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NEW DELHI' : There’s a seeming mismatch between India’s high GDP growth rates and persistently weak consumer sentiments. We have tried explaining this phenomenon in two articles in Mint before. In both, we have quoted the Nobel Prize winning behavioural economist Richard Thaler. It’s time again for a Thaler quote to explain the psychology of the average Indian consumer living in an average household.

“Giving up the opportunity to sell something does not hurt as much as taking the money out of your wallet to pay for it. Opportunity costs are vague and abstract when compared to handing over actual cash," Thaler writes.

Tightened wallets
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Tightened wallets

The GDP growth rates just released present an Indian economy that seems to be shining bright, if not dazzling. Then why does the Indian consumer feel acute pain and hurt to pay for something?

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As mentioned in our piece published on 18 June 2022, the biggest challenge confronting finance minister Nirmala Sitharaman and her team is reviving consumer sentiments that continue to remain weak. Sure, it is difficult to exactly measure consumer sentiments the way one can measure unit sales of two-wheelers in a month or the box-office collections of Bollywood disasters. But economists and policy makers know consumer sentiments are real and play a decisive role.

Since 58-60% of the GDP of India is on account of consumption, sustaining even a 7% GDP growth rate will be impossible unless the Indian consumer spends liberally. The problem for Sitharaman is that the Indian consumer still seems unwilling to spend money, particularly on goods and services that are not considered items of daily use.

A nationwide survey conducted by CVoter, on 28 and 29 August, using random sampling techniques, confirms this. Close to 2,000 respondents were engaged during the survey. Some of the questions asked were also the same in previous surveys—in November 2021, January and June 2022—the results of which were published in Mint.

Vengeance holidays. Really?

Let’s look at the responses to one question to understand the depth of weak consumer sentiments. In June 2022, we asked Indians if they had gone on a holiday or were planning to go on one. This was because the media was awash with stories of “vengeance holidays" as well-off Indians crowded airports ready to take flights to exotic destinations. About 13% said they had gone for a holiday, while another 19% said they were waiting for good bargains. So, every third Indian was positively thinking about spending on a vacation this year (particularly the summer vacations).

Now that the summer vacations are over, CVoter again asked Indians in the latest survey if they had actually gone on a vacation this year. Less than 20% of the respondents said they had taken a vacation, while more than 80% said they did not. After two years of lockdowns, disruptions and worse, one would expect more Indian households to spend money on holidays. Especially when India clocked a GDP growth rate of 8.7% in financial year 2021-22. It hasn’t happened.

Even if it had happened, it would be way below expectations. Approximately 20% of respondents had some plan—they were waiting for a good deal or opportunity—but only about 7%, or only about one-third of those who were planning to go on a summer vacation, eventually went ahead. Two-thirds of them simply dropped the idea.

Wake-up alarm

Some might argue that vacations and holidays are not a true barometer of consumer sentiments. What about television sets and smartphones— consumer products for India’s aspirational middle-class households?

For an average middle-class Indian consumer, television sets and smartphones are not a luxury purchase but an essential item. The survey asked Indians if they had purchased “costly" television sets and smartphones in 2022. The responses should be a wake-up call for policymakers. While 12.5% of the respondents said they had, a massive 87.5% of the respondents replied in the negative.

The wake-up call becomes even more alarming when one hears the responses to future buying intentions. Indians were asked if they plan to buy television sets and smartphones during the festive season that is around the corner. A little less than 10% said they will “definitely buy", while another 14% said “yes, probably". In contrast, about 76% of respondents said they will “probably not" and “definitely not".

The economics is quite simple. If consumers do not spend, there is simply no way for GDP to grow at 7%. A lot of the spikes in the sales of goods and services are basically pent-up demand that is being translated into purchases. But the Indian consumer still remains uncertain and hesitant.

The reason is simple. Ordinary Indians are still struggling to manage household expenses because income levels are not rising (or recovering post the covid-19 pandemic) despite high GDP growth rates and a clear-cut improvement in the macroeconomic situation in India.

Where’s the money

During the survey conducted in August 2022, Indians were asked a simple question: Has your income increased, decreased or remained the same since January 2022?

