5.6.20

Consumer confidence crashes: RBI


Less than two months into the Covid-19 lockdown, consumer confidence in India totally collapsed with half of those polled expecting incomes to shrink and prices to rise. The Reserve Bank of India released its consumer confidence survey, conducted through telephonic interviews across May 5-17 in 13 cities, which indicated consumers “entering the zone of pessimism”.

Consumers have turned more pessimistic on all fronts — economic situation, employment, income and spending. Among those surveyed, 74% said that the economic situation has deteriorated, while 67% said that expectations on employment have worsened. Expecting price pressure on food products, more households see general prices and inflation rising over a three-month horizon as compared to the previous round. However, the prices of all product groups, especially the cost of housing, are expected to ease over the year ahead period.

Until now, it was only a minority (less than a fourth) who felt that there is a likelihood of incomes shrinking. However, in the May 2020 survey, a record 50% said that they saw their incomes coming down. As a result, nearly 10% said they would reduce spending even on essentials, while 46% said they would cut spending on non-essential items.

The RBI also released the results of the inflation expectation survey of households. This survey shows that median inflation perception and expectations increased sharply in May 2020 as compared with the March 2020 round of the survey. Three-month and one-year ahead median inflation expectations rose by 190 and 120 basis points (100bps = 1 percentage point), respectively, over the previous round.

Overall consumer spending remained afloat, mostly due to relative inelasticity in need for essentials. Consumers, however, reported sharp cuts in discretionary spending and also do not expect much improvement in the coming year.

The RBI usually releases consumer confidence data at the time of the monetary policy. However, given the lockdown, the central bank was not in a position to complete its surveys. It has also released its survey of professional forecasters on the outlook in respect of gross domestic product growth and inflation. Most of the professional forecasters have lowered their previous (pre-Covid-19) forecasts by 7 percentage points.

Real GDP, according to the forecaster’s poll, is likely to contract by 1.5% in 2020-21, but is expected to revert to growth terrain next year when it is likely to expand by 7.2%. Real gross value-added is expected to decline by 1.7% in 2020-21, but is likely to record 6.8% growth in 2021-22, supported by an uptick in industrial and services sector activities.

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