Are consumers losing confidence in the Indian economy?

Let us understand the driving factors behind the loss of consumer confidence in Indian economy.

August 23, 2019 9:58 IST | India Infoline News Service
Indian auto sales have been slowing for almost 8 months in succession. However, till very recently, words like “economic slowdown” and “loss of consumer confidence” were only spoken in hushed tones. The cat was let out of the bag by the Economic Survey ahead of the July Budget and later by the RBI monetary policy in August 2019. Both these documents explicitly spoke about risks to GDP growth triggered by global factors and slowdown in domestic consumption. What exactly explains weak consumer sentiments? Is this ephemeral or is it more structural in nature?
Consumer Confidence Index narrates a weak story

Consumer Confidence Index
Data Source: RBI
If you consider the RBI Consumer Confidence Survey as a benchmark for consumer confidence, there has certainly been a sharp dip in the latest quarter. Advance estimates for September quarter has shown a very sharp fall. An earlier survey conducted by IPSOS had also observed a slide in consumer sentiments since January 2018. A third survey conducted by CSFB earlier in 2019 had concluded that Indian consumer’s propensity to postpone their consumption decisions had increased to one year; the highest in the recent past. But what exactly is driving this loss of consumer confidence.
Why is consumer confidence dipping?
There are broadly 6 reasons why the consumer confidence has been slipping in the recent past
  • Most consumers are seeing the current economic conditions as tougher than a year earlier due to weakness in most businesses.
  • Massive layoffs across key sectors like automobiles, banking, auto ancillaries has led to consumers becoming increasingly cautious.
  • The guidance on demand coming from some of the leading FMCG companies and consumer finance companies has been clearly indicative of a slowdown.
  • Income growth in the last one year has been much slower than earlier years and that has toned down their perception of future income growth leading to caution.
  • Monetary tightness after the IL&FS default and the DHFL crisis has led to concerns among consumers that funds may not be easily available.
  • Lastly, consumer confidence has been also dented by recent cases like defaults on FMPs and major write-offs taken by mutual funds. Consumers are becoming less optimistic about future investment income. LTCG tax has also dampened sentiments.
How to address this loss of consumer confidence

For the Indian consumer, it has been a confluence of factors. The good news is that inflation is still under control but liquidity and the business environment is getting tighter. That is making a lot of consumers sceptical about their future. Here is what the government must do.
  • This is the time to give tax breaks; in fact there is no better way to revive consumer confidence other than through tax breaks. For starters, the government can put off the HNI surcharge for now, make LTCG tax-free once again and give additional exemptions under Section 80C and Section 24. The only way to revive consumer confidence is to revive consumer spending and tax breaks impact immediately.
  • The second step in reviving consumer confidence is to take quick action in cases where there are defaults, frauds, etc. Nothing builds consumer confidence than the urgency shown by the government to bring erring parties to book. Cases like IL&FS, Jet Airways and DHFL cannot be allowed to fester for so long.
  • Lastly, it is essential to understand why consumer confidence dips. It happens when consumers decide to hoard cash. The only way consumers don’t hoard cash is when they have confidence in future growth. That can only come with a big thrust to spending by the government. That may actually hold the answer to dipping consumer confidence.

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