Covid-19 fires a fresh salvo on the consumer confidence, reveals July RBI survey; Yes! we should be worried

Consumer confidence in the market with India

The Reserve Bank of India (RBI) has released its July 2020 Consumer Confidence Survey (CCS) which points to the further dipping of consumer confidence and the Current Situation Index recording to an all-time low. The report was released on the occasion of its bimonthly monetary policy announcement.

The survey is based on five variables viz. economic situation, employment scenario, price level, income and spending. Four out of these five indicators are further pushed downwards in July survey in comparison to the May survey numbers. This means that the people are now more apprehensive about the economic situation, employment scenario, price level and income. The most telling of them all is the confidence or rather lack of it on the employment front.In May 2020, it was (-) 48.2 as against (-) 65.1 in July 2020.

These numbers are indicative of situation at the time of the survey in comparison to situation in the year ago period.

Around 5,342 households were interviewed across thirteen major cities viz, Ahmedabad, Bengaluru, Bhopal, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Kolkata, Lucknow, Mumbai, Patna and Thiruvananthapuram.

However, the ‘spending’ indicator was in the green at 30.8 in July, though down from the May numbers which stood at 43.2. The Consumer Confidence Index (CCI) for July is 53.8 as against 63.7 in the May survey.

The survey, however, reveals a contrarian view on the Consumer Confidence Index (CCI) in the year ahead period with most indicators taking an uptrend. The respondents were more positive about the economic situation, employment and income for the year ahead period. While the first two indicators see perception turning positive in July from negative in May survey, the view on income situation also sees a further uptick. The CCI in July went up to 105.4 from 97.9 in May.

Perceptions may not give a true picture of the reality, but they have certainly been impacting the consumption behaviour in a big way. I have been arguing about the need for the revival of consumption in my previous articles.While, in the pre-covid period, India was already slowing down quarter-on-quarter, this pandemic has only accelerated that slowdown.The Covid-19 situation has fired a fresh salvo.

Even this survey points out that that most respondents reported reduction in discretionary spending with majority committing to maintain the status quo for the year ahead period as well.The survey however, revels that the overall spending has gone up.

The outlook remains worrisome amid the rising cases of infections. This is only slowing down the recovery process, putting a spanner on the resumption of full blown economic activity. India has already registered over 3 million cases at the time of filing of this article. The real GDP growth in the first half of the year is estimated to remain in the contraction zone while remaining negative for 2020-21 (April-March), the RBI Governor had said in its August monetary policy announcements.

It is expected that the retail inflation will continue to remain high in the near to medium term, forcing people to spend on essentials. The retail inflation accelerated to 6.93 per cent in July from 6.23 per cent in the preceding month.

The data recently released by the National Statistical Office, reveals that food inflation in July has picked up from June month. Food inflation in July was 9.62 per cent against 8.72 per cent in June. This is primarily due to localised lockdowns and supply disruptions. Inflation in rural India at 7.04 per cent remained higher compared to urban India at 6.84 per cent, Supply disruption have led to elevated prices in the rural parts.

While Assam bore the maximum brunt among all the states and union territories, witnessing 11.2 per cent retail inflation, Delhi saw the lowest inflation at 3.6 per cent.

An adverse pandemic situation from here will only create further pain points. India already has displaced the US and Brazil as the country with the fastest growing Covid-19 cases.

While the banking regulator has assured to keep an accommodative stance, higher inflation scenario will limit its ability to cut rates further. The upper range of tolerance level is 6 per cent for the RBI.

On a brighter side, there has been some economic recovery in June as against the April and May months. While, the new normal is to live with the infection and amid continued restrictions, most observers opine that the economic activity will gradually be achieved to the pre-covid period.

India has had a good monsoon this year, which augurs well for the rural economy. Though it will not remove the distress, it will surely help mitigate it to some point. People who have returned to their states may find some solace in this. Also, government increasing spending under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) will help the migrant labours who have gone back to their native place to sustain themselves.

Moreover, the Central Bank expects the Headline consumer price index (CPI) inflation to be at moderate at 3 per cent by Q4 of 2020-21.

Most critical factor for consumption:

More than anything, the consumer confidence will be dictated by the scenario around jobs in formal and informal sectors. No amount of stimulus or aid will be able to increase consumption until the people are sure about the job prospects. While, many are still in their jobs, they have taken significant salary cuts which has put a stop to discretionary spending.

This is the biggest challenge before the government and its response to this will be critical. In the pre-covid times, the unemployment situation was grave and the government was criticised for failing to create enough employment opportunities. It has still not been able to assuage fears or at least come out with a plan.

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