NOT A HAPPY NEW YEAR
The unemployment rate continues to remain elevated. During the week ended March 18, it was 6.8 per cent. This was a tad lower than the previous week’s 7 per cent. But, the average unemployment rate during the past six weeks has been significantly higher than it was during the past year. In February, the unemployment rate had shot up to a 14-month high. Recent trends suggest that in March it may continue to remain as high or could even rise higher. While the unemployment rate has risen, the labour participation rate has not. This reflects growing stress in labour markets.
Sustained higher unemployment rates with low labour participation has impacted consumer sentiments. In February 2018, the CMIE-BSE-Umich consumer sentiment index fell to its lowest monthly level of 91.7 since its launch in January 2016. It implies that consumer sentiments in February 2018 were 8.3 per cent lower than they were in the base period, which was during September-December 2015.
Data for the first couple of weeks of March show that the situation has not improved much from this all-time-low.
Consumer sentiments matter because they are forward looking. They matter because they reflect decisions of households to spend on nonessentials. Spending on non-essentials — for example, a new vehicle or an airconditioner or a new television set — are based largely on sentiments and not only on income levels or even changes in income. When sentiments change for the better, households increase their spends. This then spurs the larger economic growth.
Changes in income levels could impact discretionary spending but it alone cannot predict its quantum or timing. Expectations about the future, or consumer sentiments more generally, matter in households decisions regarding the timing and the quantum to spend on large discretionary items.
In India, festivals or auspicious occasions are an additional independent variable in determining the timing of discretionary spending. A good part of the discretionary spending of households is bunched on or around auspicious occasions.
The week just gone by ended on the Hindu New Year. It is the equivalent of January 1 for the rest of the world. The day — the first of the month of Chaitra — is celebrated as Gudi Padwa in Maharashtra and as Ugadi in Andhra Pradesh, Telangana and Karnataka. Sindhis celebrate Cheti Chand at the same time. The rest of India makes other choices regarding new year celebrations. For example, the trading community, particularly of Gujarat, prefers the day after Diwali around OctoberNovember. Welcome to the land of great diversities and celebrations!
If discretionary spending in India is bunched around festivals then, sentiments should rise around festivals like Padwa/Ugadi. After all, festivals do tend to usher in a feel-good factor. This also explains consumer goods companies launching new products or new deals around festival times.
During the week that ended with Padwa/Ugadi, consumer sentiments increased by one per cent. This is not much of an increase for a festival season. However, this tepid increase in the sentiments index does not reflect the greater story of the loss of consumer confidence around now. Components of the index include a question on propensity to buy consumer durables around now. Responses to this question are revealing.
Only 21 per cent of the respondents said that this was a good time to buy durables. This is the lowest response to this question since we started asking it in January 2016. A higher proportion, 24 per cent of the respondents said this was a bad time to buy consumer durables. The number of households that think that this is a bad time to buy consumer durables outnumbered those who think that this is a good time. This does not happen very often. In the past 116 weeks there were only five occasions when this happened. In the last week this gap between those who believe that this is a bad time compared to those who believe it is a good time was the widest at 3 per cent, compared to any time in the past.
Rural households were a lot more negative on discretionary spending. Only 17.7 per cent believed that this was a good time while 28.8 per cent believed that this was a bad time. The gap was a whopping 11 per cent. This was the third consecutive week when rural India voted against buying consumer durables on a net basis. The feeling against buying durables in rural India is therefore quite strong.
When households vote against buying consumer durables during festivals, they signal that the economy is not in a healthy condition.