Sticky sentiments

by Mahesh Vyas

Consumer sentiments have been extraordinarily sluggish in recovering from the pandemic. Infections have dropped dramatically and vaccinations have accelerated impressively. Mobility has improved and the economy seems to be slowly limping back to a semblance of normalcy. Many fast-frequency indicators of economic activity are at levels higher than they were in the pre-pandemic times. But, consumer sentiments remain much lower than they were during pre-pandemic times because their improvement has progressed at a much slower pace.

The index of consumer sentiments in October 2021 was 13.2 per cent higher than it was in October 2020 but it was still a substantial 44.3 per cent lower than it was in the pre-pandemic month of October 2019. The index was on a rising trend from February 2018 through September 2019. It started weakening thereafter before the pandemic struck. After the pandemic and the ensuing lockdown, sentiments fell sharply. The recovery from that fall has been extraordinarily sluggish.

The index of consumer sentiments peaked in September 2019 and then weakened even before the pandemic hit the economy to fall by 3.9 per cent by February 2020 from its peak. In March 2020, when the impact of the pandemic was still very partial sentiments fell by 7.9 per cent. Then, in the following two months, sentiments crashed by 57 per cent to touch their lowest level in May 2020.

The recovery has been very slow. The index climbed back at the rate of 3.1 per cent per month between May 2020 (its lowest point following the first wave of the Covid-19 pandemic) and March 2021 just before the second wave hit India. The recovery from the second wave was faster at 5.6 per cent per month between June and October 2021. But, these rates are much lower than the rate of the fall which was of over 26 per cent per month between February and May 2020.

What is most striking about this sluggish recovery of consumer sentiments is that it cuts across all major income groups. The expectation was that the relatively well-off households would see a smarter and complete recovery in sentiments by now. But, that is clearly not the case. The rate of recovery among richer households has been more sluggish than in households of modest means. This warrants some calibration of the enthusiasm regarding the sustainability of the recovery process as seen in other economic indicators. Consumer sentiments are expected to play a significant role in determining the strength of the recovery if not the recovery itself. They therefore merit significant attention.

Consumer sentiments in the richer households are better than they are in households with relatively modest incomes. This has been true almost always before and during the pandemic. The fall in sentiments of the richer households was slightly less severe than that of the poorer households. But, the recovery of consumer sentiments of the richer households from their low levels during the pandemic is worse than the recovery in sentiments of households with modest means.

Between February 2020 and May 2020, overall consumer sentiments fell at the rate of 26.6 per cent per month. Households that earned Rs.1 million per annum or more saw sentiments drop at a slower rate of 23 per cent per month. Those with incomes between Rs.0.5 million and Rs.1 million per annum saw their sentiments drop at an even slower rate of 22.1 per cent per month. Sentiments of the rest dropped at the rate of about 26 per cent or more per month. Thus, the relatively poorer households saw a greater drop in consumer sentiments while richer households showed greater resilience to the lockdown.

The recovery was not similarly favourable to richer households. Between May 2020 and March 2021, consumer sentiments of households that earned less than Rs.0.5 million per annum grew by 3 per cent per month. But, those that earned more than Rs.0.5 million per annum recovered at less than half that pace. Similarly, the pace of recovery was systematically slower in richer households after the second Covid-19 wave.

Between June 2021 and October 2021, consumer sentiments in households that earned less than Rs.100,000 per annum improved at the rate of 8.7 per cent per month. This is a fairly quick clip. It is much better than the rate at which sentiments fell. However, this rate deteriorates as incomes rise. Households that earned between Rs.100,000 and Rs.200,000 saw their sentiments improve at a lower, 5.7 per cent per month. The rate of recovery drops further to 4.3 per cent per month for households that earned between Rs.200,000 and Rs.500,000 per annum. Then it drops further to 2.8 per cent per month for households that earn between Rs.500,000 and Rs.1 million. And, the rate of recovery was the slowest, at 2 per cent per month for households that earned more than Rs.1 million per annum. This inverse relationship between household income levels and the rate of recovery in consumer sentiments is both, disappointing and counter-intuitive. But, the data are unambigious.

The scars of the pandemic seem to persist in the form of depressed sentiments. The sustained low levels of consumer sentiments and the particularly slow rate of recovery of consumer sentiments among the relatively richer households should temper the enthusiasm associated with the recovery of the economy.