Revival in consumer sentiment faces headwinds from high unemployment scenario

A number of high frequency indicators in October have returned to pre-Covid levels or even touched new highs amidst festive season demand and normalisation of economic activities, but questions remain if this momentum will continue with at least some concerns over job creation and inflation.

Muted private consumption demand after the second wave of the pandemic has been a cause of concern and improved consumer sentiments could help lift GDP growth.

The gross goods and services tax (GST) revenue collected in October was ₹ 1,30,127 crore, which was the second highest ever since introduction of the indirect tax levy and second only to that in April 2021.

Manufacturing sector also gathered steam in October with the IHS Markit India Manufacturing Purchasing Managers’ Index at 55.9 last month.

Similarly, India Services Business Activity Index signalled the strongest rate of growth in ten and-a-half years in October at 58.4.

Digital payments scaled new highs and the Unified Payments Interface processed transactions worth ₹7.71 lakh crore last month.

There are hopes and expectations that the demand momentum will continue and the impact of the third wave, if any, will be negligible.

“Steady decline in new cases and the progress achieved in vaccinating a sizeable proportion of the population have led to the relaxation of restrictions in most states. This has progressively revived both production activities and consumption demand. Pent up demand during the festival season is likely to improve conditions, further paving the way for improved capacity utilisation during the third quarter,” said Brickwork Ratings.

Consumer confidence

The Reserve Bank of India’s Consumer Confidence Survey revealed that consumer confidence index (CCI), based on current perception compared with one year ago, for September 2021 improved to 57.7 vis-a-vis 48.6 in July 2021.

“Consumers reflected lower pessimism on the prevailing general economic situation, employment scenario as well as household income and expenditure; the current situation index (CSI) for September 2021 improved when compared with the earlier survey rounds conducted after May 2020,” the survey said.

However, CLSA’s proprietary online survey of 1,000 Indian consumers found tentative consumer confidence with 73 per cent of respondents having either lost their jobs or had a drop in incomes.

“This income uncertainty continues to play on consumers’ minds ahead of the festive season. Although two-thirds noticed increased discounts during festive season, a larger proportion plan to lower (37 per cent) versus raise (27 per cent) Diwali spending,” it noted.

It also cautioned that price hikes and possible hardening of rates through 2022 could hurt demand unless consumer sentiment improves.

Job creation

Job creation also continues to be a worry. According to CMIE, the all-India unemployment rate remained elevated at 7.75 per cent last month compared to 6.86 per cent in September.

“Despite the overall improvement in operating conditions, jobs failed to increase,” noted Pollyanna De Lima, Economics Associate Director at IHS Markit on the manufacturing PMI data.