Budget, elections and consumer sentiments

It was an extraordinary week that ended last Sunday. The government presented its fourth budget -- its first after demonetisation. There was an expectation that the government would do something extraordinary either because of demonetisation or because of the four state elections that were due soon after the budget presentation. The week also saw two of the four states -- Punjab and Goa vote in keenly contested triangular assembly elections.

The budget was arguably typically ordinary like most Modi government budgets have been so far. From the perspective of households, the budget did not contain changes that made a big difference to them. This is reflected in the consumer sentiment index which fell by 2.9 per cent over its level in the previous week. Consumer expectations declined by 1.5 per cent.

Households usually check if the budget increases prices by raising indirect taxes on goods and services or if it reduces direct taxes on income. They have little or no interest in the allocation of funds to various ministries and schemes. The budget did not increase indirect taxes and so that was a positive because there is never an expectation of a reduction in indirect taxes. But, there is always a hope of the budget reducing direct taxes and the budget did oblige on this front.

Large swathes of middle classes feel good about this reduction although a very small sliver actually files income tax returns or pays these taxes. This is almost paradoxical. But, it raises the incentive for any government to reduce taxes because the political gains are far higher than the revenues forgone.

It is possibly safe to assume that direct taxes are collected mostly from urban regions. Further, it is also safe to assume that the benefit of a reduced tax rate on companies with a turnover of less than Rs.50 crore also accrues mostly to urban households. Thus, the benefits of direct tax proposals are predominantly for the urban households. As a result, although the overall consumer sentiments was down by 2.9 per cent, urban consumer sentiments actually rose by 2.2 per cent.

Rural households, mostly, do not pay direct taxes and they did not find any tangible benefits. They probably look mostly for loan waiver proposals. But, the budget had nothing of the kind on offer. This probably explains why rural households greeted the budget with a 5.5 per cent fall in sentiments.

Unlike the union budget, the state elections were no ordinary events. The electorate in Punjab and Goa voted aggressively. A turnout of 75 per cent in Punjab and 83 per cent in Goa reflects the electorate's mood to deliver a strong political statement. We will know if this is a strong statement for continuity or for change on March 11. But usually, a large turnout implies a strong dissatisfaction with the status quo. It is usually an anti-incumbency vote.

This time the large turnout also reflects an aggressive and triangular contest. Each of the three parties, the incumbent NDA, Congress and AAP are battling hard to win the states.

State-wise data consumer sentiments data available till January 2016 throw some light on sentiments in the election bound states just before elections.

Consumer sentiments weren't very good in Punjab or Goa in the month of January. In Punjab, at 88.9 the index was 13.6 per cent lower than its level in December. Consumer sentiments in the state have fallen persistently since September 2016. By January 2017, sentiments dropped below 100 for the first time. Sentiments dropped sharply in urban Punjab in November and December 2016. Possibly, this is the result of the impact of demonetisation on medium and small scale industries that dominate the industrial landscape of the state. In rural Punjab, the fall in sentiments was essentially in January and not before that. 

In Goa, sentiments have been persistently negative. In January, they just turned much worse. Sentiments dropped by a whopping 52.5 per cent.

Sentiments worsened in Uttar Pradesh and Uttarakhand as well, in January. They fell by 9.1 per cent in Uttar Pradesh and by 7.2 per cent in Uttarakhand. These declines are closer to the all-India fall in consumer sentiments during the month, which was 7.1 per cent. 

Politics may influence consumer sentiments as they make promises and instill fears of the opposing parties. But, they also need to take into cognisance the less than sanguine sentiments of the electorate prevailing currently.

SENTIMENT DECLINES
 

Sentiment gauge



UNEMPLOYMENT RISES



Unemployment gauge



Every Tuesday, Business Standard brings you CMIE’s Consumer Sentiments Index and Unemployment Rate, the only weekly estimates of such data. The sample size is bigger than that surveyed by the National Sample Survey Organisation. To read earlier reports on the weekly numbers, click on the dates:
November 21, November 28, December 4, December 11, December 18, December 25, January 1, January 8, January 15 , January 22, January 29 Methodology

Consumer sentiment indices and unemployment rate are generated from CMIE's Consumer Pyramids survey machinery. The weekly estimates are based on a sample size of about 6,500 households and about 17,000 individuals who are more than 14 years of age. The sample changes every week but repeats after 16 weeks with a scheduled replenishment and enhancement every year. The overall sample size run over a wave of 16 weeks is 158,624 households. The sample design is of multi-stratrification to select primary sampling units and simple random selection of the ultimate sampling units, which are the households.

The Consumer Sentiment index is based on responses to five questions on the lines of the Surveys of Consumers conducted by University of Michigan in the US. The five questions seek a household's views on its well-being compared to a year earlier, its expectation of its well-being a year later, its view regarding the economic conditions in the coming one year, its view regarding the general trend of the economy over the next five years, and finally its view whether this is a good time to buy consumer durables.

The unemployment rate is computed on a current daily basis. A person is considered unemployed if she states that she is unemployed, is willing to work and is actively looking for a job. Labour force is the sum of all unemployed and employed persons above the age of 14 years. The unemployment rate is the ratio of the unemployed to the total labour force.

All estimations are made using Thomas Lumley's R package, survey. For full details on methodology, please visit CMIE India Unemployment data and CMIE India Consumer Sentiment.

The creation of these indices and their public dissemination is supported by BSE. University of Michigan is a partner in the creation of the consumer sentiment indices.