Consumer sentiments lag household income

The index of consumer sentiments rose by two per cent in February 2021, over its level in January. It had improved by 1.7 per cent in January and by 2.7 per cent in December 2019. There is a steady improvement in consumer sentiments. But, they are still a far cry from the levels seen before the lockdown.

The index (which has a base of 100 in September-December 2015) was at 55.1 in February 2021. A year ago, which was the month just before the lockdown impact began, it was at 105.3. Consumer sentiments therefore, a full year after the lockdown began, are half their level before the lockdown.

Consumer sentiments are important because they reflect the intangible component of households’ economic decisions. These are decisions to buy non-essentials such as homes, cars, two-wheelers or refrigerators. Sentiments also influence households’ decision on making long-term investments. Incomes may rise to recover lost earnings of the lockdown or asset prices may gallop past rationality but if households do not feel good about their own current and future economic well-being they are less likely to spend even if they get wealthier. Consumer sentiments matter.

Preliminary estimates derived from the Consumer Pyramids Household Survey indicate that while household incomes have recovered partially, household sentiments have not recovered commensurately. Sentiments have improved, but the improvement is too small in comparison to the improvement in incomes.

In the first quarter of fiscal 2020-21, average Indian household incomes are estimated to be 33 per cent lower than they were in the first quarter of 2019-20. By the same comparison however, consumer sentiments were down much more – by 59 per cent. Apparently, perceptions of households regarding their own well-being took a much bigger hit than the hit they suffered in terms of loss of income. 

The above comparison is not entirely fair because while all households are equal when computing sentiments, all households are not equal when computing household incomes – richer households have a greater share in the average because their incomes are higher than those of the poorer households. Therefore, part of the difference could be explained by the difference in the implicit weights in the two computations. These weights of course, should not be confused with the sampling weights, which are quite different and are same in both computations.

Such confounding of estimations does not complicate a comparison of the second quarter of fiscal 2020-21 with the first.

In the second quarter, average household incomes were 14 per cent lower than they were during the year-ago quarter. The fall narrowed substantially from the 33 per cent fall registered in the first quarter. While incomes “improved” substantially, sentiments did not improve proportionately. Consumer sentiments were still 57 per cent lower than they were a year ago. The “improvement” was by an almost unnoticeable two percentage points – from a fall of 59 per cent to a fall of 57 per cent.

It is instructive to note that sentiments do not rise proportionately with income increases. And, till sentiments don’t improve, demand will not pick up in line with income improvements. Perhaps, this explains the 2.4 per cent fall in private final consumption expenditure seen in the official national accounts data released for the second quarter of fiscal 2020-21.

We don’t have household income data yet, for the third quarter of fiscal 2020-21.  But, we do have data for consumer sentiments. These show an improvement but almost at the same miserly pace as seen between the first and second quarters. The fall compared to a year ago was down to 51 per cent. Improvement in sentiments continued into January and February 2021 as well. But, even in February 2021, sentiments were 48 per cent lower than they were a year ago in February 2020.

Recall that in February 2021, the index of consumer sentiments improved two percentage points over January. A decomposition of this improvement reveals that Indian consumers improved their perceptions regarding their future much more than they improved an assessment of their current economic conditions.

The index of consumer expectations rose by 2.6 per cent while the index of current economic conditions rose by a slender 0.9 per cent. Indians have revealed faith in a better future through the lockdown. Their faith in the future suffered much lesser than their assessment of their current economic conditions. In February 2021 they once again demonstrated this almost abiding feature of Indian households.

In February households also indicated, in their responses, that the festive season is over. Only 4.9 per cent respondents said that this was a better time to buy consumer durables than a year ago. In January and December, this proportion was higher at 6.9 per cent. In October, it was 7.4 per cent. Now, it is down to the lowest level since July 2020. Half the respondents still believe that the current times are worse than a year ago with respect to buying consumer durables.

Before the lockdown hit India, nearly 30 per cent respondent used to state that it was a good time to buy consumer durables. The low-point was about 20 per cent in early 2018. In February 2021, this proportion was down to 5 per cent. It is important to see this proportion rise to 20-30 per cent to ensure that the economic recovery is sustainable.