Consumer sentiments recovering in July

Woman paying for something in Indian rupees at a clothing store in a mall in Delhi, India.

July 2022 is poised to reverse what has been a somewhat worrying trend in consumer sentiments since March 2022. Growth in the index of consumer sentiments (ICS) has been losing momentum in the past four months. After having scaled up by 5 percent in February, the ICS’s growth rate fell in March, April and May 2022. In May and June 2022, it was a meagre 1 percent. Now, in July, the ICS is likely to register a handsome growth. Some caveats, however, warrant that this reversal be considered with some caution.

As of July 24, 2022, the 30-day moving average ICS had reached 73.05 (base: 100 during September-December 2015). At this level it was 6.7 percent higher than its level a month ago on June 24, 2022. It was also 6.7 percent higher than the ICS’s average level for June 2022. These are distinctly higher growth rates than seen in any of the recent months.

The 30-day moving average ICS has risen in spurts during the first 24 days of July. It was mostly flat in the first 9 days. Then, it grew rapidly till July 17 and, after a brief halt till July 20, has been climbing new heights every day. If the trend continues, the ICS could end close to 75 for July. If it crosses 75, July 2022 would have clocked the fastest growth in the ICS in a year. A year ago, in July 2021, it had shot up by 11.1 percent. But that was partly a recovery from the fall recorded during the second wave of Covid-19. This time there was no preceding fall, just a slowing growth rate.

The 6.7 percent growth in ICS seen till July 24 is somewhat evenly spread between urban and rural regions. The ICS of the two regions as of July 24 was 6.3 percent and 6.8 percent higher than the respective average ICS levels in June.

While the rise of the ICS in rural India could be explained by the revival of the monsoon and a gradual pick-up in sowing for the kharif crop, its rise in urban India is difficult to explain. It would be rather stretched to claim that the small fall in the inflation rate in June has sustained in July and that this has helped improve consumer sentiments. It is also odd that the recent increases in GST rates or interest rates do not seem to have disturbed urban India much. The 30-DMA employment indicators do not show any improvement either. The urban employment rate has been falling.

What seems to have changed is that urban India has turned a little more hopeful about the short-term future than rural India has. This optimism though, could be somewhat wary.

The 30-DMA of the index of consumer expectations (ICE) for urban India as of July 24, 2022, was 6.8 percent higher than its June 2022 average. It was also a substantial 10.6 percent higher than it was a month ago on June 24, 2022. The ICE comprises three components. Of these, urban households’ view on the financial and business conditions over the next 12 months has improved significantly. In June 2022, 11.5 percent of the households believed that the financial and business conditions in India would improve over the next 12 months. As of July 24, this proportion had risen to 15.1 percent. As of June 24, 2022, the proportion was 10.3 percent. The increase in optimism during the course of just a month is therefore substantial.

But this is guarded optimism. While more urban households have turned optimistic on the business prospects over a year they are not as sanguine over a five-year horizon. The proportion of households who believed that the economy would grow consistently for the next five years has grown from 10.1 percent as of June 24, 2022 to 11.7 percent as of July 24. The average for June 2022 was 10.8 percent. The level and the increase in optimism here is modest compared to that for a one-year horizon.

Further, urban households don’t believe that the improvement in the business environment over the next 12 months would benefit them correspondingly. They seem to be a lot more circumspect or prudent in their expectations. Consider the change over the period June 24 to July 24, 2022. While the proportion of urban households optimistic on the business environment over the next 12 months increased from 10 percent to 15 percent, the proportion of households who believe that their own incomes would rise over the next 12 months increased far more modestly from 12 percent to 14 percent over the same period.

Rural households also seem to be rather cautious on future prospects. Between June 24 and July 24, there is very little improvement in the proportion of households who believe that the business environment would improve over the next one or five years. This is in spite of the fact that there was a significant improvement in their current economic conditions. The index of current economic conditions for rural India jumped by 9.1 percent over the month ended July 24. But, the index of consumer expectations for rural India grew by a modest 3 percent.

While the substantive improvement in consumer sentiments during July is welcome, the caution reflected by households regarding the future is worth reflection.

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