Household incomes better, caution prevails

India’s Index of Consumer Sentiments generated by CMIE using its Consumer Pyramids Household Survey rose 2.1 per cent in October 2021. This was the fourth consecutive month of an increase in the index. Sentiments have been improving since July 2021, after the second wave of the Covid-19 pandemic abated. The index has risen 24.5 per cent from its level in June 2021. 

While this is a smart increase in sentiments, the index is still substantially lower than its pre-pandemic level. In February 2020, just before the pandemic hit the Indian economy, the Index of Consumer Sentiments was at 105.3 (base 100 in September-December 2015). In April 2020 it was down to 45.7. In October 2021 even after the impressive ascent of the past four months the index was at 59.4, nearly 44 per cent below its pre-pandemic level.

Consumer sentiments need to improve to levels higher than the pre-pandemic level for the Indian economy to get astride a sustainable economic growth path. This appears to be still quite distant. Given that private final consumption expenditure accounts for a substantial 59 per cent of GDP, a faster improvement in consumer sentiments is important to ensure a sustainable recovery in growth. Incomes are improving. This is a beginning which needs to transcend to higher spending. This transition from income to spending or intentions to spending is turning out to be sluggish.

Change in household income is one of the five components of the Index of Consumer Sentiments.

In October 2021, 9.7 per cent of the households said that their incomes were higher than they were a year ago. A year ago, in October 2020, only 5.4 per cent had said that their incomes were higher than a year ago. But, in October 2019, 31.9 per cent of the households had said that their incomes were higher than a year ago. In the quarters ended June, September and December 2019, on average, 33 per cent of the households said that their incomes were higher than they were a year ago.

The proportion of households reporting an increase in income compared to a year ago has been increasing steadily. The 9.7 per cent proportion pencilled in October 2021 is the highest since the pandemic-induced lockdowns wrecked household wellbeing in April 2020. But, it is still quite distant from the 33 per cent levels seen before the pandemic.

In October 2021, a substantial 40 per cent of the households reported a worsening of their incomes compared to a year ago. This is almost better than in any time since May 2020. But, it is still much worse than in the pre-pandemic times when less than 10 per cent of the households reported a worsening of their income. Further, a majority of the households, 51 per cent, do not see any improvement or deterioration in this income from a year ago. 

Beyond the rise in incomes lies its impact – on expectations of future incomes and also the propensity to spend on non-essentials. The lure of a sentiments index is its ability to tell a little about the turning points in an economy’s growth trajectory. If sentiments improve, households are more likely to spend on non-essentials. And, it is this spending of households on non-essentials that influences changes in the growth trajectory of an economy.

Expectations on future incomes improved in October 2021. The improvement is a shade less impressive than the improvement in income. The proportion of households that believed their incomes would increase over the coming year increased to its highest level since the pandemic, to 8.1 per cent. It was 6.7 per cent in October 2020. But, it was 30 per cent in October 2019. Implicitly, at least 1.6 per cent of the households reported an improvement in income but did not expect the improvement to continue into the future. This reticence regarding the future was the norm before the pandemic. Then, through most of the pandemic, expectations of household income ran ahead of current conditions. In October, the cautious approach towards future expectations seems to be back.

Households have similarly displayed caution when it comes to buying non-durables. In October 2021, only 4.8 per cent of the household stated that this was a better time to buy consumer durables than a year ago. This ratio improved from 4.8 per cent in the first week of October to 5.8 per cent in the third week but then fell back to 5.1 per cent in the last week. 

The festive season seems to have had almost no impact on the willingness to buy consumer non-durables. In the few weeks preceding Diwali in 2020, over 7 per cent of the households stated that it was a better time to buy non-durables than it was a year ago in 2019. Now, in the weeks preceding Diwali only around 5 per cent of the households feel similarly compared to the Covid-hit 2020. More than half the households feel that this is a worse time to buy consumer non-durables compared to a year ago.

We had highlighted this caution of households regarding their propensity to buy consumer durables in the September 2021 data. This caution has persisted in October in spite of a continued improvement on the incomes front and on income-expectations front.