New Delhi: The Indian economy is showing an unprecedented divergence between consumer and business expectations about the future. While consumer confidence remains very low, business confidence appears to be at an all-time high. And that can be problematic.
The results of two forward-looking surveys released on February 10 by the Reserve Bank of India (RBI) – the Industrial Outlook Survey (IOS) and the Consumer Confidence Survey (CCS) – clearly show this. The CCS asks respondents – covering 13 major cities in India – about their perception of the current situation and the situation in a year’s time. The IOS asks companies in the manufacturing sector about their current assessment and their expectations for the next quarter.
Since the CCS Future Expectation Index (FEI) is only available from March 2015, the comparison can be made for a relatively short period of time. However, the Business Expectation Index (BEI) is available from the quarter ending June 2000 and the latest readings (December 2021 and March 2022) are the highest ever. FEI, on the other hand, is at the third lowest value. The worst and second worst scores were achieved in the rounds before the first lockdown (May 2020) and the second Covid-19 wave (May 2021).
Whether or not the Indian economy will recover sustainably in the future depends, among other things, on such expectations. Finally, consumers can increase (decrease) their current consumption if they believe their future incomes will grow faster (slower). Investment decisions by companies are not only a function of resource availability, but are also shaped by future demand expectations. These expectations are also influenced by current experiences.
See Diagram 1: FEI & AT
What is the significance of this sharp divergence in consumer and business sentiment? It is not wrong to characterize this as a fundamental rupture in the class perception of the economic outlook.
Its meaning is best understood by applying the classical austerity assumption in heterodox economics. For the sake of simplicity, the classic austerity assumption assumes that there are only two kinds of income in the economy: wages for workers and profits for capitalists. It further assumes that the workers consume all their wages and the capitalists (entrepreneurs) invest all their profits. It follows that current profits might rise temporarily if the share of wages falls, but it also follows that in the long run this will reduce the purchasing power of workers and thus eat into profits through a fall in demand. Sure, the classic austerity assumption doesn’t hold true in reality, but the fact is that workers consume a much larger part of their income than capitalists.
Recent statistics on the Indian economy confirm this reasoning. While headline GDP is expected to return to pre-pandemic levels in 2021-22, private consumption expenditure (PFCE) will continue to lag behind 2019-20 levels. Corporate profits have rebounded strongly in the post-pandemic era while the labor market continues to show weakness, a fact reflected in data showing sustained high demand among MGNREGS, the prevalence of high unemployment rates and a deterioration in job quality as HT analyses on December 1, 2021. (see https://bit.ly/3swpb0o)
The proportion of employees in the March quarter fell the most since June 2018.
The headline unemployment rate was 9.4% in the March quarter of 2021. This is the lowest reading since the quarter ended June 2020, which coincided with the 68-day nationwide lockdown imposed on March 25, 2020.
What is the likely outcome of such a situation?
The government hopes its public investment push will incentivize the private sector to invest, which in turn will create a virtuous cycle of income growth. But while highways and logistics facilities help factories move their raw materials and finished goods easily and efficiently, they don’t guarantee they will find buyers. The problem that the Indian economy is currently facing is demand where consumers are reluctant to spend money in the future.
Another set of indicators from RBI’s CCS and IOS underscores this point again. The proportion of factory owners who feel their current production capacity is more than sufficient to meet future demand has increased, but the proportion of consumers who believe their non-essential spending will increase over the next year remains in negative territory. Until this changes, companies may not invest. If this does not happen, future incomes will remain low.
See Diagram 2: Insignificant expenses and adequacy of production capacity
Of course, there will be some multiplier effect of government investment spending from construction workers’ incomes and demand for infrastructure goods like cement and steel – but that alone cannot be expected to rekindle the animal spirits in the Indian economy.