Impressive rise in consumer sentiment in April

The BSE-CMIE-UMich Index of Consumer Sentiments rose smartly during April 2017. It shot up by 6.4per cent from 93.84 in March 2017 to 99.82 in April. It had declined steeply in January 2017 from its peak level in December 2016. It had declined during February and March as well, to progressively lower levels. In March, the index reached its lowest level of 93.84.

Given this recent deteriorating trend, the recovery in April is impressive.
The weekly indices tracking this smart recovery in the index during April suggested that the improvement is essentially limited to rural India. The monthly estimates, which are based on a larger sample, confirm this largely rural contribution to the improvement in consumer sentiments.
While the highlight of the pro-farmer stance of the government was the massive loan waiver in Uttar Pradesh, there were many instances of farmers being given unilateral benefits during April. Telangana announced providing Rs 8,000 per acre to all farmers in the state every year irrespective of the size of holding. Maharashtra extended easier repayment scheme for farm loan arrears and it extended support to tur pulse producers. Puducherry extended free electricity to farmers. Punjab seems to have promised to waive farm loans in three months.
The impact of these schemes and hopes on rural sentiments is evident in the impressive 10.3 per cent increase in the rural sentiments index during April. At 105.83, the rural index of consumer sentiments was the second highest monthly level since the launch of this measure in January 2016. The highest level was 106.9, reached in December 2016.
In stark contrast the urban consumer sentiments index at 89.87 in April was at its lowest level since the launch of these indices in January 2017. While rural sentiments improved dramatically in April, urban sentiments declined during the month. They fell 1.5 per cent to 89.9 compared to 91.2 in March.
Rural India has a greater share in the overall index and so, its impressive rise during the month dominated the performance of the overall consumer sentiment index in April.
The decline in the urban consumer sentiments index can be considered intriguing if one contrasts this with the impressive and sustained rise in the equity markets. The Sensex and Nifty touched record levels during the month. The Sensex grew one per cent, the Nifty grew 1.4 per cent and the broad index COSPI grew 3.2 per cent. COSPI includes about 2,500 actively traded companies. In the preceding three months, all three indices have been growing at over three per cent per annum. The cumulative increase in the equity markets in the past four months is therefore of the impressive order of 17 per cent.
Why are people so blah when the equity markets have given such a wonderful free ride? While equity markets scaled up 17 per cent, consumer sentiments tanked 3.4 per cent. And, urban consumer sentiments dropped 7.5 per cent. Consumer expectations have fallen as well, by similar amounts. So, if the equity market changes are a precursor to economic changes then why do consumer expectations when measured directly show a different trend — more importantly, an opposite trend?
Or, should we turn the question on its head? What are stock markets celebrating when consumers at large are not very happy. As explained last week the increases in consumer sentiments seen in the recent past are entirely episodic. Bereft of these episodes — demonetisation and loan waivers — the sentiments are lower than their level in the base period of September-December 2015. So, if sentiments are low and if corporate earnings are subdued, then the markets are possibly riding merely on a liquidity wave.
If this be true, then the RBI has more reasons to raise interest rates than just the feared increase in inflation caused by increasing commodity and services prices. A sustained increase in asset prices without a corresponding growth in the underlying fundamentals could lead to a bubble. The Nifty PE is over 23, but the PE for the market as a whole (the COSPI set of companies) is over 35.
Such valuations are unsustainably high. And, these could be contributing at least partly to a higher consumer sentiments index. Ergo, minus the effect of these unsustainable equity market valuations, consumer sentiments could be a shade lower compared to where they stand today.
The author is managing director and CEO, Centre for Monitoring Indian Economy P Ltd


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.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel