Gloomy Consumers Are The Indian Economy's Bugbear

For decades, India has believed that domestic demand will help it pull through the vagaries of global markets. Be it a recession in the U.S., a crisis in Europe, or a slowdown in China, India banked on 'domestic demand' to ensure a reasonable level of growth.

That confidence had started to break down even in the lead up to the pandemic, and now, as the Indian economy recovers from the Covid-19 crisis, the Indian consumer's confidence remains shaky.

Consumer confidence surveys are telling us that the Indian consumer, once the optimistic sort, has turned more cautious, even pessimistic.

"Of all the indicators in the Indian economy, consumer sentiments have been the slowest to recover," Mahesh Vyas, managing director and chief executive of the Center For Monitoring Indian Economy, told BQ Prime in an interview.

"Whether you look at the RBI's Consumer Confidence Survey or you look at the CMIE's Consumer Sentiment Survey, both of them tell us that the recovery in sentiments has been far more sluggish than the economy as a whole."

The CMIE's Index of Consumer Expectations was at 105.3 in February 2020 before the pandemic hit, according to figures published on the data provider's website. It plummeted thereafter to a low of 41.7 in May 2020. Since then, the climb back has been slow with the index now at 69.2.

"We are growing at 7% or maybe 8% or thereabouts in this year and sentiments are still lower than they were in the pre-pandemic times, when you look at the RBI survey or CMIE survey," said Vyas. "That's because employment is not good enough and wages are not good enough."

According to Vyas, the fine print of the survey shows a noticeable shift towards pessimism in the recent times. Even during the pandemic, when surveyors asked households if they expect their incomes to be better, a year from now or five years from now, the answers suggested that consumers were hopeful about the future. That has flipped and consumers are not as optimistic about their own future, although their current income has improved, he said.

"Why are people not as optimistic or as hopeful as they were six months ago, in the last three months or so. More from let’s say January or so, but more so since April? They have become less optimistic about the future..." said Vyas, adding that the issue needs attention.

The findings of the CMIE survey are not very different from the RBI's surveys. The Current Situation Index and the Future Situation Index, compiled as part of the Consumer Confidence survey, are both below pre-pandemic levels.

The responses to individual categories within the survey are telling.

When asked whether households expect the overall economic situation to deteriorate, stay the same, or improve, the net response is positive but less so than before the pandemic hit. The extent of optimism is also lower than in January 2021, when it had shown a sharp increase.

On employment, more households now expect the situation to be better one year down the line than just before the pandemic hit.

On income, a similar proportion (44%) of those surveyed expect an improvement now and before the pandemic.

On prices and inflation, the extent of pessimism over the likely conditions a year down the line has worsened.

The sentiment on spending, and particularly non-essential spending, is considerably weaker than before the pandemic. A net 6.6% of households now expect that their non-essential spending will reduce over the next one year.

Why consumer sentiment remains subdued is a matter of conjecture. But, Vyas puts it down to the multiple hits the household balance sheet has taken. "We have employment not growing, wages not growing, inflation rising, and now interest rates rising," Vyas said.

As surveys go, those measuring consumer sentiment are among the more important ones. According to an RBI paper, published in the December 2019 bulletin, the net responses on price, general economic situation and spending have valuable information about the future trajectory for consumer price inflation, economic growth and growth in consumption spending.

If this is the case, the relatively gloomy sentiment indicators do not bode well for the economy.

Already, private consumption has been the slowest to recover after the pandemic, pointed out Crisil Research, in its economic outlook released earlier this month. Private final consumption expenditure was just 1.4% above its pre-pandemic (fiscal 2020) level in fiscal 2022. In fact, its growth slowed sharply to 1.8% on-year in the fourth quarter of fiscal 2022, from 7.4% in the third quarter.

"Higher and broader-based inflation this fiscal will create a further drag on the private consumption revival. Higher food and fuel prices would shrink the budget for discretionary spending in the low- and mid-income categories, since food and fuel form a greater part of their consumption," wrote Crisil economists led by chief economist DK Joshi.

This is in sync with the RBI’s consumer confidence survey, which found that households “expected higher essential spending whereas the sentiments on non-essential spending remained downbeat", the report said.

Joshi and his team said the divergence in consumption persists, with weak recovery seen in low-priced items while higher-ticket items have seen a better uptick. "This reflects the K-shaped nature of economic recovery."

The subdued consumption revival, coupled with an uncertain global environment, could limit the extent and pace of overall investment recovery, Crisil added.

"Consumption so far has been like a car with poor suspension rattling over a stretch of really bad roads," said Aurodeep Nandi, India economist at Nomura. "It was already weak going into the pandemic, post which the K-shaped recovery has eclipsed the deeper pandemic scars that would have been inflicted on the bottom of the pyramid."

Nandi pointed out that the services sector has seen a rapid recovery over the past few months, which should offer some support to overall consumption in the economy. "However, it comes amidst elevated levels of inflation in which firms have been aggressively passing on higher input costs to consumers, which has already started biting into consumption."

He added that the tightening of financial conditions as the RBI further hikes rates, will also impact the interest sensitive sectors of the economy. "Ultimately, we may end up experiencing a more italicized ‘K’– with the formal and urban economies faring better than the informal and rural economies."