Mean reversion in consumer sentiment index

The BSE-CMIE-UMich Index of Consumer Sentiment declined 4.5 per cent during the week ended April 23 -- from 102.3 to 97.7. The index had remained above 100 consecutively for the first three weeks of April. The return to its sub-base level indicates that the increase in April so far was more likely a response to short-term gains on loan waivers. It is equally likely that structurally, consumer sentiment is, in fact, weak.

The week ended April 23 was the second straight week of decline in the index. The index had fallen 2.4 per cent in the preceding week. The cumulative fall in the sentiment index during these two weeks, therefore, works out to 6.7 per cent.

The fall in the index during the past two weeks is sharp by historical standards. Most of the variation in the index is between -1.5 per cent and 5 per cent. So, a 6.7 per cent fall is extraordinary.

Nothing happened during this week or fortnight to warrant such a sharp fall. The worst news came from Kashmir. But, it is unlikely that Indian households would change perceptions negatively regarding their own well-being because of the misery in Kashmir.

A more pertinent phenomenon that could have adversely impacted consumer sentiment was the news that ATMs were running short on cash, again. Several reports in the media suggested that ATMs could not dispense cash because banks had not replenished these with fresh stock. The use of digital modes of payment had declined after cash started getting back into circulation. The failure of ATMs at this time must have led to some irritation. But, my guess is that this is unlikely to have swayed the mood too much. Therefore, while it is a pertinent point, it is not sufficiently potent. It is unlikely to be the cause for the fall in the index of consumer sentiment.

The fall in the consumer sentiment index is largely a correction for the extraordinary rise in the preceding weeks. The rise in the overall index of consumer sentiment was almost entirely because of the rise in rural sentiment. And, the fall is also almost entirely because of the fall in rural sentiment.

The index of consumer sentiment for rural India has been generally higher than for urban India. On an average, the rural index has been about 4.3 per cent higher than its urban counterpart.

In general, rural India had good reasons to be happier than urban India. Good rains, good prices and good loan waivers made 2016-17 a great year for rural India. After two consecutive years of poor monsoon, 2016 delivered copious rains. As a result, the production of foodgrain reached a record 272 million tonnes, oilseeds a record of 33.6 million tonnes, tea peaked at 1.24 million tonnes and cotton recovered from a fall. Only sugarcane did not do well. In spite of these increases, the terms of trade remained in favour of the rural sector. Wholesale prices of food articles grew 5 per cent in 2016-17, although the overall WPI growth was 3.7 per cent.

Now, add to this the loan waivers. Rural India had every reason to rejoice. But why then has rural sentiment fallen sharply after handsome gains?

Consumer sentiment in rural India has reacted sharply to demonetisation and to loan waivers. During both events, consumer sentiment in rural India rose more sharply than it did in urban India, and in both cases it fell sharply soon after the effects of these events wore out.

This reversion to some kind of a mean seems to suggest that the sudden increase in the rural sentiment is, in fact, merely episodic. These episodes, like demonetisation and loan waivers, do not carry much shelf-life. They lead to momentary celebrations. But, the structural difficulties of the times remain, and household sentiment reverts to reflect these difficulties. These structural difficulties have more to do with the lack of availability of jobs and the corresponding lack of sustainable growth in well-being.

Urban India has not seen much reason to rejoice. As a result, its consumer sentiments is much lower. While on an average, the urban consumer sentiment index has been 3.8 per cent lower than the rural index, in April it was 12 per cent lower. The structural problems in urban India are apparently, higher.


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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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