November 2020 saw a fall in employment and also a fall in household incomes. This double whammy has hurt consumer sentiments. Households are less enthusiastic to buy consumer durables according to CMIE’s Consumer Pyramids Household Survey. This sentiment was translated into reality with all major two-wheeler manufacturers reporting a sharp fall in their sales in November compared to October.
Employment fell by 0.9 per cent or 3.5 million during November 2020 and, only 4.3 per cent of the households reported an increase in their nominal incomes compared to a year ago. The latter data implies that a very large proportion of households saw a shrinking of their incomes in real terms, i.e. after accounting for inflation. Inflation has been rising over the last year and so with an overwhelmingly large proportion of the households experiencing a shrinking of their real incomes.
Household wellbeing worsened in November compared to October. Households have suffered worsening health conditions as is reflected in resurgence in Covid-19 cases, a reversal of the rapid improvement in employment conditions seen till August 2020 and now, a fall in household incomes as well. In all three measures, trends that were improving gradually have reversed into deterioration.
October 2020 wasn’t a great month as it ended with job losses and also with nearly 95 per cent of households reporting shrinking of real income. But, November has just made it much worse. The month broke a very gradual improvement seen in the proportion of households that said hitherto, that their incomes were better than a year ago. This proportion had dropped to 3.6 per cent in July 2020 and was rising very slowly since then. It reached 5.4 per cent in October. And then it fell to 4.27 per cent in November which is the same as it was in August 2020.
An increase in perceptions of a deterioration of household incomes is accompanied with an increase in a lack of confidence in the future. The proportion of households that believed that their incomes would be better a year later fell from 6.6 per cent in October to 5.2 per cent in November 2020.
Before the lockdown, about 30 per cent of the households expressed confidence that their incomes would improve in a year. This proportion was also seen rising since 2016 when it averaged closer to 25 per cent. As soon as the lockdown was announced, this optimism plummeted along with incomes to low single digits. The economy opened up gradually in June and July. But, this did not show in any improvement in households’ perceptions about their incomes or their confidence in their future incomes. An uptick was seen as late as August. This small gain was sustained till October before it dropped back close to its pre-August levels again in November.
This behaviour of household perceptions regarding their incomes and their future prospects indicates a very different, and rather gloomy picture of the Indian economy compared to the starkly different picture that can be drawn from all other fast frequency indicators that show a sharp, nearly v-shaped, recovery during June and July. These fast-frequency indicators are mostly from the supply side such as production of goods and services. Apparently, there is a disconnect between the quick recovery story seen in supply-side indicators and the demand-side indicators of household incomes.
Deterioration in perceptions regarding current incomes has probably played a role in influencing households’ intentions to spend on durables. Intentions of households to spend on durables are a powerful indicator of consumer sentiments. The Index of Consumer Sentiments fell from 52.5 in October to 51.8 in November (base 100 in September-December 2015).
At its worst, only 1.25 per cent of households were willing to buy consumer durables. This was in May 2020. Since then, this proportion rose steadily to reach 7.4 per cent in October. This is a very modest recovery compared to the pre-lockdown times when 25-30 per cent of the households were willing to buy durables. But, in November, even this modest recovery regressed to 6.5 per cent.
This relapse could reflect a multiple factors at play simultaneously. First, the fall in incomes (technically fall in proportion of households that report an increase in income) could have led to intentions to buy sliding back. Second, deteriorating perceptions about the future, as is seen in the data, could have nudged households to be conservative in current times. Third, the ramp-up in the intentions to buy till October could be a combination of release of pent-up demand and festive demand. Both are necessarily temporary. And so, when these are satiated, intentions to buy durables roll back to relatively modest levels.
Data released by the Society of Indian Automobile Manufacturers show that all major producers of two-wheelers saw a fall in sales in November 2020 compared to the sales in October. Sales of top six producers in November 2020 were lower than in September and October 2020. Much of this decline is seasonal and it may be early to draw a strong inference from this yet. Car sales did not do as badly. But, car purchases are the indulgence of 5-10 per cent of households in India compared to two-wheelers that are purchased by over 50 per cent of the households in India. .
The Index of Consumer Sentiments perked up a bit in the week ended December 6. At 50.9 it was an improvement over the 48.9 level in the preceding week but, it was still much lower than 51.8 in the month of November 2020.