FUEL OR ENGINES: What does RBI's consumer confidence survey suggest

UEL

NGINES

5 January 2018

RIEND

CONOMY

What does RBI’s consumer confidence survey suggest?

Adjustments to widening divergences key to future growth



Inflationary expectations, as reflected by the households survey conducted by Reserve Bank of India (RBI), has always

been an important variable taken into consideration during the monetary policy meetings. However, the consumer

confidence survey (CCS) for November 2017, which is conducted among households across various cities, has revealed

some conflicting trends.

According to the results of the recent survey, while households’ one-year-ahead expectations of income and

employment are at the lowest level in four years, an overwhelming majority of respondents (second highest on record)

expects spending to improve next year. Moreover, while the current perception (vis-à-vis a year ago) on income and

employment is the worst on record (more respondents expect a decrease than increase), a record-high proportion of

respondents has reported higher spending.

Such widening divergence (i) between current situation and households’ expectations of income/employment and (ii)

between consumption spending and income/employment is unsustainable. The adjustments to these divergences will

determine the future trajectory of economic growth. If the outlook on income/employment does not alter positively,

consumers will most likely revise down their spending outlook, creating more risks to real GDP growth.

Over the past few years,

while consumers have

grown more wary of the

current situation, they have

remained optimistic about

the future

Consumer confidence at second lowest level in seven years:

According to the

results of the recent round of the RBI’s consumer confidence survey (CCS)

conducted in November 2017, the current situation index (CSI) fell from 95.5 in the

previous survey to 91.1

(Exhibit 1).

This is the lowest reading in four years and the

second lowest level on record (data available since 3QFY11 or quarter-ending

December 2010). Likewise, the future expectations index (FEI) has also fallen to a

four-year lowest level; however, it remains better than the level seen in 2012-2013.

Over the past few years, while consumers have grown more wary of the current

condition, they have remained optimistic about the future, as reflected in the

growing difference between FEI and CSI. While the two indices were very close to

each other until 2013, consumers have turned more confident about future from

2014. The present condition, however, started deteriorating after some

improvement seen in FY15. The difference between FEI and CSI was 23.6 points in

the recent survey, one of the highest since the record began in FY11

(Exhibit 2).

Exhibit 2: …and the divergence with future expectations

index (FEI) is among the highest

(5)

Difference between FEI and CSI

Exhibit 1: Consumers’ current situation index (CSI) is among

the lowest on record, according to CCS

140

Current Situation index

Future expectation index

120

100

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

Source: Reserve Bank of India (RBI), MOSL

Nikhil Gupta

– Research analyst

(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405

Rahul Agrawal

– Research analyst

(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

For the first time, more

respondents reported a

decline than increase in

income level vis-à-vis a year

ago

Current perception on income/employment the worst on record…:

The CSI is an

index based on its various components: economic conditions, income, spending,

employment and price level. The primary reason for the sharp deterioration in CSI is

the record-low readings in two of its components – income and employment. The

current perception of consumers on income has fallen to its lowest-ever level. For

the first time, more respondents reported a decline than increase in income level

vis-à-vis a year ago. While only 24.4% of respondents perceived their income rising

during the last one year, 28% of respondents – highest ever – perceived a decline in

their incomes

(Exhibit 3).

Similarly, the current perception on employment was also the lowest on record.

While the perception on employment has never been very high and has been in

negative territory earlier also, almost half of the respondents – highest on record –

perceived that the employment situation worsened during the last year

(Exhibit 3).

…however, record-high proportion of respondents reported higher spending:

Household income is one of the most important determinants of spending ability.

Economic theory tells us the higher the income, the higher the consumption.

However, CCS responses fail to match such economic theory. Although the current

perception of consumers about income (and employment) was at the lowest on

record (more respondents perceived a decline in income last year than increase), we

note that an overwhelming majority of consumers (~85% on net basis) reported

higher spending

(Exhibit 4).

Not only the share of respondents reporting higher

spending has increased in the past few surveys, but it has also increased to a record-

high of 84.3% in the recent survey.

Is this a coincidence that

when a record-high number

of respondents turned

pessimistic about income

and employment, the

highest number of

respondents reported

higher spending?

Is this just a coincidence that when a record-high number of respondents turned

pessimistic about income/employment, the highest number of respondents

reported higher spending, or is this the peak of irrationality? If consumer confidence

survey is not credible enough to be considered seriously, how credible then are the

inflationary expectations of households, which are considered an important input in

monetary policies, especially when both the surveys are based on responses from

about 5,000 households?

Exhibit 4: …however, spending perception improves to

record-high in November 2017 (% of net responses)

Consumer confidence survey: Current situation

Spending

(LHS)

Income

(RHS)

Exhibit 3: Current perception on income and employment at

record-low level (% of net responses)…

(10)

(20)

Employment

Income

Consumer confidence survey: Current situation

-3.6

(30)

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

-19.3

(10)

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

Source: RBI, MOSL

Net response = % of respondents with increase - % of respondents

with decrease

5 January 2018

Only ~33% of respondents –

on net basis – expect higher

income next year, down

from ~40% in 2016

Outlook for income/employment has also deteriorated significantly…:

Not only has

the current perception, but the one-year-ahead expectations have also witnessed a

serious dent in the past few surveys. According to the recent survey, only ~33% of

respondents – on net basis – expect higher income next year, down from ~40% in

2016

(Exhibit 5).

This is the second lowest reading on record.

Similarly, less than one-fifth of respondents expect an improvement in employment

condition over the next year, which is the lowest optimism in four years

(Exhibit 5).

