Sentiment beyond electoral and government data hype

The BSE-CMIE-UMich Index of Consumer Sentiments tanked sharply by 5.2 per cent during the week ended March 5 after falling by 3.4 per cent fall in the preceding week. At 89.08, the index is at its lowest since its launch 62 weeks ago in January 2016.

It is evident that consumer sentiments turned sour after the initial surge in hopes post demonetisation.

The index had peaked at 108.98 in the week ended December 11, the fourth week after demonetisation. Then the disappointment started to set in, although there was a brief pause just before the Prime Minister's speech on December 31. Sentiments did improve on the hope that the speech would contain substantive announcements. It did not. And, the index fell by 7.3 per cent in the immediately following week.

The Index of Consumer Sentiments has headed south relentlessly having lost 18.3 per cent since its peak in the week ended December 11.

The sharp 5.2 per cent fall in sentiments in the past week shows that consumers are not impressed with the 7 per cent GDP growth number put out by the government in the middle of the week. In fact, the estimate of 10.1 per cent real growth in private final consumption expenditure during the October-December 2016 quarter is a cruel joke on the people of India. It seems to suggest that 84 per cent of liquidity can be sucked out suddenly and consumers would still show the highest growth in spending in 14 years!

The problem is that the government simply does not have a machinery to estimate fast frequency private final consumption expenditure directly. It derives consumption from production. It assumes what is produced is essentially consumed. Such an assumption works in normal times. But, it fails when almost all cash is sucked out of the consumers' pockets suddenly. We know that what was produced was in fact stuck in broken supply-chains immediately after demonetisation. Demand dried up because consumers did not have sufficient money to buy, not because producers did not produce. The consequent demand contraction shows up in a 15.8 per cent drop in nominal sales of consumer durables of listed companies, a 3.5 per cent fall in textiles, a 2 per cent fall in cosmetics and toiletries and a 1.8 per cent fall in food processing industries.

These declines in sales were borne by the larger listed companies who were better positioned to deal with the crisis. We know that bulk of the brunt of demonetisation was suffered by small and medium companies and by even smaller unregistered / informal markets. How does the 10.1 per cent growth in real private final consumption expenditure square with these facts?

In India, we never fudge statistics. We don't have to. The creaky old system often suits us just as well. It delivers a 10.1 per cent increase in private final consumption expenditure even when consumers were handicapped with next-to-no-liquidity to buy goods or services.

The consumer sentiment indices suggest that consumer goods companies would be better off if they do not get carried away with the official numbers because consumer sentiments during the current quarter are much worse than they were in the preceding quarter. The little hope that existed during November-December has evaporated.

In January 2017, the consumer sentiments index reached a new low of 95.95. It was never lower in any month of 2016. In February 2017, it fell further to 94.72 and to its lowest of 89.08 in the first week of March.

Sentiments were low although political parties were trying very hard in the past few months to raise expectations. Election rallies in Uttar Pradesh, Uttaranchal, Punjab, Goa and Manipur were full of extravagant promises by political parties. The spin in presenting demonetisation as a game-changer and in presenting the real GDP growth of 7 per cent as a rebuff to critics of demonetisation combined with election promises is likely to have impacted consumer sentiments positively. Yet, the Index of Consumer Expectations is close to its lowest level. What would happen after next week when the hype stops and we face new realities? Note that cash on hand is still less than 63 per cent of what it was before demonetisation.

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