Consumer sentiment turned sharply negative in first week of 2017

The sharp fall in sentiment seen in the first week after the end of the 50-day ‘pain’ period is almost a public verdict on demonetisation. Except to the few who live on blind faith, it is now evident to all that the 50-day demonetisation venture was a failure. While the government refuses to provide details, it is apparent that not much black money was found through this exercise. A lot was spent -- in terms of economic activity and political capital -- to gain very little.


CMIE had estimated that the transaction cost of demonetisation would be Rs 1.28 lakh crore. Reports suggest that the amount not returned (presumed to be black money) to the banking system is far less.


The BSE-CMIE-UMich Consumer Sentiment Index rose to its peak within a month of the announcement of the demonetisation, reflecting a positive consumer response to the bold initiative of Prime Minister Narendra Modi. Then, as the scheme flip-flopped too often and as it became evident that it wouldn’t achieve much, the index scaled down to lose all its gains. As of the week ended January 8, the index stood lower than its level just before November 8, the day the demonetisation move was announced.


The index fell by a steep 7.3 per cent during the week of January 8.


This dramatic fall during the first week after the end of the 50-day ‘pain’ period is instructive. It tells us that when a scheme fails so dramatically, it is better to admit the mistake and make corrections. Attempts to hide facts (the Reserve Bank of India has stopped telling us how much of the demonetised currency was returned to the banking system) or give small sops don't help.


The prime minister announced several sops for different segments of society during his speech on the eve of the New Year. In the next two days, all leading banks announced significant 80-90 basis points reductions in their MCLRs, much in tandem, indicating that even this was possibly in response to a Central nudge.


None of this helped save the sentiment from falling sharply during the week. A bad situation (sentiment was down by Christmas already) worsened after the small sops. Expectations did rise during the last week of the year, but these were soon belied, indicating that the sops were not what consumers were looking for. Small sops have lost relevance.


Urban India has been particularly disappointed. The Index of Consumer Sentiment in urban India fell 10.7 per cent during the week ended January 8. Urban expectations took the biggest beating as its index fell 11.3 per cent. The worst weekly fall in urban expectations before this was less than 6 per cent.


This fall partly reflects the high expectations in the preceding week, when expectations had scaled up an equally strong 7.5 per cent. These expectations were dashed in the following week. The rise in expectations is not new by past standards, but the fall in expectations is a record.


In rural India, consumer expectations fell 4.5 per cent during the week ended January 8.


Consumer sentiment fell because expectations, which had risen on the announcement of the demonetisation initiative, were not met. Expectations were not met because they were unrealistic and had stemmed from big dramatic moves.


The Election Commission has announced state elections in Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur. A failure to report the promised destruction of a large cache of black money and a failure to demonstrate the arrival of the much promised better days would impact the electorate in these states when they vote in the coming two months.


The electorate likes big dramatic moves from its leaders, the moves that promise big changes -- like slaying the demon of corruption. A peaceful steady state is tiring. Surgical strikes, demonetisation, digitisation and raids with new currency notes on display are narratives that seem to work better in the short run. But, over time, the big dramatic moves more often than not fail, as witnessed in the failure of the demonetisation move. This brings down expectations and consumer sentiment which adversely impacts economic growth in the long run.


Should this monster of expectations, therefore, be fed and made bigger, or should expectations be tamed to make them realistic? The answer is obvious.


Sentiment gauge


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,


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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