The Indian economy seems to have recovered much faster from the second Covid-19 shock that struck India around April-May 2021 than it did from the first one about a year ago. Electricity generation and consumption did not fall much during April and May 2021 unlike in April 2020 and they displayed a smart spurt during July 2021. Labour participation recovered in July 2021 to its March 2021 level. The unemployment level was slightly elevated compared to the March 2021 level of 6.5 per cent but it has declined well to 7 per cent in July 2021 from 11.9 per cent re­.....
The Indian economy
seems to have recovered much faster from the second Covid-19 shock that struck India around April-May 2021 than it did from the first one about a year ago. Electricity generation and consumption did not fall much during April and May 2021 unlike in April 2020 and they displayed a smart spurt during July 2021. Labour participation recovered in July 2021 to its March 2021 level. The unemployment level was slightly elevated compared to the March 2021 level of 6.5 per cent but it has declined well to 7 per cent in July 2021 from 11.9 per cent recorded in May 2021. The Nomura Business Resumption Index had fallen from about 94 in March 2021 to about 60 by the end of May. By July 25, 2021 it had surpassed its March level.
Consumer sentiments cheered in tandem. The index of consumer sentiments recovered much of the fall triggered by the second wave in a single month, July 2021. During the second Covid-19 wave, between March and June 2021, consumer sentiments fell by 15.4 per cent. In July 2021, sentiments improved quickly and smartly by 10.7 per cent. The recovery is still incomplete but the progress in a single month is impressive.
This quick recovery is interesting because consumer sentiments were the most sluggish in terms of recovery from the 2020 Covid shock.
Households were not impressed by the smart V-shaped turnaround of most economic indicators during the first wave. Between March and June 2020, sentiments had fallen by a massive 55 per cent. It took nine months between June 2020 and March 2021 for sentiments to recover by only 30 per cent. Therefore, at the cusp of the second Covid wave, consumer sentiments were still 41.6 per cent lower than they were before the first wave, in March 2020. RBI’s Consumer Confidence Survey tells us a similar story. Its current situation index of households in March 2021 was 38 per cent lower than it was in March 2020. The second wave stalled even this snail-paced recovery for a good three months.
The July 2021 recovery in consumer sentiments is not only substantial but it is also spread evenly and robustly across rural and urban regions. It reflects an improvement in current conditions as well as an improvement in perceptions regarding the future. The improvement in consumer sentiments also reflects an improvement in almost all components of consumer sentiments.
Consumer sentiments improved by a handsome 12 per cent in urban India and by 11 per cent in rural India. Both regions reported robust increases in current economic conditions. This indicates an improvement on two fronts — in perceptions regarding current household income compared to a year ago and also about intentions to buy consumer durables.
While there is an improvement on both fronts, the prevailing absolute levels are still quite dismal. Only 6 per cent of urban households reported an improvement in their income compared to a year ago in July 2021. In June, the proportion was just 4 per cent. Similarly, only 4 per cent of urban households said that it was a better time to buy consumer durables in July compared to just 2 per cent in June.
In rural India these proportions are even lower. Only 4.5 per cent households claim an increase in income over a year and only 2.7 per cent think this is a good time to buy consumer durables.
Evidently, the increase in proportion of households reflecting improved income conditions in July 2021 is not good enough to instil confidence in a sustained recovery of household wellbeing. Households themselves demonstrate reticence. While the index of current economic conditions expanded by 13.7 per cent, the index of consumer expectations grew by a lower 9.2 per cent. These growth rates of the indices are of limited use because of the low base. Some of the constituents of the indices are more revealing of a restraint. For example, the proportion of urban households that expect their incomes to grow in a year declined from 5 per cent in June to 4 per cent in July 2021. The future appears promising to fewer urbanites. More than half of them believe that their incomes would remain the same a year ahead. We know from RBI surveys that median inflation expectations one year ahead are of the order of 11 per cent. Therefore, most urban households expect an erosion of their real incomes over the next 12 months. This can be expected to have an impact on the spending propensities of households. An improvement in current incomes has not helped improve future expectations. Fewer urban households believe that their incomes would improve in a year compared to those who have experienced an improvement over the past year. The underlying pessimism that these statistics portray of urban households is the millstone that holds back a strong economic recovery in India.
The proportion of rural households that expect the overall economic conditions to improve over the next five years declined marginally from 5.4 per cent in June to 5 per cent in July.
The overall consumer sentiment
index in July at 53 was still 50 per cent lower than its level of 105.3 in February 2020, i.e. before Covid-19 started impacting household sentiments. It is a long way before consumer sentiments recover completely.
The writer is MD & CEO, CMIE P Ltd
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