CONSUMER EXPECTATIONS WEAKEN ITS LEAD
Consumer sentiments improved by an impressive 5.7 per cent during the week ended June 18. It is not surprising that the improvement is entirely in rural regions. Rural sentiments improved by 11.1 per cent while urban sentiments declined by 3.4 per cent. A wave of loan waivers or promises of public procurement of agricultural crops at higher prices and more importantly expectations that farm loans will be waived further, have improved rural sentiments.
Farmer agitations have spread beyond Madhya Pradesh and Maharashtra. Correspondingly, rural expectations have risen. The rural index of consumer expectations rose by nine per cent during the past week. The timely arrival of the monsoon rains has also helped improve rural expectations.
In spite of these improvements in consumer expectations, the BSECMIE-UMich consumer sentiments indices tell us that there is a substantial weakening of consumer expectations since May this year. This is a significant break from the past.
Ever since the launch of these consumer sentiment indices, consumer expectations have been ahead of consumers’ current economic conditions. Hopes on the future were always higher in India, than any assessment of current conditions. This is starkly different from the behaviour of American consumers.
According to the indices of consumer sentiments generated by the Surveys of Consumers, University of Michigan, the index of consumer expectations is always lower than the index of current economic conditions. In fact, the difference between the two has been rising. The index of current economic conditions has been scaling a sharper gradient compared to the index of consumer expectations. In May 2017, the Current Index was 111.7 while the Expected Index was 87.7. This is the opposite of what we have seen in India, till recently.
The Current Index (and also BSECMIE-UMich’s Index of Current Economic Conditions) measures perceptions of households regarding their current economic conditions compared to a year ago, and whether this is a good time to buy consumer durables. The Expected Index (and also the Index of Consumer Expectations) measures households’ perception regarding their expected economic conditions in the future and their perception about the performance of the economy on a oneyear and five-year horizon.
Usually, the Expected Index in the US is about 20 per cent lower than the Current Index. In contrast, in India, the Index of Consumer Expectations is about 2.5 per cent higher than the Index of Current Economic Conditions. This Indian phenomenon of expectations being better than current conditions has weakened in recent weeks.
In May 2017, the Index of Consumer Expectations was 0.5 per cent lower than the Index of Current Economic Conditions. Expectations recovered during the first 10 days of June. But, during the week ended June 18, the expectations index was 2.3 per cent lower than the index of current economic conditions.
In rural India, both indices have risen smartly thanks to the current wave of loan waivers and other supports. Expectations have also grown, albeit at a much slower pace compared to current conditions. In the current circumstances, this may not be considered to be altogether undesirable. But, this is not just about expectations of personal income; it is also about expectations of the growth of the economy in the next one to five years. Therefore, the relative weakness in expectations has elements we must worry about.
In urban India, both indices declined during the week ended June 18. But, index of expectations fell more sharply than the index of current conditions.
It is not clear whether this relative weakness in expectations will persist. But, the lower level of expectations in May compared to current economic conditions, and its continued relative weakness in June is a somewhat worrying break from its past performance. It is also worrying because the current expectations at least partly reflect the ill-conceived, inflated expectations of farmers.
In a few weeks we will learn whether the current angst in farmers will dissipate with the arrival of a good monsoon or whether it will get worse if the monsoon does not oblige.
Retrieving urban India from its persistently low consumer sentiments is the equally daunting challenge. Neither the monsoon nor a booming stock market is of any use here. Urban India needs more jobs.