Covid-19 eats into consumer confidence

Consumer confidence collapsed in May, and the expectation for the next one year is that Indian households will remain pessimistic, the survey by the Reserve Bank of India (RBI) shows.

“Consumer perception on the general economic situation, employment scenario and household income plunged deeper into contraction zone …; while expectation on general economic situation and employment scenario for the year ahead were also pessimistic,” the RBI Consumer Confidence Survey, released on the central bank’s website, showed. The RBI has not yet released the Industrial Outlook Survey, which had showed “stark pessimism” among manufacturing companies, which were expecting a deterioration in sentiment across sectors for the just concluded fourth quarter of the previous fiscal year, and the current first quarter of 2020-21.

The survey was conducted in 13 major cities during May 5-17 through interviews on the phone because of the nationwide lockdown. A total of 5,300 households participated in it.

The RBI said the current situation index (CSI) had touched a historic low and the future expectations index (FEI) for the year ahead also recorded a sharp fall, “entering the zone of pessimism”.

Consumer spending remained intact, mostly due to relative inelasticity in essential spending. “Consumers, however, reported sharp cuts in discretionary spending and also do not expect much improvement in the coming year,” the RBI survey said.

Households also expect a sharp rise in prices in the next three months as well as the next year to come, notwithstanding the RBI’S own expectation that inflation would taper off in the second half, which it used as a justification to cut rates on May 22.

The Households’ Inflation Expectations Survey, conducted in 18 major cities, and based on responses from 5,761 urban households, shows that people expect a sharp rise in inflation.

“Households’ median inflation perception and expectations increased sharply in May 2020 as compared with the March 2020 round of the survey,” the RBI said, adding three months and one year ahead median inflation expectations rose by 190 and 120 basis points, respectively, over the previous round.

The households are now expecting increasing price pressure on food products; more households expect general prices and inflation to rise over three months as compared to previous round.

However, the households expect prices of all product groups, especially the cost of housing, to ease over a year ahead.

Professional forecasters

Even as the RBI did not give its own projections on inflation and growth, even as it said the economy will contract in the current fiscal year, a group of 22 professional forecasters indicated the real gross domestic product (GDP) growth rate could be a negative 1.5 per cent in 2020-21, but could rise to a positive 7.2 per cent in 2021-22. Real gross value added (GVA) growth could fall to a negative 1.7 per cent in 2020 -21 and rise to 6.8 per cent in 2021-22.

Real private final consumption expenditure (PFCE) is expected to decline by 0.5 per cent during 2020-21 but likely to record 6.9 per cent growth during 2021-22. Real gross fixed capital formation (GFCF) is likely to register negative growth of 6.4 per cent in 2020-21 but likely to grow by 5.6 per cent in 2021-22.

“Forecasters have assigned the highest probability (86 per cent) to real GDP growth lying below 2.0 per cent in 2020-21,” the RBI said, adding, for 2021-22, highest probability (19 per cent) has been assigned to GDP growth lying between 6.0 and 6.4 per cent.