The Indian economy has surprised analysts and investors alike with its smart recovery from the severe lockdown during the first quarter of 2020-21. Growth that bounced back from -23.9 per cent in the first quarter to -7.5 per cent now seems poised to return back to the positive zone in the third quarter.
The smartest recovery is in corporate profits, in the second and third quarters. Many supply-side fast frequency indicators such as crop production, power generation, freight movement and GST collections provide evidence of a continuation of the recovery story into the third quarter of fiscal 2020-21. On the demand side, non-petroleum-non-valuables imports grew well in December and January and sales of two-wheelers and tractors have been robust in recent months. Equity markets have been celebrating this recovery in steady strides.
India got this recovery for free. It did not achieve this at the cost of heavy fiscal spending. It did not pay the price of debt or interest to achieve this recovery. It did not require any great investments by the government or the private sector either. This is exceptional. It is now important to consolidate these gains and to ensure that the momentum is maintained.
Sustenance of the recovery is best achieved when households feel positive of their well-being. While India’s growth acceleration in the past was coupled with international trade, its recovery depends largely upon its domestic economy. India’s vast consumer markets need to feel like spending beyond their essential requirements for the economy to pick pace beyond the recovery. Two-wheeler sales have been growing at over 10 per cent compared to a year ago and tractor sales have been growing at over 40 per cent y-o-y. These are robust discretionary spending by consumers. But these reflect spending decisions by a very small segment of the Indian market. What we need is a measure of the sentiments of the household sector as a whole.
CMIE’s Consumer Sentiments Index (CSI) is a very useful yardstick to measure the mood of households in India. The CSI unveiled the positive mood of the nation when the Prime Minister announced demonetisation in November 2016. The optimism was sustained in December 2016. But, in January 2017after the initial period of euphoria, the index fell sharply as demonetisation seemed to fail at its expected effects.
The CSI fell precipitously, by 53 per cent, in April 2020 when the country came under the lockdown. The month-to-month variation in the CSI was rarely more than low-single digits before this. The 53 per cent fall in April 2020 is therefore almost a collapse of consumer sentiments. The index fell from 97 in March 2020 to 46 in April 2020. The index has a base of 100 in September-December 2015. Sentiments have recovered very marginally since the April 2020 fall. In January 2020 the index was at 54.
While the GDP has recovered, household sentiments have not. The RBI’s Consumer Confidence Survey shows a similar trend although it does not have an estimate for the April 2020 fall. The index was 85.6 in March 2020 and 55.5 in January 2021.
An interesting feature of Indian households is that independent of their current economic conditions, they are systematically optimistic of their future. RBI’s Future Expectations Index for households was more optimistic of the future in January 2021 than it was in March 2020. The index was 115.2 in March and 117.1 in January 2021. One limitation of RBI’s Consumer Confidence Survey is that it is limited to India’s urban regions with a sample of less than 5,400 households.
CMIE’s Consumer Sentiments Index is based on a much larger sample and is spread over rural and urban regions. The CSI also shows that urban sentiments are somewhat worse than rural sentiments. The rural Consumer Sentiments Index was 55.8 in January while the urban index was lower at 50.3.
But, both rural and urban Indian households indicate greater confidence in their respective future than their current economic conditions.
The Index of Consumer Expectations is usually about 1.5 per cent higher than the Index of Current Economic Conditions. This was true till the lockdown. In April 2020, the Index of Current Economic Conditions fell by 55.3 per cent but, the Index of Consumer Expectations fell by a lesser 51.2 per cent. In May 2020, the former fell by 10.3 per cent but, the expectations index fell by a lesser 8.1 per cent.
In April and May 2020, the Index of Consumer Expectations was 6.9 per cent and 9.6 per cent higher than the Index of Current Economic Conditions. In July 2020 it was 15.5 per cent higher and since then it has been systematically significantly higher. The average difference has been 11 per cent.
This continued confidence in the future is vitally important to sustain the recovery seen thus far. If households remain hopeful of their future they are likely to spend and help in the recovery process. But, this cannot be taken for granted. It is important to build upon the confidence of households.
Like the government has now started motivating private enterprises it is important that it recognises the importance of the households. Like animal spirits of private enterprises is important, sentiments of households are also very important to sustain the free recovery ride we had so far.