Consumer sentiment yet to return to pre-pandemic levels: RBI study

Among the seven large economies compared with the US, Britain, Japan, China, Russia, Brazil and South Africa, which also bore the brunt of the pandemic like us, India was the worst hit: RBI

Noting that the successive waves of the pandemic have severely dented consumer confidence that hit an all-time low of 48.5 in May 2021 at the peak of the second wave, an RBI bulletin released on Monday said even now the sentiment is yet to return to the pre-pandemic levels.

Among the seven large economies compared with the US, Britain, Japan, China, Russia, Brazil and South Africa, which also bore the brunt of the pandemic like us, India was the worst hit, especially after the second wave that had seen the maximum number of deaths, the RBI says in the bulletin, titled 'Impact of Covid-19 pandemic on consumer confidence'.

Most countries have seen a major slump in confidence when the pandemic first hit their shores, and then gradually started to rise, though it is yet to return to pre-pandemic levels in most countries, it said.

The central bank added that the rising vaccination levels may help speed up recovery but the repeated bouts of the pandemic are expected to have an impact on consumer confidence for the longer term, especially with the associated uncertainty regarding business and employment situations.

But, consumer expectations about the future have been relatively optimistic, despite being dented in successive rounds, on the back of the ongoing vaccination drive.

"The outbreak of pandemic in early 2020 had a further negative impact on the confidence level, weakening it to 63.7 in May 2020.

"Since then, it has been on a declining trajectory and hit the survey's all-time low of 48.5 in May 2021 with the onset of the second wave. However, with the gradual abatement of the second wave, some rise was seen in current sentiments, though they still remained highly negative," said the report.

Among the survey indicators, household income was impacted the most, causing consumer confidence to hit multiple lows in its wake. The effect of the lower income was also seen on consumers' perception about the general economic situation and employment. Overall spending was shored up by essential spending, which is mostly influenced by prices.

Data reveal that the economy was slowing down since 2018-19, which turned into a contraction with the pandemic in Q1FY21. Since then, it recovered with growth returning to positive territory in the third quarter.

In contrast, consumers were comparatively optimistic about the future as the future expectations index was mostly in the positive territory (above 100).

The expectations index was moving in tandem with the consumer sentiment index till May 2020, when it first entered the negative territory during the first phase of the countrywide lockdowns but started improving from July 2020 onwards with the gradual easing of the pandemic related restrictions.

But, the second wave in April-May 2021 and the severe restrictions imposed to break the chain of transmission, expectations for the future again fell into the pessimistic territory (below 100), for the second time during the pandemic.

On consumer perception about the changes in their own incomes and expenditure, the study found that a general perception of high prices and rising inflation further aggravated the situation for the consumers already worried by employment scenario and the general economy.

Although consumers expect prices to be higher in the short term, those expecting higher prices and inflation is much lower than those perceiving higher prices and inflation now than a year ago.

This gap has widened during the pandemic, pointing towards the price shocks during the lockdowns and concomitant supply chain disruptions impacting perceptions but expectations remained relatively unaffected by such short-term shocks.

Income sentiments remained afloat till March 2020, though there were episodes of net response entering negative territory in some rounds. But, with the outbreak of the pandemic, the income situation of the households took a massive hit, with an overwhelming majority of them reporting decreased incomes as compared to a year ago.

As a result, the net response for the current period household income fell over 50 per cent in March-July 2020, when the economy was shut and GDP massively contracted.

The sharp fall in net response for current household spending from a steady 70-75 per cent level till March 2020 to just over 25 per cent in September 2020 reflected the unusual distress that the households found themselves in during the pandemic.

Expectations for future overall spending were similar, both in terms of absolute levels and directional changes, till March 2020. But, since then, akin to the other survey parameters, a 15-20 per cent gap is seen between the perceptions and expectations, according to the study.