Households cautiously optimistic

An optimism of sorts is in the air. Perhaps, it is a reflection of an economic turnaround. Recent data suggests that the economy is reviving. Tax collections, foreign trade, electricity generation have all been convincingly and consistently buoyant so far in this fiscal year. Employment conditions and consu­mer sentiments also improved dramatically in September. Further, in the week ended Oc­tober 10, consumer sentiments vaulted by an extraordinary 9.8 per cent. To benchm­ark this, note that the mean weekly change in consumer sentiments has been 0.6 per and the median 0.5 per cent over the past one year. A near-ten per cent increase is, therefore, worth taking notice of, particularly as it comes on top of three consecutive months of steadily improving sentiments. The growth seen in macroeconomic indica­tors seems to be in harmony with the direction in which the mood of households is veering. Something seems to be working for Indian consumers. Yet, the Indian consumer expresses some caution this festive season.

The index of consumer sentiments scaled up by a handsome 7.9 per cent in September. This came on top of a 1.7 per cent increase in August and a massive 11.1 per cent jump in July. The cumulative gain in the past three months was, therefore, an impressive 21.9 per cent.

The index has improved largely because the current economic conditions of households have improved and not so much because of expectations of improvement in the future. The overall index comprises both current conditions and expectations. The greater contribution of current conditions towards the improvement in the consumer sentiments index is, thus, more real than anticipatory. In September, the index of current economic conditions rose by 11.9 per cent over its level in August. At the same time, the index of consumer expectations increased by a relatively modest 5.7 per cent. In the quarter ended September, the former increased by 29.8 per cent, while the latter increased by a lower 17.7 per cent.
 

The principal reason the index of consumer sentiments improved in September was that more households reported that their incomes were higher than a year ago. Eight per cent of the respondents said so as against just 4.6 per cent in August. This is the first time since the beginning of the current economic downturn since April 2020 that more than seven per cent of the responding households said that their incomes were higher than a year ago. Equally importantly, it is the first time since April 2020 that less than 40 per cent of the respondents said that their household income was worse than what it was a year ago. There is an increase in the proportion of households reporting an improvement in incomes and a reduction in the proportion reporting a worsening of incomes.

This improvement in household incom­es had a rather marginal impact on household intentions to buy consumer durables. This is disappointing given that India is heading into a festive season. Only 4.3 per cent of the households reported that it was a better time to buy consumer durables in September 2021 compared to a year ago. More than 51 per cent considered these to be worse times than a year ago to buy consumer durables.
 

A year ago, in September 2020, only 5 per cent of the respondents had said that their incomes were higher than they were a year ago. In September 2021, this proportion, as noted above, has increased to 8 per cent. However, while 5.7 per cent of the respondents thought it was a better time to buy durables in September 2020, a lower 4.3 per cent believe this is a good time to buy consumer durables. The income effect has not translated into a discretionary buying effect this year.

This, perhaps, is an indication that an increase in income may be a necessary but not a sufficient condition for households to start spending. Compared to a year ago, the threshold of income increase required to motivate a larger proportion of households to increase their spending on discretionary goods has risen now. By September, the spread of the phenomenon of increase in household income had not translated into an increase in intentions to buy durables. By September, enthusiasm for the future was also muted.

Both improved somewhat during the week ended October 10. The index of consumer expectations jumped by 10.4 per cent. This again is extraordinary. The recent historic mean (since August 2020) is 0.5 and the median is 1. Most of this extraordinary gain emanates from a jump in the exp­ectation that the economy as a whole would do better in the coming one year and also in the coming five years. However, expectations of this translating into better household incomes are still muted. There is only a small increase in the intention to buy consumer durables.

We see progression. First, there was an im­provement in households reporting an in­crease in incomes. Then, there was an in­crease in households expecting the economy to improve in the short-to-medium term. But, the progression may be incomplete. There is no increase, yet, in expectations of an increase in household incomes or enthusiasm for purchasing consumer durables.

There is optimism in the air but there is some hesitancy, too.

The writer is CEO and MD, CMIE P Ltd