 2021 stood at 5.59%, 0.7% points lower than the May and June 2021 estimates but still hovering around the higher end of the spectrum. A detailed look at the numbers gives a worrisome picture, especially in context of urban inflation. Urban CPI inflation increased sharply from 5.97% in May 2021 to 6.37% in June. It was higher at 5.86% in July. As predicted by the economists, fuel prices contributed to a significant increase in the urban CPI (13.93% in June and 14.10% in July). Among the food components, egg, oil & fats, pulses & products, and non-alcoholic beverages were the major drivers in both rural and urban areas. In addition, transportation, healthcare and recreation and amusement were significant contributors to an inflation uptick in July 2021.
To this end, most domestic and international agencies cut their growth forecasts for India by at least 100 basis points compared to their previous estimates. An indicator of the business activity, the Purchasing Managers Index (PMI) for both manufacturing and services sectors, shows a downward trajectory, indicating a loss of confidence on their part over the last few months, especially for the services sector.
However, the picture is not as gloomy as it seems. The weekly unemployment rates collected by CMIE have fallen to 7.47% as of 13th August 2021, but the urban unemployment rates still continue to hover around 9%. The LFPR (especially female LFPR) needs to improve on account of job creation. Public investments can crowd in private investments in the employment generating sectors of manufacturing, construction, and infrastructure. Studies for various OECD nations show significant positive economic effects of an increase in the female LFPR. Households are sitting on considerable savings, which could be utilized over the next few months once the lockdown restrictions ease. Large pent-up demand and spending during festive seasons can be expected to alleviate the current low consumption levels. In the inflation scene, RBI MPC members believe the current spike to be supply-driven and temporary on account of imputed indices in Q1FY21. They expect the conditions to ease over the next few months.
At the current juncture, Andy Dufresne seems partially right. Indian households need to clutch on to their hopes for an improvement in the economic conditions in the coming months. However, how the macroeconomic dynamics evolve over FY22 will be instrumental in shaping consumer confidence.
[1] In its August 6 MPC meet, RBI changed inflation forecasts from 5.1% to 5.7%, keeping the growth forecasts unchanged at 9.5% for FY22.
Image Credits: Pxhere.com
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