Sluggish recovery after sharp fall

The inverse relationship between household income levels and the rate of recovery in consumer sentiments is both disappointing and counter-intuitive. But the data is unambiguous

Consumer sentiments have been extraordinarily sluggish in recovering from the pandemic. Infect­ions have dropped dramatically and vaccinations have accelerated impressively. Mobility has imp­ro­ved and the economy seems to be slowly limping back to a semb­lance of normalcy. Many fast-frequency indicators of economic activity are at levels higher than they were in the pre-pandemic times. But not so consumer sentiments, which remain much lower than they were in pre-Covid days since their improvement has progressed at a much slower pace.

The index of consumer sentiments in October 2021 was 13.2 per cent higher than in October 2020 but it was still a substantial 44.3 per cent lower than in the pre-pandemic month of October 2019. The index was on a rising trend from February 2018 through September 2019. It started weakening thereafter, before the pandemic struck. After the pandemic and the ensuing lockdown, sentiments fell sharply.

The index of consumer sentiments peaked in September 2019 and then weakened even before the pandemic hit the economy, to fall by 3.9 per cent by February 2020 from its highs. In March 2020, when the impact of Covid-19 was still partial, sentiments fell by 7.9 per cent. And in the following two months, they crashed by 57 per cent to hit a nadir in May 2020.

The recovery has been very slow. The index climbed back at the rate of 3.1 per cent per month between May 2020 (its lowest point following the first wave of the Covid-19 pandemic) and March 2021 (just before the second wave hit India). The recovery from the second wave was faster at 5.6 per cent per month between June and October 2021. But, these rates are much lower than the rate of the fall, which was over 26 per cent per month between February and May 2020.

What is most striking about this sluggish recovery of consumer sentiments is that it cuts across all major income groups. The expectation was that the relatively well-off households would see a smarter and complete recovery in sentiments by now. But that is clearly not the case. The rate of recovery among richer households has been more sluggish than in households of modest means. This warrants some calibration of the enthusiasm regarding the sustainability of the recovery process as seen in other economic indicators. Consu­mer sentiments are expected to play a significant role in determining the strength of the recovery if not the recovery itself. They, therefore, merit significant attention.

Consumer sentiments in the richer households are better than in households with relatively modest incomes. This has been true almost always — before and during the pandemic. In richer households, the fall in sentiments was slightly less severe than in poorer ones. But their recovery from their pandemic lows is worse than the recovery in sentiments of households with modest means.

Between February 2020 and May 2020, overall consumer sentiments fell at the rate of 26.6 per cent per month. Households that earned Rs 1 million per annum or more saw sentiments drop at a slower rate of 23 per cent per month. Those with incomes between Rs 0.5 million and Rs 1 million per annum saw their sentiments drop at an even slower rate of 22.1 per cent per month. Sentiments of the rest dropped at the rate of about 26 per cent or more per month. Thus, the relatively poor households saw a greater drop in consumer sentiments, while richer households showed greater resilience to the lockdown.

The recovery was not similarly favourable to richer households. Bet­ween May 2020 and March 2021, consumer sentiments of households that earned less than Rs 0.5 million per annum grew by 3 per cent per mon­th. But, those that earned more than Rs 0.5 million per annum recovered at less than half that pace. Similarly, the pace of recovery was systematically slower in richer households after the second Covid-19 wave.

Between June 2021 and October 2021, consumer sentiments in households that earned less than Rs 100,000 per annum improved at the rate of 8.7 per cent per month. This is a fairly quick clip. It is much better than the rate at which sentiments fell. However, this rate deteriorates as incomes rise. Households that earned between Rs 100,000 and Rs 200,000 saw their sentiments improve at a lower 5.7 per cent per month. The rate of recovery drops further to 4.3 per cent per month for households that earned between Rs 200,000 and Rs 500,000 per annum. It drops further to 2.8 per cent per month for households that earned between Rs 500,000 and Rs 1 million. And, the rate of recovery was the slowest, at 2 per cent per month, for households that earned more than Rs 1 million per annum. This inverse relationship between household income levels and the rate of recovery in consumer sentiments is both disappointing and counter-intuitive. But the data is unambiguous.

The scars of the pandemic seem to persist in the form of depressed sentiments. The sustained low levels of consumer sentiments and their particularly slow rate of recovery among the relatively rich households should temper the enthusiasm associated with the recovery of the economy.

The writer is MD & CEO, CMIE P Ltd