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Plummeting consumer confidence: Why it matters

The Reserve Bank of India reported its monthly consumer confidence numbers yesterday, and consumer confidence hit its lowest point since Modi came to power in 2014 (RBI Survey). The current situation index slid further to 85.7, and while the consumer continues to be positive about the future they have been less so every month for the past three months, with the future perception index falling to 114.5. Today we try to understand how these numbers are calculated, what the current numbers seem to indicate, and why they are important not just to policy makers but your everyday life.




For starters let us understand what the survey is and how it gets these numbers. The survey reaches out to 5000+ households across 13 Indian cities and asks people questions about their view on current levels as well as future expectations of the economic situation, price levels, employment levels, income and spending. The index is basically the average of the net response (% of people who believe the factor will improve - % of people who believe the factor will worsen) added to a base number of 100 for reference. What this basically means is that as the number begins to slip below a 100, people are more pessimistic about the economy in general.


But why should you care about perception? Well, because how consumers feel about the economy drives how they act, how they spend, and how they consume. In a very simplified version, as people begin to get more worried about the economy, they begin to cut back spending and to build their rainy day funds. The lower spending in turn affects firms, affecting how many people they can keep on their payroll, how much they can pay them, and how much they invest in future capacity, beginning a viscous self fulfilling prophecy of sorts. (This view of consumer confidence sees it as a leading indicator: i.e. that it predicts the future direction of the economy. There is also a counter view point that sees consumer confidence as a lagging indicator, meaning consumers do not have a perfect understanding of the economy, and their optimism/pessimism is often shaped on the news-flow, gdp data, or stock market information.) That being said, irrespective of the drivers of consumer confidence, the fact that is impacts spending and consumption is almost universally agreed upon.


It helps to see the current RBI numbers in light of this information. The fact that 45% and 47% of people have a negative perception on the state of the economy and the state of employment is worrying. 88% of the people also expected price levels to increase, the highest number in the last six months. The faith of the Indian consumer is clearly shaken. What makes matters worse though is that there is very little room policy makers have to fix this, given the already booming deficit post the corp tax cuts and lowering indirect tax collections. With the RBI worried about inflation however, the only way forward seems to be some sort of fiscal loosening to revive the economy.


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