In 2019, economy can’t be the key narrative for Modi

A new Reserve Bank of India survey shows the travails of demonetisation and GST are far from over

The Reserve Bank of India (RBI) has predicted a softening of inflation and an acceleration in the pace of economic expansion through fiscal 2018-19. The central bank’s forecast coupled with its decision on Thursday to keep the key lending rate – the repo rate – unchanged has, for now, renewed hopes that things can get better.

Amid cheers from the market and investors that made the headlines, few took note, however, of another important report from the RBI on Thursday — its latest survey of consumer confidence that paints a less than enthusiastic, if not, borderline picture of economic pessimism. The survey, in essence, tells us that consumer confidence in top cities has waned, yet again. The sentiment emerging from the January-march 2018 period, after a temporary improvement in the preceding quarter, has now become subdued in terms of the prospects for jobs, growth in income and the economy. The survey, which covered 5,279 respondents across New Delhi, Mumbai, Bengaluru, Kolkata, Hyderabad and Chennai, tracked households’ perceptions and expectations on the general economic situation, jobs, prices, income and spending. “The current situation index (which is based on perceptions) has remained in the pessimistic zone since March 2017,” the RBI note on the survey said. “The future expectations index followed a similar trajectory.”

The survey results show the doublewhammy of demonetisation and GST is far from over. What is also more clearly revealed is that a growing disconnect is strikingly visible between what people expected and what they actually got.

Sample this: At the time, prime minister Narendra Modi made the surprise announcement about scrapping high value currency notes in November, 2016, about half of the respondents participating in the RBI Survey had said the economic situation had improved, while the other half found it either unchanged or worse. Today, only a third feel the economic situation has improved, while two-thirds of the respondents feel it has remained the same or worsened. In November 2016, 63% of the respondents expected the economic situation to improve. That number has steadily slipped to 48% in March 2018. There is a growing pessimism around jobs and income growth among respondents in these cities, which account for a sizeable chunk of the demand for consumption and constitute a key source for the generation of new employment.

In November 2016, 31% of the respondents said the job market had worsened from a year ago. That number has jumped to 43% in the latest round of the survey. Similarly, only 24% reported an improvement in their incomes, while 25% said their incomes had actually declined and 51% of the respondents had seen no change. This is further reflected in the gap between how people spent and how they expect to spend on nonessential purchases – an indicator of growing economic well-being. This too has shrunk by a few percentage points. Worse, an overwhelming proportion of respondents said the rate of inflation has not only got worse from a year ago, but prices will keep rising faster in the year to come – an expectation that runs contrary to the Central bank’s forecast.

While the RBI will go by data, and not perceptions, when it makes macroeconomic forecasts, the findings of the consumer confidence survey do offer valuable insights into the state of play. It points to how consumer sentiments, which recovered sharply after Modi came to power, but have steadily deteriorated since the impact of demonetisation became apparent and got worse by the chaotic introduction of GST.

By the end of 2017, things were looking to turn around, on the back of a sharper recovery in the global markets and the ruling BJP‘S victory in Gujarat. But it appears now that those gains were perhaps temporary.

If the RBI survey correctly mirrors the economic sentiments of the urban middle class, then the economy and its growth story (or the lack of it) cannot be the main narrative for Prime Minister Modi’s re-election bid in 2019. Conversely, therefore, it can be argued that the non-performing economy is what the Opposition can most likely bet on and challenge in 2019.

Bluntly put, Modi’s re-election strategy for 2019 — if one goes by the latest sentiment analysis from the RBI — will have to depend on factors other than those that relate to India’s economy.

WHILE THE RBI WILL GO BY DATA, AND NOT PERCEPTIONS, WHEN IT MAKES MACROECONOMIC FORECASTS, THE FINDINGS OF THE CONSUMER CONFIDENCE SURVEY DO OFFER INSIGHTS INTO THE STATE OF PLAY