Review: Consumer Confidence dips slightly in the RBI’s Forward Looking Surveys

• Aprajita Verma

The RBI recently released the results of the March round of ‘Forward-Looking Surveys’. Both the Current Situation Index (CSI) and the Future Expectations Index (FEI) related to consumer confidence dipped slightly in the latest survey as compared to the previous survey. The business expectations index, however, showed an improvement. The impact of the second wave of COVID-19 on these indices will be only known in future surveys. 

On 07 April 2021, RBI released the results of ‘Forward-Looking Surveys’. The RBI periodically conducts surveys on various aspects such as consumer confidence, industrial production, inflation expectations, etc. to understand the prevailing economic conditions in the country. In this story, we take a look at a few of the critical observations from these surveys and explore the trends over the period of time.

Consumer Confidence Survey (CCS)

The Consumer Confidence Indices comprise of Current Situation Index (CSI) and Future Expectations Index (FEI). The Current Situation Index measures the overall consumer sentiment regarding the present economic situation. It is an indicator of consumer sentiment about current business and job market conditions. The Future Expectations Index is used to gauge future trends. The Future Expectations Index indicates how business conditions, employment, and income would likely change over the next year. In other words, the Consumer Confidence Survey gauges consumer perception and expectations on the following:

• Economic Situation
• Employment
• Prices (Price Level)
• Inflation (Change in Price Level)
• Income
• Spending
• Spending on essential items
• Spending on non-essential items

Businesses, investors, and economic policymakers watch these indices along with other related indicators to help gauge near-term consumer demand. One of our previous articles details the intricacies involved in the Consumer Confidence Survey.

The survey was conducted through field interviews during 27 February and 08 March 2021 in thirteen major cities, viz., Ahmedabad, Bengaluru, Bhopal, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Kolkata, Lucknow, Mumbai, Patna, and Thiruvananthapuram. Perceptions and expectations on the general economic situation, employment scenario, overall price situation, and own income and spending have been obtained from 5,372 households across these cities.

Highlights of the Consumer Confidence Survey:

• Consumer confidence weakened significantly in March 2021 as the CSI dipped on the back of deteriorating sentiments on the general economic situation, income and prices. Current perception on all major parameters, except spending, dipped significantly as compared to previous phases of the survey. The declining trend in CSI can be seen more evidently from May 2020 towards.
• Respondents expressed lower optimism for the year ahead, which was reflected in the FEI. One year ahead sentiments on all major parameters except prices, however, remained in positive terrain.
• With higher essential spending vis-a-vis a year ago, most consumers reported higher overall expenditure, which is expected to increase further in the coming year despite continuing moderation in discretionary spending. However, the resurgence of COVID-19 and the rapid rise in cases puts a question mark on expenditure in the coming months. 

In order to understand these major highlights, let us take a look at specific parameters of the Consumer Confidence Survey.

• In March 2021, the net perception regarding the economic situation stood at -63.9 with 76 percent of respondents saying that the situation has worsened. The declining trend in net perception regarding the economic situation has been in motion since May 2020, indicating the impact of the COVID-19 pandemic. In March 2021, the net future expectation regarding the economic situation stood at 5.3 with 44 percent of respondents saying that situations will improve and 38.7 percent saying that situation will worsen (for the year ahead). The declining trend in net expectation regarding the economic situation has been in motion since 2020 as in the case of perception. 
• In March 2021, the net perception regarding employment stood at 62.4 with 75.3 percent of respondents saying that the situation has worsened. The declining trend in perception regarding employment has heightened since 2020. In March 2021, the net expectation regarding employment stood at 10.7 with 46.7 percent of respondents saying that situation will improve and 36 percent saying that situation will worsen (for the year ahead). The declining trend in net expectation regarding employment has been in motion since 2020, although it increased slightly towards the end of 2020.
• In March 2021, the net perception regarding price levels stood at -92.6 with 93.8 percent of respondents saying that the prices have increased. Cross-sectional data indicates that the net perception regarding price levels has been consistently high. In March 2021, the net expectation regarding price levels stood at -64.4 with 75 percent of respondents saying that the prices will increase (for the year ahead). Cross-sectional data indicates that the net expectation regarding price levels has been consistently high.
• In March 2021, the net perception regarding inflation stood at -86.1 with 88.8 percent of respondents saying that the inflation has increased. Cross-sectional data indicates that the net perception regarding inflation has been consistently high. In March 2021, the net expectation regarding price levels stood at -76.6 with 81.1 percent of respondents saying that inflation will increase (for the year ahead). 
• In March 2021, the net perception regarding income stood at -53.7 with 61.6 percent of respondents saying that the income has decreased. The net perception regarding income has been on a declining trend since the end of 2016 and the values declined drastically since May 2020. In March 2021, the net expectation regarding income stood at 33.4 with 46.4 percent of respondents saying that income will increase (for the year ahead). Cross-sectional data indicates that the net expectation regarding income has been relatively stable, with some variations, throughout.
• In March 2021, the net perception regarding spending stood at 38.2 with 56.6 percent of respondents saying that spending has increased. Cross-sectional data indicates that the net perception regarding spending has been consistently high; however, it has decreased since May 2020 (i.e. relatively lesser percentage of respondents saying spending has increased and more saying it remained constant). In March 2021, the net expectation regarding spending stood at 59.3 with 67 percent of respondents saying that spending will increase (for the year ahead). Cross-sectional data indicates that the net expectation regarding spending has been relatively stable, with some variations, throughout. 

