Consumer sentiment saw a slight improvement in May test1 May 2017 saw the consumer sentiment index crossing the base value of 100 after four months test1

The overall consumer sentiment improved a tad during May 2017. The BSE-CMIE-UMich Index of Consumer Sentiment, at 100.2, was 0.36 per cent higher than its 99.8 level in April.

This increase, even though by just a whisker, is significant because the index crossed the base value of 100 after a lapse of four months. As such, it tells us that sentiment has recovered to least around the same as they were in the base period of September-December 2015.

The sentiment hasn’t been very good since the launch of the indices in January 2016. They were mostly below the base value. May 2017 was one among 4 months out of 17 when the index was higher than in the base period.

Since this is the season of judging the performance of Modi sarkar during its three year reign, we can say that during the second half of its reign sentiment has not improved in any significant sense but, they haven't deteriorated much either. Much of the improvement in sentiments is because of the extraordinary communication of the Prime Minister and the episodic interventions done by the government which effectively prop sentiments.

Two things can be said about where we are on sentiments as of May 2017. First, May 2017 shows a rare phenomenon where consumer expectations of economic conditions are lower than the current economic conditions. This has happened only once in the past – in March 2016.

By and large, consumer expectations were always ahead of current conditions. Hopes were always higher than current economic conditions.

This greater hope in the future among Indian consumers is remarkable. It has sustained demonetisation, an apparent lack of jobs, a deteriorating situation in Kashmir and several curtailments on consumption of meat, etc.

Post demonetisation, the index for current economic conditions fell quite sharply. It fell for three consecutive months – in January, February and March. By March 2017, the index of current economic conditions had fallen to its lowest level of 90.5.

In contrast, the index of consumer expectations remained relatively elevated during the January-March 2017 months.

In April and May, current economic conditions recovered much of lost ground. Loan waivers for farmers, better support prices for sugarcane, better agricultural prospects in general played an important role in the improvement of current economic conditions of households.

Expectations did not rise correspondingly in April and they fell in May. As a result, compared to current economic conditions, expectations are lower by a notch today. This is unusual.

Second, the disparity between rural and urban consumer sentiments was accentuated in May. Consumer sentiment in rural India have been better than in urban India. After demonetisation, the sentiment in urban India fell a lot more sharply than they did in rural India. But, in April, consumer sentiment in rural India shot up – largely because of government largesse and also because of a better prospects for agriculture after two years of drought. Urban sentiment had no reason to improve.

As a result, the gap between rural and urban consumer sentiments has widened quite sharply. In May, the index of consumer sentiments for rural India was 104.9, while the same for urban India was much lower at 92.4.

The plight of urban households is best described by its falling labour participation rate. In this measure, the divergence between rural and urban regions has increased recently.

Labour participation rate in urban India fell from being steadily a shade above 45 per cent till October 2016 to 41 per cent by May 2017. LPR is higher in rural India. Till October 2016, it moved in the range of 47-51 per cent. The fall in rural LPR since November 2016 was less steep. It also recovered a bit in May. As a result, the divergence between rural and urban labour participation rate has increased.

During the week ended June 4, the index of consumer sentiments fell by 5 per cent. The fall was concentrated in rural regions. It is quite likely that this reflects the severe curtailment of cattle trade that was announced by the Central government at the end of the preceding week (May 26). By the end of the last week (June 3), Maharashtra government announced its largest farm loan waiver of Rs.300 billion.

Rural India is much larger than urban India and, it seems to be subjected to tremendous uncertainties. Much of this is through policy interventions in recent times. Now, it braces for the monsoon, its traditional source of uncertainty, and hope.

SENTIMENT DOWN IN LATEST WEEK, BUT UP OVERALL IN MAY