Sentiments sour

It is quite possible that the controls on export of wheat and sugar could have caused the sentiments in general and expectations in particular to sour in recent times

Something snapped in the week ended May 29, 2022. The Index of Consumer Sentiments (ICS) tanked by 9.4 per cent. This is an unusually sharp fall. Sentiments fell across urban and rural regions, but with varying intensity. The ICS fell by 5.9 per cent in urban regions and by a much steeper 11.4 per cent in rural regions. The 30-day moving average as of May 29 dropped to 67.91 (base 100 in September-December 2015). It was 68.09 just a day earlier.

The ICS had closed April 2022 at 67.2. As of May 29, it was still a per cent higher. The month of May could still end with the ICS higher than it was in April. If it does so, it would be the highest compared to any month since March 2020 — i.e. before the lockdowns. However, there are signs that the steady improvement in consumer sentiments seen so far during 2022 may be slowing, or even reversing.

The final ICS data for May will be available only on June 1. However, using the 30-day moving indices generated every day by CMIE, it is safe to assume that the index will be marginally higher than April. But the slender growth in May also implies a slowing down of the monthly growth rate of the ICS. During the previous four months, Jan­uary through April, the ICS saw monthly growth rates between 3 per cent and 5 per cent.

Compared to other economic indicators, the recovery in the ICS from the lockdown-induced drop in April 2020 has been distinctly slower. Most economic indicators have recovered to their pre-lockdown levels. For example, real gross domestic product (GDP) and gross value added (GVA) in 2021-22 were about 2 and 3 per cent higher, respectively, than in 2019-20; and the central government’s total tax collection in 2021-22 was 25 per cent higher than in 2019-20. However, the ICS in April 2022 was a substantial 36 per cent lower than it was in February 2020. Apparently, ICS, which includes perceptions about current and future well-being of households, takes longer to recover from a severe economic shock.

There are three problems we see in the recent trajectory of consumer sentiments in India.

First, the relatively slow growth in consumer sentiments compared to other economic indicators mentioned above is slowing further in recent months. The ICS grew by 4 per cent in January and then the growth accelerated to 5 per cent in February. But in March, it slowed down to 3.7 per cent. It slowed further to 3 per cent in April. And now in May, it is expected to slow down further — probably to less than 1 per cent.

Second, the gro­wth in consu­mer sentiments, which was slowing till recently, now seems to be reversing. This is evident from the 30-day moving average (30-DMA) series of the ICS. The 30-DMA was rising steadily from a local trough in the series on April 22 when the index measured 64.01. By April 30, it had recovered to 67.02. Then, it marched up steadily to reach 70.04 on May 20. At this level it was al­ready 4.2 per cent higher than the April level. But then began a fall, which looks like a reversal of the growth trajectory seen hitherto. By May 29, the 30-DMA ICS had fallen to 67.91, which was a mere 1 per cent higher than the April-end level.

The reversal is also evident in the weekly ICS data. The weekly index fell by over 11 per cent in the last two weeks of May.

Third, and probably the most worrisome part, is that the recent reversal is moving at a distinctly faster pace than the pace of the recent rise. The fall in the 30-DMA between May 20 and May 29 is at the rate of 0.34 per cent per day. In comparison, the rise between April 30 and May 20 was at the rate of 0.22 per cent per day. The 30-DMA is a less volatile series than the weekly series and, therefore, its accelerated decline since May 20 is worrisome.

The trajectory of the ICS is changing because consumer expectations are turning adverse at a faster pace than consumer perceptions regarding their current well-being. This is evident in the data for each of the three trends of the ICS described above.

First, the slowdown is more pronounced in expectations. Between December 2021 and April 2022, while the ICS has grown by 3.9 per cent, the index of consumer expectations (ICE) grew at a slower rate of 2.9 per cent compared to the index of current economic conditions (ICC), which grew at 5.5 per cent.

Second, the reversal in consumer expectations is greater in the case of expectations (ICE) than current conditions (ICC). During the upswing, from April 30 through May 20, ICE grew by 4.8 per cent while ICC grew by a lower 4 per cent. But during the downfall, from May 20 till May 29, the ICE fell by 2.9 per cent while ICC fell by only 2.5 per cent.

We do not know what could have caused the sentiments in general and expectations in particular to sour in recent times. Given that the fall was more striking in rural India, it is quite possible that the controls on wheat and sugar export could be responsible. We may conjecture that measures to control inflation hurt sentiments in rural India but the continued elevated inflation hurts urban India.

The writer is MD & CEO, CMIE P Ltd