Spending in further divided into essential and non-essential categories.

• In March 2021, the net perception regarding spending on essential items stood at 58.2 with 71.1 percent of respondents saying that essential spending has increased. Cross-sectional data indicates that the net perception regarding essential spending has been consistently high; however, it has decreased since May 2020 (i.e., a relatively lesser percentage of respondents saying spending has increased and more saying it decreased or remained constant). In March 2021, the net expectation regarding spending on essential items stood at 69.2 with 74.6 percent of respondents saying that essential spending will increase (for the year ahead). Cross-sectional data indicates that the net expectation regarding essential spending has been relatively stable, with some variations, throughout.
• In March 2021, the net perception regarding spending on non-essential items stood at -46.6 with 58.5 percent of respondents saying that non-essential spending has decreased. The declining trend in perception regarding non-essential spending has consistently heightened since 2020. In March 2021, the net expectation regarding spending on non-essential items stood at -12.4 with 37.1 percent of respondents saying that non-essential spending will decrease and 38.3 percent saying it will remain the same (for the year ahead). The declining trend in net expectation regarding non-essential spending has consistently heightened since 2020.

Households’ Inflation Expectations Survey

The Households’ Inflation Expectations survey seeks qualitative responses from households on price changes (general prices as well as prices of specific product groups) in the three months ahead as well as in the one year ahead period and quantitative responses on current, three months ahead, and one year ahead inflation rates. The results of this survey provide useful inputs for monetary policy. The survey was conducted through field interviews on 27 February and 08 March 2021 in 18 major cities. The results are based on responses from 5,955 urban households. The survey aims at capturing subjective assessments on price movements and inflation, of approximately 6,000 households, based on their individual consumption baskets, across 18 cities, viz., Ahmedabad, Bengaluru, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, Raipur, Ranchi, and Thiruvananthapuram.

Highlights of the Households’ Inflation Expectations Survey:

• Households’ median inflation perception for the current period as well as three months ahead expectation increased by 50 basis points (bps) and 80 bps, respectively, as compared to the January 2021 round.
• Median inflation expectations for one year ahead remained at an elevated level. 
• Inflation expectations increased for the major categories of respondents (viz., financial sector employees, other employees, self-employed, homemakers, retired persons and daily workers) for both three months and one-year horizons.
• The higher expectation of an increase in general prices and inflation was led by the food and services groups.

Industrial Outlook Survey of the Manufacturing Sector

The Industrial Outlook Survey (IOS) encapsulates a qualitative assessment of the business climate by Indian manufacturing companies and their expectations. In all, 967 companies responded in this round of the survey. The 93rd round of the IOS was conducted during January-March 2021 and owing to uncertainty driven by the COVID-19 pandemic, an additional block was included in this round of the survey for assessing the outlook on key parameters for two quarters ahead as well as three quarters ahead.

The business assessment index (BAI) showed a significant dip in Q1 of 2020-21 and improved thereafter. The BAI extended further to 113.1 in Q4 of 2020-21 from 108.6 in the previous quarter. The business expectations index (BEI) showed a decline through 2020 and improved thereafter. The BEI has increased to 119.6 in Q1 of 2021-22 from 114.1 in Q4 of 2020-21.

Highlights of the Industrial Outlook Survey of the Manufacturing Sector:

Assessment for Q4 of 2020-21

• Manufacturing companies assessed further strengthening of production and employment during Q4 of 2020-21.
• Sentiments on the financial situation improved in terms of availability of finance from banks, internal accruals and overseas sources.
• Manufacturers perceived higher cost pressures mainly stemming from the purchase of inputs and salary expenses and some increase in selling prices during the quarter.

Expectations for Q1 of 2021-22

• Optimism prevails in the overall financial situation. Production volumes, new orders, and job landscape are expected to strengthen in Q1 of 2021-22.
• Respondents expect more pressure from the cost of finance, purchase of raw materials and salary outgo in Q1 of 2021-22.
• Selling prices, as well as profit margins, are expected to increase in Q1 of 2021-22.
• The business expectations index (BEI) increased further to 119.6 in Q1 of 2021-22 from 114.1 in Q4 of 2020-21.

Expectations for Q2 & Q3 of 2021-22

• Manufacturers perceived further improvement in production and overall business situation in Q2 & Q3 of 2021-22.
• Capacity utilisation and employment conditions are expected to improve.
• Respondents expected input cost pressure to continue, albeit with marginal easing and selling prices to harden gradually.

While things sound favourable in terms of the overall business climate, it has to be noted that these surveys were conducted before the onset of the COVID-19 second wave in India which is causing severe distress across the country. The impact of the second wave and vaccinations will only be known in future surveys.