Are Consumer Sentiments Improving Rapidly Enough?

By: Sutanu Guru

Consumption by Indian households accounts for 58% to 60% of the GDP and a sustained recovery in the Indian economy will only be possible when consumer sentiments improve and they start spending more not just on essential items but also discretionary purchases that include consumer durables and other “luxury” items.

Virtually no major media outlet or platform featured the results of the latest bi monthly Consumer Confidence Survey that was released on September 30, 2022. Perhaps there has been such an avalanche of data on economic parameters that this significant information was largely ignored. But the results of the survey reveal two distinct trends in consumer sentiments that will have an impact on not just GDP growth, but also the financial well being of Indian households. After all, consumption by Indian households accounts for 58% to 60% of the GDP and a sustained recovery in the Indian economy will only be possible when consumer sentiments improve and they start spending more not just on essential items but also discretionary purchases that include consumer durables and other “luxury” items. The first is: Indian consumers remain deeply pessimistic when it comes to the general economic situation. The chart below shows that there has been a drop in pessimism between September 2021 and September 2022. Unfortunately, the drop has neither been rapid, nor substantive.

For example, 71.6% of the respondents in September 2021 had reported that the general economic situation had worsened in the last one year. Do remember: this perception at a time when the first quarter GDP growth in the financial year 2021-22 was 20.1%. Since then, there has been a steady improvement in sentiments. But it is clearly not as much as Finance Minister Nirmala Sitharaman would have hoped for. In September 2022, 59.2% off the respondents were of the opinion that the general economic situation had worsened in the previous one year. Remember again, this sentiment when GDP grew at 8.7% in 2021-22 and by 13.2% in the first quarter of the current financial year. No doubt, 46.5% of the respondents stated that the general economic situation will improve. But that’s a negligible improvement from September 2021 when 42.3% expected an improvement in the general economic condition. Clearly, despite the hype surrounding record festive sales, something is amiss when it comes to consumer sentiments.

However, as the chart above indicates, there is a silver lining. When consumer sentiments are weak, households spend most of their income on essential items that range from food to fuel to communications to transport. Discretionary purchases are postponed because households are uncertain about their financial well being in the future. The key factor is what consumer perceive about their current income levels. This is a major reason why two wheeler sales in India actually declined by more than 11% in 2021-22 even though GDP of the Indian economy grew at a very healthy 8.7%. But the tide seems to be turning, albeit not in a dramatic fashion. In September 2021, 57.3% of the respondents were of the opinion that their income had decreased in the last one year. That has dropped significantly to 34.4% in September 2022. Equally important, the percentage of respondents who think their income has increased in the last one year has doubled to 20.2%.

Nirmala Sitharaman may not be cock a hoop. But there will certainly some sighs of relief.