Covid-19 pushed RBI’s current situation index to a record low in July. Future expectations swung back into the positive zone, but State support will be needed to justify any optimism
As an ear to the ground, our Consumer Confidence Survey was found by a recent study to have got better after mid-2016, when the Reserve Bank of India (RBI) adopted its flexible inflation-targeting regime. Overall, the survey’s data has not been very reliable as a lead indicator of the economy’s direction since it was launched by RBI a decade ago, but its consumer outlook on economic conditions and prices was found to forecast retail inflation rather well. This suggested that RBI had acquired either an alert system or actual handle on inflationary expectations. Either way, now that covid-19 has blurred the path ahead, a fog light offered by the perceptions of people should serve as a useful input for policy calls on price stability. Accordingly, some of RBI’s evident wariness of inflation can be pinned on the survey’s latest findings. What these imply for government policy, though, may be even more relevant. While the survey’s current situation index (CSI) fell to its gloomiest ever level of 53.8 in July, down from 63.7 in May, its future expectations index (FEI) rose to 105.4, a break into optimism zone, from a dismal 97.9 two months earlier. Hopes of a vaccine and the Centre’s Atmanirbhar package may deserve credit for this mood uplift, but sustaining it will be hard without a renewed fiscal push.
Corona clamps meant that July’s survey had to be done by phone, like the one in May, so it cannot claim to represent all of India. Yet, it is a credible signal of popular sentiment. Broadly, the CSI captures the views of 5,400 randomly picked households in 13 cities (5,342 this time), with respondents asked to rate the economy, jobs scenario, inflation and their own income and spending as either better than it was a year ago, or worse (or the same). Likewise, the FEI reflects how optimistic or pessimist they feel on those five counts a year ahead. Both indices have the same formula. If positive and negative votes were to turn out exactly equal, the index would be at a neutral 100. If the percentage of up-thumbs exceeds that of down-thumbs by 10 percentage points, it would read a cheery 110. And if anxiety exceeds confidence by the same gap, the reading would dip to a gloomy 90. An average of the CSI and FEI could offer us a composite index of consumer confidence, but it is the former that most analysts go by. Expectations often go awry, after all, while the current report holds validity as a ground signal for analysis. This year’s crash of the CSI has been steeper than the tumbles it took before 2014, a revival year, though it has largely been slipping since 2015; after a spike in 2019, it was on a downslide again. And then, in March, covid struck. The pandemic seems to have pushed people deeper into despondency over earnings, employment and the economy, with worsening income and job worries having led the drop of nearly 10 points from May to July.
Brighter job expectations next year have nudged July’s FEI back above 100, but finer data also points to a clear trend of tightening thrift. This is consistent with CSI signals of a rapid descent into a spiral of scroungy times and weak demand. Arresting it would take direct fiscal action against a widespread loss of economic confidence. Money handed out via cash transfers and tax relief could work as a boost. But inflation mustn’t flare up in the process. Price sensitivities needs to be kept track of, too. Maybe RBI’s confidence survey should be done every month from now on.
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