Only ~45% of respondents – lower than ~60% in 2014 – expect an improvement in

employment conditions over the next year, while 27.4% – as against less than 10% in

2014 – anticipate a deterioration in the employment situation.

…however, future perception on spending still very robust:

Once again, however,

the survey fails to provide any support to the economic theory. While the one-year

ahead outlook for income and employment has fallen sharply and close to multi-

year lows, the future perception of consumer spending is close to its all-time highs.

While only about 2% of respondents – lowest on record – expect a decline in

spending over the next year, ~87% of respondents – close to the record high of

88.5% in March 2017 survey – expect an increase in consumer spending. Thus,

84.6% of respondents – on net basis – perceive an increase in consumer spending

over the next one year

(Exhibit 6).

Only ~45% of respondents –

lower than ~60% in 2014 –

expect an improvement in

employment condition over

the next year

Like the past year,

consumers are more

optimistic about the

spending next year than

their income and

employment prospects

Not only has the proportion of respondents – on net basis – expecting an increase in

spending over the next year has increased during the past few surveys (it was 80.7%

in June 2017 survey), but it is also close to the all-time high reading on record

(85.4% in March 2017 survey).

In short, like the past year, consumers are more optimistic about the spending

outlook next year than their income and employment prospects.

Exhibit 6: …however, spending outlook remains buoyant (%

of net responses)

100

Employment

Spending

Income

CCS: One-year expectations

Exhibit 5: One-year-ahead perception on income and

employment has also fallen (% of net responses)…

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

CCS: : One-year expectations

Income

(20)

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

Source: RBI, MOSL

5 January 2018

The divergence between

the present situation and

the future expectations for

income and employment

has also widened

considerably

Divergence between the present and future has widened:

As we noted the growing

divergence between consumers’ income/employment situation and their spending,

it is also important to note that the divergence between the present situation and

future expectations for income and employment has widened considerably.

In line with growing pessimism on the current situation, consumers have also

revised down their future expectations on income and employment. However, the

alteration in the future prospects is still mild relative to the present situation. While

more number of respondents reported a decline in income than increase last year,

about a third of respondents – on net basis – expect higher income next year. The

gap between the present situation and the future outlook has widened to 37

percentage points (pp), the highest on record

(Exhibit 7).

Similarly, while the one-year-ahead expectations on employment have also been

revised downward, about 18% of respondents expect employment to improve next

year and ~20% respondents – on net basis – reported deterioration in employment

during last year

(Exhibit 8).

The gap, thus, has widened to about 38pp.

Continuation of high

spending amid slower

income growth indicates

toward further fall in

household savings

Nevertheless, consumer spending remained buoyant during the past year and is

expected to remain as buoyant over the next year

(Exhibit 9).

While this is

perplexing, a continuation of high spending amid slower income growth indicates a

further fall in household savings.

Exhibit 8: Employment outlook is also expected to improve

substantially (% of net respondents)

37pp

(20)

Perception on employment

Compared to year ago

One-year expectations

Exhibit 7: Consumers expect better income in future amid

very weak present (% of net respondents)

22pp

(20)

Perception on Income

Compared to year ago

29pp

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16 Mar-17 Nov-17

Source: RBI, CEIC, MOSL

Exhibit 9: Confidence on spending remains undeterred by

income/employment outlook (% of net respondents)

100

(20)

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

Exhibit 10: Lower number of respondents expect higher

inflation over the next year (% of net respondents)

100

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 Nov-17

Source: RBI, CEIC, MOSL

Perception on Price level

Compared to year ago

One-year expectations

Perception on spending

Compared to year ago

One-year expectations

5 January 2018

Adjustments to growing divergences key to future growth:

As we have discussed

earlier too (here and

here),

such divergences between income/employment and

consumption spending is unlikely to sustain for a long period of time. Pre-2013, the

proportion of respondents – on net basis – expecting higher income and spending

was close to each other. During 2013-14, while consumers turned wary of their

spending perception (which was also reflected in weak GDP growth), their income

outlook was still healthy.

Post-2014, however,

expectations have reversed.

While consumers turned

more optimistic on

spending, their income

outlook started worsening,

which has continued till

date

Post-2014, however, expectations have reversed. While consumers turned more

optimistic on spending, their income outlook started worsening, which has

continued till date. Consequently, while real GDP growth has maintained, household

savings have fallen drastically from ~23% of GDP in FY12 to ~18% in FY17 (Exhibit

11). Since savings are the primary raw material for domestic investments, it is not

surprising that domestic investments have fallen from ~40% of GDP in FY12 to ~33%

in FY17

(Exhibit 12).

Exhibit 12: Investments rate has fallen even more

dramatically during the past 5-6 years

Gross capital formation (% of GDP)

39.6

20 20 19

39.2

35.4

35.7

34.9

33.2

Exhibit 11: Household savings have fallen sharply toward

~18% in FY17

Household savings (% of GDP)

23 22

FY 99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17E

E = Our estimate for Physical savings

FY12

FY13

FY14

FY15

FY16

FY17

Source: CSO, RBI, CEIC, MOSL

If the outlook on

income/employment does

not alter positively,

consumers will have to

revise down their spending

outlook, creating risks for

real GDP growth

Since such divergences between income/employment and consumption must

disappear over time, the future course of economic growth will depend on the way

of convergence. If the economic environment improves, consumers are more likely

to turn optimistic about their income/employment perceptions and continue

spending more with higher savings. On the other hand, if the outlook on

income/employment does not alter positively, consumers will have to revise down

their spending outlook sooner rather than later. While the former scenario is the

most desirable case, the latter will create more risks to real GDP growth. According

to our base case, the possibility of the second scenario is more than the occurring of

the desirable (first) scenario.

5 January 2018

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5 January 2018