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The legislators need to support privacy to establish consumer confidence. RBI on June 4, 2020 had released the consumer confidence survey which was conducted through telephonic interviews across May 5 to May 17, covering 13 cities. The consumer confidence in India has collapsed in less than two months during the Covid-19 lockdown. Covid-19 pandemic has caused many countries to shut large segments of their economies. The relationship between the number of COVID-19 cases and consumer confidence provides insight into the optimal prioritization of these two competing aims. A strong negative correlation indicates that reopening the economy before the number of cases falls is less likely to reignite economic activity. On the other hand, a weak negative correlation indicates that consumer confidence and consumer spending could return even without curbing the number of COVID-19 cases.
The report is showing that the consumers have started to enter the zone of pessimism. It is talking about how the consumers have become pessimistic on the current economic situation regarding employment, income and their spending. Until now, it was only minority people who felt that there are chances of their income’s shrinking. But the recent survey shows that 50% are seeing their income’s coming down. Households see the general prices and inflation rising over as compared to the previous rounds. As a result, 10% said that they would spend less on essentials and around 46% said that they would cut their spending on non essential items. Consumers have reported sharp cuts in discretionary spending. There was a sharp increase in the median inflation perception and expectations in May 2020. The real GDP of our country is expected to contract by 1.5% in the year 2020-21. It is also predicted that it will rise by 7.2% in the upcoming year. In the same way, the Real Gross Value Added is expected to contract by 1.7% but will probably expand to 6.8% in the upcoming years.
Salient features of the report
- The consumer confidence index and the future expectations index recorded a sharp fall in May 2020.
- The perception of the consumer on employment scenario, economic situation is going down to the contraction zone.
- Consumers reported sharp cuts in discretionary spending and overall consumer spending remained afloat due to relative inelasticity in essential spending.
What is consumer confidence
Consumer confidence is basically an economic indicator. It measures the optimistic level that the consumers have in the country’s economy and their own expected financial situation. When there is an increase in the consumer spending, it helps the economy sustain its expansion. The consumer confidence declines when they become less certain on their financial prospects. Due to such reasons they spend less of their money, which in turn reduces the overall sales. If the consumer spending declines, then the economy experiences a slowdown and eventually entering the state of recession.
- The consumer confidence index is basically a survey, which is administered by the conference board.
- It is based on the perception that when the consumers are optimistic they usually spend more and they will stimulate the economy if they are pessimistic.
- It is generally a confidence survey of around 5000 households and is released on the last Tuesday of every month.
Factors that affect the consumer confidence
- Unemployment- Rising unemployment discourages consumers.
- House prices- Rising house price enables households to re mortgage and gain equity withdrawal.
- Uncertainty- A political or an economic change can lead to uncertainty which reduces confidence.
- Economic growth- Consumer confidence increases when there is a positive economic growth and recession will associate a fall in consumer confidence.
- Current economic situation- The news of loss in employment is a key factor that will make the consumer confidence very low. The current Covid-19 crisis has seen a drop in the employment sector, resulting in joblessness of many citizens. This makes the consumer confidence very low.
- Personal debts- It will be a major concern if the economy slows down or the interest rate are too high.
- Inflation and real wages- Higher the inflation, lower will be the confidence. In the same way, stagnant and falling real wages will make people more pessimistic and which in turn leads to low consumer confidence.
- Widespread household deleveraging lowers the consumer confidence.
- The dominance of short term thinking leading to absence in long term strategic activity leads to lower the consumer confidence.
The consumer confidence has been conducted by the RBI on a quarterly basis since June 2010 and then on a bi monthly basis since March 2016. The expectations and the consumers spending in the report are of three forms: positive, neutral and negative; and increased, decreased and remained the same. The two sub-indices are combined by the RBI to calculate the consumer confidence. The current situation index (CSI) and the future expectation index (FEI) are calculated on the net responses. CSI/FEI= 100 + average of net responses. The CSI and the FEI can take values between 0 and 200. If an index value is over 100, then it implies that the consumers are optimistic about the current and future situations. The responses to the three main variables; income, spending and employment are recorded in a percentage form. The spending and income will be the consumer’s own personal spending and personal income.
If confidence falls because of uncertainty, it can have a significant impact on the other economic variables like the firms may react by delaying the investments. Sometimes confidence can be influenced by non-economic factors and prove temporary, e.g. a major sporting success may improve confidence, but this could be very short lived.
The consumers across the world are closely following corona outbreak. In Japan, consumers more closely follow the number of COVID-19-induced deaths, which is likely a function of scepticism regarding testing in Japan. This suggests that policymakers have to slow the cases confirmed and the induced deaths before consumer confidence and consumer spending can improve. Reopening the economy in an environment of depressed consumer confidence is unlikely to generate adequate economic activity to justify the health risks.
Author: K.Yugantara from Sastra University, Thanjavur.
Editor: Silky Mittal, Junior Editor, Lexlife India.