Households hesitant to spend

by Mahesh Vyas

Consumer sentiments in India deteriorated in August 2022 after having improved substantially in the previous month. The Index of Consumer Sentiments (ICS) shrunk by 0.5 per cent in August after having risen by an impressive 6.7 per cent in July. The ICS had been rising in every month of 2022 till July. The August fall therefore broke a seven-month record of regular gains. Household perceptions do not seem poised for a quick recovery in consumer sentiments. The first week of September saw the ICS fall by a substantial 3.1 per cent.

The weakening of consumer sentiments in August reflects, to a large extent, a sharp fall in sentiments in the last week of July and the first week of August. During these two weeks, the ICS cumulatively lost 11.3 per cent. This was an extraordinary fall the effect of which was spread over the ICS of two months. The ICS was seen improving during the last three weeks of August, but the improvement was slow. The index did not recover entirely from the fall experienced earlier. There seems to be some hesitancy.

The fall in the ICS in August reflects the problematic journey of consumer sentiments in India in recent times. There was a certain weakness in consumer sentiments. This is notwithstanding the regular improvement in sentiments for seven months from January through July 2022 and the excellent 6.7 per cent jump in the ICS in July. The steady improvement in sentiments in the first seven months of 2022 was also characterised by a progressive fall in the rate of growth from March through June 2022. The sharp improvement in July, it now appears, was an outlier to a weakening trend in consumer sentiments.

We have believed thus far, that the weakness in consumer sentiments was largely the result of the erratic progress of the south-west monsoon and the consequent delay in kharif sowing activities. But, the complete data for August reveals a substantial weakness in urban sentiments. The urban ICS declined by 1.5 per cent in August while the rural ICS remained unchanged. In the first week of September, the urban ICS fell by 4.7 per cent while the rural ICS fell by 1.5 per cent. The two broad components of the ICS the Index of Current Economic Conditions (ICC) and the Index of Consumer Expectations (ICE) reveal the sources of the weakness in consumer sentiments. Perceptions seem to differ in the two regions. But the underlying common theme seems to be scepticism regarding the future.

The ICC fell 1.2 per cent in August. This reflects two observations on the current well-being of households. First, the proportion of households that stated that their incomes had improved over a year-ago fell to 14 per cent from 16.3 per cent in July. This proportion had shot up in July and in August it has reverted close to its level before that. Second, the proportion of households that considered these to be better times to spend on consumer durables fell substantially from 14.2 per cent in July to 10.9 per cent. This measure of households’ propensity to spend on consumer durables is the lowest since April 2022. This reticence of the households to spend could restrain the recovery of the Indian economy.

The fall in the ICC is concentrated in rural India and within rural India the damage is to the propensity of households to buy non-essentials. Rural ICC fell by 2.4 per cent in August. The proportion of households that reported an increase in income over a year dropped from 15.8 per cent in July to 12.7 per cent in August. But, the drop in the propensity to buy non-essentials was sharp, from 13.8 per cent to 8.7 per cent, which is the lowest since January 2022.

Urban ICC has moved differently. It scaled up a bit, by 0.6 per cent. While urban India also saw a fall in households reporting an increase in income over a year, their propensity to spend on non-essentials did not fall, although its rate of increase had dampened. The proportion of households reporting an increase in income fell from 17.2 per cent to 16.5 per cent, but households considering this to be a better time to buy consumer durables increased marginally from 15 per cent in July to 15.5 per cent in August. The proportion of urban households expressing it to be a better time to buy consumer durables has been increasing every month for over a year, since June 2021 when it had reached its nadir. But, the rate of increase is slow and this rate has also been slowing.

Urban India is not very sanguine about its future. The ICE for urban India fell by a substantial 2.8 per cent in August. This reflects deterioration in all three relevant perceptions about the future. Less households believe that their incomes would be better over the next year, less believe that the financial and business conditions would improve over the next year and less believe that India’s economic conditions would keep improving over the next five years. Further, on all three counts more urban households believe that conditions would worsen. This dim view of the future could have influenced dampening of urban enthusiasm to buy consumer durables.

Rural India doesn’t do too well on ICE either. Its outlook over the next 12 month is not very encouraging although it remains more hopeful that things will not get worse.

The fall in the ICS in August is small at just 0.5 per cent. But, rural India’s steep fall in willingness to spend on consumer durables and urban India’s scepticism regarding their future well-being is worrisome. The 4.7 per cent fall in the ICS in the first week of September amplifies this worry.