A combination of the second wave of Covid-19 and an inflationary spike seems to have done lasting damage to aggregate demand in the economy, findings from the latest Consumer Confidence Survey (CCS) of the Reserve Bank of India suggest.
Despite a significant reduction in Covid-19 infections, the current situation index (CSI) of CCS was at 48.6 in the July round, almost the same as the all-time low of 48.5 in the May 2021 round. The numbers, when broken down, reflect negativity about jobs and incomes, and concerns about rising prices.
CCS is a useful leading indicator of economic performance, especially of private consumption. To be sure, it cannot track the state of the rural economy.
The latest CCS findings — it was conducted between June 28 to July 9 — show that the second wave of Covid-19 has done far more damage to consumer confidence than what the first lockdown and the first wave did.
CSI fell sharply from its March 2020 value of 85.6 to 48.5 in May 2021. The fact it did not recover by the first week of July despite a significant reduction in cases shows that consumer confidence has taken a serious beating from the second wave.
What explains the continuing weakness in consumer confidence despite the second wave of Covid-19 infections ebbing?
A look at various sub-indices in CCS suggests two factors: a weakness in bargaining power of workers and high prices of essentials putting a squeeze on non-essential spending. The numbers speak for themselves. Net current perception — difference between share of respondents who reported improvement and worsening compared to last year — on employment improved from — 74.9 in the May round to -68.2 in the July round of the CCS. But the income sub-index became worse; with the net current perception falling from -50.1 in the May round to -59.1 in the July round. Similarly, net current perception on essential spending increased from 48.7 in the May round to 51.4 in the July round, whereas non-essential spending index worsened from -51 in the May round to -56 in the July round.
“The fact that consumer confidence has not recovered between underlines what we have been saying about permanent damage to demand and a stagflation threat to the economy. Most other high frequency indicators have been painting a relatively better picture because they capture formal sector activity”, said Himanshu, associate professor of economics at Jawaharlal Nehru University.