Consumer sentiments uncertain

by Mahesh Vyas

The index of consumer sentiments (ICS) grew by 0.8 per cent in May 2022. That’s a rather small increase. Monthly growth in the ICS in the past few months has been in low single-digits, but a fall below one per cent is a new low. The fall in the growth rate in May is not surprising because it seems to be an extension of a trend of falling growth rates of the ICS since February 2022. May was the fourth consecutive month of a fall in the growth rate.

The two major features of the May ICS are first, sentiments have taken a big hit in rural India and second, expectations on the future are muted.

There is a big difference between the change in ICS in urban India compared to the change in ICS in rural India in May. The urban ICS jumped up by a smart 7.8 per cent. At the same time the rural ICS moved in the opposite direction and fell by 2.3 per cent. This is the biggest jump in the ICS that urban India has witnessed in several months in ten months to be precise. And, this is the biggest fall that rural India has suffered in the ICS in 5 months. In fact, May 2022 was a rare month where the ICS has moved so starkly divergently across urban and rural regions.

The second takeaway from the ICS of May is a bit complex. Future expectations as expressed by the Index of Consumer Expectations (ICE) increased by 0.9 per cent in May. This is a tad higher than the Index of Current Economic Conditions (ICC) that grew by 0.7 per cent. The complexity is in the components of the index of consumer expectations that reveal a greater weakness in expectations than may be evident from the relative growth rates of ICE and ICC.

In a nutshell, the complexity is that the proportion of households that are optimistic about the future is declining, but the proportion of households that are pessimistic is also declining. While the latter is a good sign, the former is not. This simultaneous divergent movement convolutes the reading of consumer expectations. There are three indicators that inform us about consumer expectations. We discuss each of these below.

First, what do households feel about their household incomes in the year ahead? In April 2022, 12.7 per cent of the households believed that their incomes would improve. In May, this proportion fell quite sharply to 10.9 per cent. But, the proportion of households who believed that their incomes would shrink was larger at 33.5 per cent in April. In May, this proportion shrunk a bit to 32.9 per cent. This yields conflicting signals. Nevertheless, on a net basis we see a small deterioration on expectations of incomes a year into the future. In April, on a net basis 20.8 per cent households expected a deterioration of incomes and in May, 22 per cent expected a deterioration.

The second indicator is regarding perceptions of business and economic prospects in the coming 12 months. Here again, the proportion of optimist households shrunk in May. In April, 11.2 per cent of the households were optimistic but in May only 10.8 per cent were optimistic. But, the number of pessimistic households on this front shrunk a lot more from 39.5 per cent to 37.3 per cent. Therefore, on a net basis, economic or business expectations over a one year period looked better. The net proportion of pessimistic households declined from 28.3 per cent to 26.5 per cent.

Similarly, on the third indicator regarding the business and economic prospects over a 5 year horizon, the net proportion of pessimistic households declined from 22.2 per cent in April to 20.4 per cent in May.

As is evident the net message of the second and third indicators is not in sync with that of the first indicator.

While the net effect of these three indicators is a small increase of 0.9 per cent in the Index of Consumer Expectations, it is perhaps, worth noting that this is not a strong all-round improvement in expectations. The increase of the ICE in May 2022 reveals a decline in pessimism regarding the future. But, it also contains a decline in optimism.

Consumer expectations in rural India were down by 1.7 per cent in May while expectations in urban India improved by 6.4 per cent.

Urban optimism regarding the future as seen in CMIE’s ICS is at odds with the small pessimism seen in RBI’s Future Expectations Index. The RBI’s Future Expectations Index, which is a part of its Consumer Confidence Index, is based on about six thousand responses from 19 major cities. Its coverage expanded from 13 towns till January 2022 to 19 in March. This, Future Expectations Index, shows a 1.9 per cent fall between March and May 2022. In the same period, CMIE’s Index of Consumer Expectations shows a 10 per cent increase. CMIE’s index is based on responses from over 300 towns.

The urban ICS continued to improve into June. The urban ICS for the week ended June 12 was 8.8 per cent higher than it was in the week ended May 29. By the same comparison, the rural ICS increased by 7.6 per cent. The weekly rural ICS has been volatile. This volatility lends uncertainty to the future course of consumer sentiments in India.