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ANALYSIS

Consumer sentiments pick up on better income expectations

by Mahesh Vyas

Consumer sentiments improved in April 2018. The index of consumer sentiments (ICS) scaled up 1.7 per cent to 94 compared to 92.4 in March. The index has a base of 100 during September-December 2015.

April was the second consecutive month of an increase in the index of consumer sentiments. This increase has come after three consecutive months of fall. Cumulatively, the index had slipped by 4.9 per cent during the three months ended February 2018. The index had reached its lowest level in February. March and April have only partially recovered the fall of these three months.

Of the two broad components of the overall index of consumer sentiments, the index of current economic conditions increased rather sharply by 2.5 per cent in April. The other index - of consumer expectations - grew at half the rate, of 1.25 per cent during the month.

The index of current economic conditions (ICC) reflects household responses to two questions - is the household financially better, worse or same compared to a year ago and, is this a good time (or a bad time or same as any other time) to buy consumer durable goods.

The improvement in the index of current economic conditions in April was entirely because of an uptick in the proportion of people who believed that April was a good time to buy consumer durables. There could be many Indian cultural reasons for this. April was the month of Akshaya Trithiya, which marked commencement of a small window of auspicious period for Hindus. This will last till middle of May that would see the beginning of the adhik month, which is considered to be inauspicious. April came soon after the end of Lent at the end of March. And, April was punctuated with Vaishakhi and Vishu festivals in north and south, respectively, as well.

Decisions to buy consumer durables are known to be often independent of changes in income. This phenomenon was demonstrated in the month of April. While the decision to buy consumer durables increased, the change in perceptions regarding income changes was net negative.

The proportion of households that believed that their incomes are getting worse compared to a year ago has been rising. The proportion was 10-11 per cent in early 2016. By early 2018, this proportion rose to 17-18 per cent. Many more feel that their incomes are rising. The proportion of such happy households is also rising. The proportion that has seen an improvement in their financial wellbeing increased from 26 per cent to 30 per cent between early 2016 and early 2018.

The proportion of net positive households has shrunk from about 16 per cent in the first quarter of 2016 to 14 per cent in the first quarter of 2018.

In April 2018, perceptions regarding incomes worsened a bit. The proportion that saw their incomes falling, increased to 18 per cent, from 17.1 per cent in March. And, the proportion that saw their incomes increasing declined - from 30.8 per cent to 30 per cent. As a result, the proportion of net optimists declined from 13.7 per cent in March to 12 per cent in April.

The index of consumer expectations (ICE) is derived from responses to three questions - expectations of household income in the coming year, expectations of business conditions in the coming year and, conditions in the country over the next five years.

Here we see a remarkable improvement in expectations of household income in the coming year. This is noteworthy because during the same month we have seen a fall in the net proportion of households reporting an increase in their incomes.

27 per cent of the respondents in April believed that there will be an improvement in their incomes over the period of a year. This is the highest proportion of households expressing such optimism if we discount the unusual increase seen during November and December 2016, which possibly was due to an irrational expectation of households from demonetisation.

Expectations of an increase in financial wellbeing over a year started rising after remaining mostly below 25 per cent, during the second half of 2017. Then the proportion of households that were optimistic of their finances rose to 25.6 per cent in January and February 2018. During March and April the proportion rose to 27 per cent.

Households are more optimistic about their own finances than they are about the business environment or the conditions in the country over a longer period.

It is this optimism of the growth of their own incomes over the period of one year that is driving the consumer expectations index. It is not clear what drives this optimism. But, there is greater optimism of households regarding their incomes over the next 12 months than it was during most of the recent past.