Households wary of discretionary spending

On April 7, Reserve Bank of India released updates to its regular Consumer Confidence Survey. These refer to the 9-day period February 27 through March 8, 2021. For simplicity we will refer this as the first week of March 2021. The RBI releases two indices – the Current Situation Index and the Future Expectations Index. Both reflect net responses, i.e., the difference between respondents whose perceptions are improving against those with deteriorating perceptions. An index is computed as 100 plus net responses. It reflects views of households in state capitals of 13 large states of India. It is therefore an index of consumer confidence in the larger towns of India.

In the first week of March 2021, the Current Situation Index was negative and it had deteriorated compared to the previous survey conducted in early January 2021. An index that is below 100 in the RBI Confidence Surveys is negative. An index below 100 indicates that responses of deterioration in conditions exceeded those indicating an improvement. In early March 2021, the Current Situation Index was 53.1 compared to 55.5 in early January 2021. This index had touched its nadir at 49.9 in September 2020. It has improved marginally since then. But, the current situation index is still much lower than the 85.6 level it was a year ago in March 2020.

The RBI Current Situation Index has been negative in all surveys conducted in the past four years except the one in March 2019. In general, respondents who believe that current conditions are worse than a year ago have almost always exceeded those who believe that the conditions had improved over a year ago. Of course, this sustained negative sentiment worsened after the lockdown.

The Current Situation Index in March 2021 at 53.1 was 48 per cent lower than it was a year ago. The extent of this fall is similar to the 58 per cent fall seen in CMIE’s Index of Current Economic Conditions for urban India. CMIE’s indices cover a much larger number of towns. Sentiments had worsened a little more in the relatively smaller towns. 

The constituents of the RBI consumer confidence indices and CMIE’s consumer sentiments indices are different. CMIE’s indices are based on five questions – perceptions regarding current household income compared to a year ago, expectations of household income a year into the future, expectations of economic conditions in the country a year into the future and five years into the future and finally, whether this is a good time to buy consumer durables compared to a year ago. The first and last questions create the index of current economic conditions and the other three go into the making of the index of consumer expectations.

The RBI indices are based on current perceptions compared to a year ago and future expectations on five subjects – general economic conditions, employment, income, prices & inflation and spending on essentials and non-essentials. Although the RBI asks many more questions, some of these are correlated. For example, if a household is negative on employment it is likely it will also be negative on income. The two indicators are positively correlated. 

Current perceptions in the first week of March 2021 compared to a year ago in respect of all five subjects except spending were negative and had worsened compared to the previous survey in January. Spending had increased compared to a year ago. More households were reporting an increase in spending on essentials than a year ago and also compared to January 2021. But, the spending on non-essentials has worsened. Only 12 per cent of the households reported an increase in spending on non-essentials. A year ago, this ratio was 28 per cent.

The uptick in spending on essentials could be the result of higher inflation. The proportion of households reporting an increase in inflation increased to 88.8 per cent – the highest level in about seven years. Inflation expectations have gone up as well. Over 81 per cent of the households expect inflation to go up. This is the highest proportion of households expressing such a view in three years.

While spending on essentials is sensitive to price changes, spending on non-essentials is sensitive to sentiments. Spending on essentials is not discretionary. But, spending on non-essentials is discretionary. 

One constituent question in the CMIE consumer sentiment indices relates closely to RBI’s question on spending on non-essentials. The CMIE question is whether households feel that this is a good time to buy consumer durables, which are arguably, non-essentials. The CMIE question, of course, is more direct by asking about consumer durables as compared with the more open-ended “non-essentials”, which could be open to interpretation.

In early March when the RBI said that 12 per cent of urban households had increased their spending on non-essentials and 59 per cent had reduced it, the CMIE survey said that 4 per cent of urban households considered it to be a good time to buy consumer durables and 54 per cent said it was a worse time to buy consumer durables compared to a year ago. Both surveys tell us that the urban Indian household continues to remain wary of making non-essential or discretionary expenses. Till this wariness continues, economic recovery will remain elusive.