One of the unintended consequences of the pandemic has been an all-round knowledge of macroeconomic terms, which, in normal pre-Covid times, would have been relegated to textbooks. Ask your average Raj or Simran why the economy is going through a slowdown and the answer would be one that would make Keynes proud. “It is because of lack of demand,” they would state confidently.
Such lack of demand has indeed cost the economy dearly. The pandemic has squeezed private consumption, the mainstay of India’s aggregate demand, particularly hard. During the fiscal 2020-2021, private consumption fell sharply by 9%, which has been the first in the past four decades.
The lack of demand does have to do with fewer jobs and higher unemployment, cuts in wages and salaries, shutdowns especially of micro, small and medium enterprises (MSMEs) amidst the pandemic, and the stringent lockdowns and social distancing norms associated with the pandemic. Discretionary consumption—essentially what people spend on travel, hotels and restaurants, recreation, etc.—that accounts for 20% of total private consumption has slumped much more than that on essentials. Reverse migration of workers, especially during the first wave but seen in the second one as well, also contributed to the reduction in disposable incomes of a large proportion of the population, reducing consumption.
While the economy’s slump can be reasonably explained through such tangible losses in income and employment, there is another part that is likely to pose a far greater challenge to recovery. And that pertains to the reduction in both business and consumer confidence, but especially the latter.
On the surface of it, consumer confidence appears to be a nebulous term. How does one measure confidence, and does it really affect consumption?
Consumer Confidence Surveys (CCS) conducted by the Reserve Bank of India capture households’ perceptions regarding the current situation compared to the previous year, as well as their future expectations for a year ahead, regarding five parameters. These parameters include the economic condition, employment scenario, general price levels, income and spending of the households. Covering more than 5,000 households from 13 cities, the CCS is a barometer of the consumer sentiments in the country. The resultant Consumer Confidence Index is a lead indicator, with values below 100 indicating consumers’ pessimistic attitudes towards future developments in the economy, resulting in a tendency to consume less, and vice-versa for values above 100.
The CCS for May 2021 conducted across 5,268 households in 13 cities presented an extremely dismal picture of consumer confidence. Thus, the Current Situation Index has dropped to 48.5—the lowest in more than a decade. This index, however, has been in the negative not just following the pandemic, but from July 2019 itself. The index regarding Future Expectations (FEI) has also moved into pessimistic territory, with a value of 96.4, after remaining positive for nearly a year since May 2020.
Household sentiments regarding both the economic situation and employment in India have not only remained negative, it appears; they have in fact deteriorated compared to the previous year. Similarly, people feel they are worse off with regard to their spending compared to the previous year. While the current perception is bad, the future expectation is bleak. Households expect the general economic situation, employment scenario and their incomes over a one-year horizon to fall sharply. The proportion of people who feel that their one-year-ahead spending on both essentials and non-essential goods and services will go down has increased in May 2021, compared to May 2020.
The second set of lockdowns, while it may have helped in reducing the number of Covid cases, has affected consumer confidence and consequently recovery in a manner that has currently not been factored in. For human behaviour is a response to memories. It is memories of difficult times in the past that would shape our behaviour today. The 1990 US recession had to do with a contraction in private consumption, which in turn was due to a dip in consumer confidence in the nation in response to the American action against Iraq during the Gulf War. Such confidence dips were triggered by an expectation of oil price hikes of the sort experienced in 1975 during the Oil Crisis, leading to Volckerism. With expectations of a third wave following the second, Indians would be far more wary of spending, at least in the next few months.
Current policies seek to increase investment, since it has been found that such increases not only boost GDP but also spur private consumption. With private investment not forthcoming, a high public spending through an increased fiscal deficit seems to be one way out. However, while an increase in public investment may help put money in the hands of the people, as is being currently advocated, it does not necessarily mean people will spend. Policies to boost private consumption through increased consumer credit would have little impact where people are not confident about the future.
What would be required in this scenario is for multiple stakeholders to come together to brainstorm over confidence-boosting measures and implement them expeditiously. The Centre and states will need to work in tandem along with the private sector to ensure that people have confidence in both lives and livelihoods. Mere sloganeering will not do. Large corporates will need to work with SMEs to ensure that the latter do not face cash flow issues. With MSMEs being cost-conscious, this in itself will ensure employment guarantees organically. The prevailing climate of negativity needs to be reversed. It is only then that one can state, with confidence, that private consumption will revive.
Tulsi Jayakumar
Professor, Economics and Chairperson, Family Managed Business at Bhavans SPJIMR
(tulsi.jayakumar@spjimr.org)
(Views are personal)