To re-emphasize, the GDP growth rate in 2021-22 was 8.7% and the just released figures for the June quarter of 2022-23 show a very healthy GDP growth rate of 13.5%.

Yet, only 11.7% of the respondents stated that their income has increased since January 2022; 36.9% said it has remained the same, while 51.4% said it has decreased.

Common sense suggests that at a time when high inflation pinches pockets, the average Indian consumer would find it difficult to make ends meet. We asked another question: compared to January 2022, has the difficulty in managing your household expenses increased or decreased? About three in every four respondents were of the opinion that it has become difficult to manage household expenses. This is grimmer than the figures consistently thrown up by CVoter trackers since March 2020, when two-thirds of Indians used to say they find it difficult to manage household expenses.

The Reserve Bank of India (RBI) comes out with a bi-monthly Consumer Confidence Survey. The latest one was released on 5 August 2022. The responses to questions on income, price rise and current economic situation as reported by the RBI are similar to the results in the CVoter survey. Take income, for instance. About 36% of the respondents in the RBI survey said their income has decreased—lower than 51.4% for the CVoter survey. However, the RBI survey asked respondents to compare income in July with that in May, while CVoter covered the January to August period. Like with the CVoter survey, the RBI survey confirms the fact that about three in every four respondents think household expenses have increased. The RBI survey breaks down expenses into essential and non-essential items. The latest report indicates that while 82% said expenses on essentials had increased, 45.5% reported a decrease in expenses on non-essential items.

The coming dawn

The tantalizing question that arises from analysing all the data is: will GDP growth rate run out of steam during the rest of 2022-23 because of persistently weak consumer sentiments? Is it possible that the GDP growth rate could even fall below 6% this year?

Many analysts think so. But, fortunately for Nirmala Sitharaman and her team, the data also clearly suggests that while it is still dark for the Indian consumer, the dawn could be near. By ‘consumer’, the authors mean the aspirational middle-class Indian. The high-income Indians barely suffered— even during the peak of the pandemic—and have been driving consumption growth for the last year or so.

The most telling symbol of the gap between aspirational and high-income Indians was on display in 2021-22 when GDP grew at 8.7%. According to data released by the Society of Indian Automobile Manufacturers (Siam), two-wheeler sales declined 11% to a decade-old record registered way back in 2011-12. Despite the brutal lockdowns and other disruptions, two-wheeler sales in 2020-21 were 15.12 million units, while the figure was 13.46 million units in 2021-22.

In sharp contrast, car sales grew 13.6% to about 3.07 million units in the same period. There can be no better indicator than this set of data to illustrate how the benefits of a revival in GDP growth did not reach the aspirational middle class.

Yet, the latest data underlines the coming turnaround.

According to data from Siam, scooter sales zoomed 100% and motorcycle sales grew 38% in the April-June quarter of 2022-23 from the year-ago period. This is an unmissable signal that the aspirational consumer in India is beginning to spend. Along with two-wheelers, smartphones are a powerful symbol of purchasing intentions of aspirational Indian consumers. According to data released by market research firm IDC, green shoots of recovery can be seen here, too, with smartphone sales growing 3% to 35 million units in the April-June quarter.

This is further confirmed by responses to the CVoter survey. When asked about future prospects for the family’s financial situation, 18.1% said it would definitely improve while 22.4% said it will probably improve. In contrast, 15.9% said there is no chance of improvement, while 7% said it could deteriorate. This is a significant improvement in sentiments compared to 2021. Even the RBI survey released in August shows a similar improvement. Close to 52% of the respondents said they expect their income to increase in the next one year, while less than 9% felt it would decrease.

The authors would like to conclude with yet another Richard Thaler quote: “You can’t make evidence-based policy decisions without evidence."

Yashwant Deshmukh is founder & editor-in-chief of CVoter Research Foundation & Sutanu Guru is executive director.

Elsewhere in Mint

In Opinion, Indira Rajaraman writes on the fiscal state of the states. Jaspreet Bindra tells why we are so fascinated with sentience of AI. Rahul Jacob writes about the Biden administration’s August on steroids

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