Last week, RBI Governor Shaktikanta Das announced the latest Monetary Policy Review. The broad takeaway: The RBI marked down India’s GDP growth forecast for the current financial year from 10.5% to 9.5% and marked up the inflation forecast for the year from 5% to 5.1%.
Typically, faltering growth prompts the RBI to cut interest rates in order to spur economic activity. But rising inflation requires raising interest rates. And since the RBI is mandated by law to target inflation within the band of 2%–6%, the best it could do — and it has been doing this for several months now — is to maintain the status quo on interest rates.
Actually, for most of his tenure as the RBI Governor, Das has found that the GDP growth rate has faltered while inflation has spiked. But more salient than the RBI’s decision on the benchmark interest rates were the results of the latest RBI Consumer Confidence Survey that was conducted in May.
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What is this survey?
The RBI conducts this survey every couple of months by asking households in 13 major cities — such as Ahmedabad, Bhopal, Guwahati, Patna, Thiruvananthapuram — about their current perceptions and future expectations on a variety of economic variables. These variables include the general economic situation, employment scenario, overall price situation, own income and spending levels.
Based on these specific responses, the RBI constructs two indices: the Current Situation Index (CSI) and the Future Expectations Index (FEI). The CSI maps how people view their current situation (on income, employment etc.) vis a vis a year ago. The FEI maps how people expect the situation to be (on the same variables) a year from now.
By looking at the two variables as well as their past performance, one can learn a lot about how Indians have seen themselves fairing over the years.
What was the main finding?
As Chart 1 shows, the CSI has fallen to an all-time low of 48.5 in May. An index value of 100 is crucial here, as it distinguishes between positive and negative sentiment. At 48.5, the current consumer sentiment is more than 50 points adrift from being neutral — the farthest it has ever been. It is important to note that even a year ago, the CSI had hit an all-time low.
The FEI moved to the pessimistic territory for the second time since the onset of the pandemic. However, there were two peaks (of positive consumer sentiment) in the recent past; they coincide with demonetisation in 2016 and Prime Minister Modi’s re-election in 2019.
What are the factors responsible for pulling down the CSI and FEI respectively?
The RBI states that CSI is being pulled down because of falling consumer sentiments on the “general economic situation” and “employment” scenario.
Chart 2 maps the “net responses” of households on the general economic situation. In the survey, the RBI asks how many people currently perceive that the general economic situation has “improved”, “remained the same” or “worsened”. The difference between those who say it has improved and those who say it has worsened is the “net response”. It is in percentage terms and if it is negative, it means that more people think the situation has worsened. Suppose 40% say their perception of the general economic situation has “improved” from a year ago, 10% say it has “remained the same” and 50% say it has “worsened” then the net response would be –10%.
Net responses are calculated similarly for “one year ahead expectations” and a negative net response implies more people expect things to get worse in a year.
So, on the “general economic situation”, RBI finds that there has been a largely secular decline in both current consumer sentiment and future expectations since PM Modi’s re-election in 2019.
On employment (Chart 3), the current sentiment has been worsening ever since PM Modi was elected in 2014. There were only two spikes, which again coincide with demonetisation and PM Modi’s re-election in 2019.
Beyond the medium-term trend, what also stands out is the starkness of consumer sentiments on employment. The difference between the percentage of respondents who think the employment situation has improved (7.2%) and those who think it has worsened (82. 1%) from a year ago is a whopping 75%. What is equally worse is that more people expect the employment situation to worsen a year from now — that is why the one year ahead expectation line is below the zero mark.
There was one more factor that is bringing down the FEI: the outlook on incomes (Chart 4). Much like employment, the prospects on incomes have registered a secular decline since roughly the start of PM Modi’s tenure in 2014. The two positive spikes coincide, yet again, with demonetisation and the 2019 Lok Sabha elections.
What else did the RBI survey find out?
The RBI also collected data on spending levels, especially spending on non-essential items such as leisure travel, eating out, luxury items etc. The net responses on this variable suggest that while Indian had started curtailing spending on non-essential items quite sharply since the middle of 2018, the pandemic simply pulled the metrics into the negative territory. In other words, more respondents say that they spend less today, and more respondents expect to spend less on non-essentials a year from now. This may explain why even the big firms want the government to print money and spend it on the people.
What is the big takeaway?
These data lay out the tricky challenge facing the Indian economy.
If the government’s strategy for fast economic growth — expecting the private sector to lead India out of this trough by investing in new capacities — is to succeed, then consumer spending (especially on non-essentials) has to go up sharply. But for that to happen, household incomes have to go up; and for that to happen, the employment prospects have to brighten; and for that to happen, again, companies have to invest in new capacities.