Muted expectations

Consumer sentiments remained unchanged in September 2017 compared to its level in August. It was 94.54 in both months compared to a base of 100 during September-December 2015. Except for a few months, consumer sentiments remained below the base level through most months since January 2016.

The consumer sentiment index comprise of two sub-indices -- the index of current economic conditions and the index of consumer expectations.

During September 2017, the index of consumer expectations fell by 2.1 per cent after having fallen by 1.2 per cent in August. Consumer expectations have weakened rather sharply in recent weeks. As a result, the index of consumer expectations has fallen to its lowest level of 93.64, since the launch of these indices in January 2016.

The festive season has not raised expectations as it would be normally expected. The less-than-satisfactory rains and consequent fall in sowing has tempered expectations in rural India. Besides, sustained low labour participation rates has sapped the patience of urban India. To many, the promise of acche din has become a joke rather than a promise now.

In general today, it is not uncommon to see political promises being derided rather than them holding hope like they did, till recently. A tipping point seems to have been crossed. Little things seem to be making a difference. Hope is slowly giving way to uncertainty.

Inflation has remained low for a fairly long time. But, inflation expectations have not tempered. According to RBI's survey on inflation expectations released in June 2017, households believed that inflation was 6.4 per cent (median value). And, they expected inflation to rise to 7.5 per cent in three months and then to 8.5 per cent in 12 months. In reality, consumer price inflation was 1.5 per cent in June 2017 and it was less than 3 per cent during April and May 2017 as well.

It would be quite pointless blaming the survey. It is more important to understand why consumers do not believe that inflation is down and why can their expectations of inflation not be tempered.

The immediate impact of introduction of the Goods and Services Tax is a rise in prices of several consumer durables and a substantial increase in uncertainty among medium and small businessmen, in particular exporters. Working capital disruptions is likely have added to the woes of many small-business households.

An added factor playing on the minds of professionals and small business persons alike is the threat of dire consequences of non-compliance. Administrative action is apparently crossing a line in many cases that is creating the perception of an over-bearing state.

Consumers seem to be shying away from purchases. Sales of televisions, refrigerators and washing machines dropped by 1-2 per cent this year during Onam and Ganesh Chaturthi compared to the last year, according to a report in Economic Times. There is some hope in sales picking up around Diwali but, the buzz is perceptibly muted. Companies are complaining that they cannot absorb the additional costs (of raw materials and GST) and consumers are shy of splurging because of uncertainties in the economic conditions.

E-tailers are upbeat as they continue to increase their market share in the total retail business. But, the brick-and-mortar retailers and even manufacturers are a little more circumspect although many talk of 20 and even 40 per cent increase in sales this festive season.

Would a rate-cut by the RBI tomorrow help? RBI's data shows that lending for consumer durables has been falling. Outstanding consumer durables loans declined by Rs.36 billion during April-August 2017. The last rate cut on August 2, 2017 did not reverse this trend. But, the rate cut did impact consumer savings as many banks cut deposit rates.

No wonder then that urban consumer sentiments have been much worse than in rural India. The urban consumer sentiment index was at 90.7 in September 2017 compared to rural India's 96.17. The index fell sharply in February 2017 to below 91 and it has remained between 90 and 92 since.

Worse still, urban consumer expectations fell to its lowest level at 89.23 in September 2017. This is the first time that the monthly consumer expectations index has fallen below 90.

Consumer durables companies are probably brave in announcing expectations of a 20 and even 40 per cent rise in sales this Diwali. It is more likely that they are desparately trying to pep-up a market that has decided to hang on to their savings for now.

 

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, February 4 , February 12, February 19, February 27, March 5, March 13, March 19, March 26, April 02, April 10, April 17, April 23, May 1, May 8, May 15, May 21, May 28, June 4, June 11, June 18, June 25, July 2, July 10, July 16, July 23, July 30, August 7, August 14, August 21, August 27, September 3, September 10, September 17, September 24

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.