Household optimism rises but it is wafer thin

by Mahesh Vyas

Consumer sentiments data collected by CMIE in December 2020 through its Consumer Pyramids Household Survey show an improvement in household confidence of an economic turnaround in the next twelve months. 2020 has been such a forgettable year that expectations of the future cannot get any worse. Interestingly, however, household responses are not uniformly gung ho on the future. There is considerable hesitation in the optimism. Apparently, households do not expect themselves gain from this recovery.

The index of consumer sentiments improved in December 2020 and in the quarter ended December, after having suffered a sharp deterioration in the wake of the Covid-19 pandemic induced lockdown in India. The index has a base of 100 in September-December 2015. Its performance was below 100 in 2016-17, 2017-18 and 2018-19 before scaling up fleetingly to 106.2 in 2019-20. That ascent did not last. The index suffered a steep fall in the first quarter of 2020-21 to 43.6 when the lockdown was at its severest. The recovery was slow, to 45.2 in the second quarter and then to 52.7 in the quarter ended December 2020.

The index reached 53.2 in the month of December 2020. A slow recovery is evident. It hinges on expectations of an economic recovery in the near future.

An interesting characteristic of Indian households is their sustained confidence in the future. In 48 of the 60 months for which sentiments data is available from CMIE’s CPHS, the index of consumer expectations was higher than the index of current economic conditions. These are the two components of the index of consumer sentiments. Even when the chips were seriously down in the lockdown, the relative confidence in the future was higher than perceptions of current conditions.

In the quarter ended December 2020, the index of consumer expectations at 54.5 was 9.5 per cent ahead of the index of current economic conditions which was at 49.8. This greater optimism regarding the future was across rural and urban regions.

The forward looking index of consumer expectations seems to have swung to positivity largely because of an improvement in confidence in the economy recovering in a year’s time. But, here’s the oddball: the increase in optimism on the economy over a 12 month horizon exceeds the increase in optimism on personal incomes. Households seem to reflect, or are influenced by, the news of a smart turnaround seen in fast-frequency data on the economy since the lockdown. But, their optimism in their own incomes has not increased proportionately.

In November 2020, only 3.2 per cent of households believed that the financial and business conditions in the economy would improve in 12 months. This proportion improved to 5.8 per cent in December. Also, the proportion of households that believed that the conditions would worsen in 12 months declined from 48.9 per cent in November to 48 per cent in December. Note that the proportion of households who believe that the economy would worsen is much larger than those that believe that it would improve. There is an increase in optimism on the economy’s recovery in 12 months and there is a fall in pessimism but, optimism is not widespread.

Further, while the proportion of households that believe that their own incomes would rise in the next 12 months has also increased from 5.1 per cent in November to 6.8 per cent in December, the proportion that believes it would worsen has increased from 44.9 per cent to 45.4 per cent. Optimism on personal wellbeing has improved but pessimism has not reduced. The low proportion of the household income optimists and the increase in pessimists among them is at odds with the increase in optimism on the economy.

The relationship of an improvement in expectations of an economic recovery with expectations on household incomes is a little noisy in monthly variations indicating that short-term variations do not provide strong inferences in current circumstances. Quarterly trends provide a more robust indication of the direction of change regarding household perceptions on the future.

In the quarter ended December 2020, 4.6 per cent of the households believed that the financial and business conditions in the economy would improve over a 12-month horizon. This is an improvement over a smaller, 3.8 per cent who believed so in the previous quarter and 2.2 per cent who believed so in its preceding quarter that ended in June 2020. The proportion of households who believed that the economy would worsen has declined from 63.4 per cent in the June 2020 quarter to 55.7 per cent in the September quarter to 48.4 per cent in the December quarter.

This systematic improvement in expectations on the economy was not similarly uniform on household expectations of their own incomes. In the June 2020 quarter, 6.4 per cent of households believed that their income could improve over a 12-month period. This dropped to 5.7 per cent in the September quarter even though there was an increase in proportion of households believing that the economy would improve. In the December 2020 quarter, the proportion of households who believe that their incomes would improve over a 12-month horizon rose to 6.2 per cent. But, this is lower than the proportion who believed in such an outcome in the first quarter.

Evidently, while there is a steady improvement in proportion of household who believe that the economy would improve in 2021, there isn’t a similar improvement in households who believe that their incomes would be better. Besides, the optimists are outnumbered by the pessimists by a huge margin. The recent improvement in the index of consumer sentiments therefore needs to be taken with the proverbial pinch of salt.

References
1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001124000000000000&repnum=104834&frequency=M&colno=1
CMIE STATISTICS
Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.0 +0.1
Consumer Sentiments Index
Base September-December 2015
55.3 +0.7
Consumer Expectations Index
Base September-December 2015
57.4 +0.5
Current Economic Conditions Index
Base September-December 2015
52.0 +0.9
Quarterly CapEx Aggregates
(Rs.trillion) Mar 20 Jun 20 Sep 20 Dec 20
New projects 3.82 0.86 1.15 0.91
Completed projects 1.73 0.26 0.72 0.68
Stalled projects 0.73 0.11 0.08 0.30
Revived projects 0.42 0.68 0.36 0.11
Implementation stalled projects 10.22 0.09 0.07 0.12
Updated on: 25 Feb 2021 8:28PM
Quarterly Financials of Listed Companies
(% change) Mar 20 Jun 20 Sep 20 Dec 20
All listed Companies
 Income -5.0 -27.6 -6.3 1.5
 Expenses -1.8 -27.9 -10.3 -0.1
 Net profit -51.1 -40.3 47.2 58.4
 PAT margin (%) 2.2 5.3 8.4 8.6
 Count of Cos. 4,374 4,370 4,365 4,299
Non-financial Companies
 Income -9.0 -37.4 -10.5 0.0
 Expenses -4.8 -37.7 -14.2 -1.0
 Net profit -52.2 -56.0 31.5 55.2
 PAT margin (%) 3.1 4.5 8.1 9.0
 Net fixed assets 13.5 5.8
 Current assets 2.5 0.7
 Current liabilities 5.4 -2.8
 Borrowings 15.8 8.1
 Reserves & surplus 1.7 4.4
 Count of Cos. 3,256 3,252 3,250 3,205
Numbers are net of P&E
Updated on: 25 Feb 2021 8:28PM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.4 13.5 -0.2
 Expenses 9.9 13.8 0.1
 Net profit -41.4 16.6 -12.8
 PAT margin (%) 1.9 2.2 3.6
 Assets 10.9 9.6 9.2
 Net worth 7.3 8.4 4.6
 RONW (%) 3.3 3.9 5.3
 Count of Cos. 30,112 29,570 11,060
Non-financial Companies
 Income 8.6 14.1 -3.0
 Expenses 8.8 14.3 -2.4
 Net profit -9.8 21.1 -22.6
 PAT margin (%) 2.7 3.0 3.7
 Net fixed assets 7.2 5.5 11.8
 Net worth 6.0 8.0 1.6
 RONW (%) 5.6 6.5 6.5
 Debt / Equity (times) 1.0 1.0 0.9
 Interest cover (times) 2.1 2.3 2.5
 Net working capital cycle (days) 78 71 59
 Count of Cos. 24,243 23,774 8,018
Numbers are net of P&E
Updated on: 19 Feb 2021 9:59PM