Consumer sentiment recovery only by end FY23: CMIE

Consumer sentiments are likely to regain pre-pandemic levels by the end of the current fiscal, only if no major disruption upends the recovery process. The three-year-long road to recovery – which is expected to culminate at the end of March 2023 – cannot be cut short as the upturn in consumer sentiments remains “grossly inadequate, and the rate of recovery is not only too slow but is also slowing down,” a report says.

A recent analysis by Centre for Monitoring Indian Economy (CMIE) states that consumer sentiments have grown every month since the downturn during the second wave of Covid-19 during April, May and June last year, except for one retreat in December. The index of consumer sentiments has risen cumulatively by 36.8% between June 2021 and March 2022, and made a comeback of 56.6% since hitting its lowest point in May 2020.

The rate of recovery is slow in comparison to the rate of decline in consumer sentiments seen between February and May 2020, which was 26.6%, CMIE states. “The recovery from the middle of the first wave and just before the beginning of the second wave of Covid-19, i.e. between May 2020 and March 2021, the index of consumer sentiments increased at the rate of just 3.1% per month. Even this miserable rate of improvement in consumer sentiments was interrupted by a rather sharp fall in sentiments in the second wave of Covid-19.”

“During the second wave of Covid-19, sentiments fell at the rate of 5.5% per month. While this is not as sharp as the fall in the first wave, it is much sharper than the rate of recovery. As a result, sentiments retreated a lot more in the three months of the second wave than they gained in the three months preceding it. The second wave, in fact, wiped out gains in sentiments made in the six months between September 2020 and March 2021,” it further adds.

To make matters worse, the rate of recovery has slowed down to 2.6% per month after the second wave of Covid-19, compared to 3.1% after the first wave.

“If the index of consumer sentiments continues to grow at this rate then by the end of this fiscal year, i.e. by March 2023, the index would still be about 15% lower than it was in February 2020, i.e. before the pandemic,” the CMIE report estimates.

This could be detrimental for the already shaken Indian economy as depressed consumer sentiments will impact consumer spending. This will hamper growth in private final consumption expenditure (PFCE) that accounts for about 55% of India’s GDP.

On the bright side, the rate of change in the index of consumer sentiments has been much better during the recent months, CMIE notes. “In March 2022, the index of consumer sentiments expanded by 3.7%. It had expanded by 5% in February and by 4% in January. The average monthly rate of increase in consumer sentiments works out to 4.23% during the past three months. If we assume that the index of consumer sentiments would continue to grow at this average rate then by March 2023, it would finally cross the pre-Covid levels. If that happens, it would be a three-year recovery process.”

Consumer sentiments have been resilient towards smaller disruptions, but not so much when it comes to large shocks like lockdowns, CMIE says. “The all-India index of consumer sentiment has shown relative stability in the face of electoral outcomes or political disturbances. Apparently, electoral outcomes do not seem to change the perceptions of consumers regarding their own immediate or future well-being,” it adds.

Moreover, the rural index of consumer sentiments have benefitted from the relatively better performance of the agricultural sector during the pandemic period. While the urban index fell 44% in March 2022 as compared to a month ago, the rural index fell only 35% during this period.

“The economic recovery of 2021-22 has been accompanied by high inflation and high unemployment. But, these have not stopped consumer sentiments from rising during this period. Thus, while the risk of higher inflation is elevated and while it is also unlikely that the unemployment rate would recede, their impact on consumer sentiment during 2022-23 may not be significant,” CMIE states.

Amid clear risks of economic shocks and help from sustained growth in agriculture, there are no stimuli that could have directly boosted household sentiments. Recovery has been “in some kind of an auto-pilot mode.”