Consumer expectations and the budget

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Tomorrow, the finance minister will present the Union Budget for 2017-18. Most macroeconomic analysts will try to find signs of the government increasing outlays with a hope of spurring consumption demand. They would do well to first find if consumers are indeed in any mood to increase spending at all.

If you put additional monies into the hands of consumers they will not always go out and spend and spur consumption demand. Even if it is a direct bank transfer, it will generate a lot of good press but, in the current circumstances, it is unlikely to spur consumer demand. And a recently learnt lesson is that money in the bank is not really the same as money in hand. This lesson will not be forgotten in a hurry.

The Keynesian premise that consumers react passively to changes in income has its caveats. It would be too facile to believe that households will start spending if the government puts more money in their hands. George Katona, a contemporary of Lord Keynes, held the view that consumers had discretion in how much to spend and when. This discretion, manifest in their economic optimism or pessimism, is an important intervening variable between a stimulus of, say, increased household income and its response in the form of consumer spending.

This discretion is an outcome of household expectations. Interestingly, Katona demonstrated that in addition to learning from the past to form expectations of the future, households have a more powerful form of learning that is not dependent on past experience. The latter was more true for a few economic indicators that mattered the most to households such as household income, employment, inflation and interest rates. Ergo, a time-series analysis of the relation between income and spending is unlikely to be sufficient to predict the future.

Measuring expectations directly is therefore very important. The BSE-CMIE-UMich consumer sentiments index measures consumer expectations separately. Consumer expectations is one part of the overall consumer sentiments, the other part being the current economic conditions.

Consumer expectations are running low in India. As of the week ending January 22, the Consumer Expectations Index was 96.83 against a base of 100 during October-December 2015. Demonetisation decisively raised expectations. But, those dissipated within a few weeks.

The net result is that today consumers are less enthusiastic regarding their future than they were about a year ago. For the economy to come back to an aggressive growth path, consumers need to have sufficient confidence in their future to become aspirational once again.

It is evident that the aspirational young India that voted Narendra Modi to power has pulled back on their aspirations. Smartphone sales dropped by 30.5 per cent during November 2016 compared to October 2016. Two-wheeler sales dropped by 28 per cent. Aspirations are not unrealistic hopes. They are based on reality. A smartphone and a two-wheeler is considered within reach for large part of India's young population. It's an aspiration worth working for.

George Katona believed in asymmetric dynamics of changes in aspirations: fulfilment leads to greater aspirations, but failure does not diminish aspirations, instead it leads to renewed efforts towards aspirations. Aspirations are finally reduced only after prolonged failure and frustration.

So, where is the Indian consumer on this Katona trajectory of aspirations? Many hope that the consumer will bounce back from the temporary curtailment of spending following demonetisation. But, not many hold a similar hope that the demand for housing would bounce back equally fast. At best we may return to the ennui of a lacklustre housing market that prevailed before demonetisation. So, the aspirational classes, who have been waiting since 2014, may have to wait a little longer for the gratification they expected.

Given the low consumer expectations index, the continued lower liquidity at least for some time and an apparent frustration of the aspirational classes, any efforts to pump prime the economy through increased government spending is unlikely to have great multiplier effects. Consumers are in no mood to oblige for now.

Sentiment gauge

UNEMPLOYMENT RISES

Unemployment gauge

Business Standard brings you CMIE’s Consumer Sentiments Index and Unemployment Rate, the only weekly estimates of such data. The sample size is bigger than that surveyed by the National Sample Survey Organisation. To read earlier reports on the weekly numbers, click on the dates:

November 21November 28December 4,
Methodology

Consumer sentiment indices and unemployment rate are generated from CMIE's Consumer Pyramids survey machinery. The weekly estimates are based on a sample size of about 6,500 households and about 17,000 individuals who are more than 14 years of age. The sample changes every week but repeats after 16 weeks with a scheduled replenishment and enhancement every year. The overall sample size run over a wave of 16 weeks is 158,624 households. The sample design is of multi-stratrification to select primary sampling units and simple random selection of the ultimate sampling units, which are the households.

The Consumer Sentiment index is based on responses to five questions on the lines of the Surveys of Consumers conducted by University of Michigan in the US. The five questions seek a household's views on its well-being compared to a year earlier, its expectation of its well-being a year later, its view regarding the economic conditions in the coming one year, its view regarding the general trend of the economy over the next five years, and finally its view whether this is a good time to buy consumer durables.

The unemployment rate is computed on a current daily basis. A person is considered unemployed if she states that she is unemployed, is willing to work and is actively looking for a job. Labour force is the sum of all unemployed and employed persons above the age of 14 years. The unemployment rate is the ratio of the unemployed to the total labour force.

All estimations are made using Thomas Lumley's R package, survey. For full details on methodology, please visit CMIE India Unemployment data and CMIE India Consumer Sentiment.

The creation of these indices and their public dissemination is supported by BSE. University of Michigan is a partner in the creation of the consumer sentiment indices.


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