Number Theory: Reading GDP numbers with consumer sentiment data

Here are three charts which offer a glimpse into what might be happening in the economy

World’s fastest growing major economy is suddenly having second thoughts about its growth prospects. The doubts have been triggered by a larger than expected slowdown in the September quarter growth numbers, the RBI overestimating the economy’s growth prospects in its previous projections and a turbulent global environment going ahead. How pertinent and concerning, if at all, are these growth concerns? What lies at the root of the problem? Some of these questions can be understood better if one reads the

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  The slowdown in September quarter was primarily on account of industry losing momentum

  This is the most important takeaway from the Gross Value Added (GVA) numbers. A comparison of growth numbers for quarters ending June 2024 and September 2024 shows that it was primarily the sub-sectors in industry: manufacturing, construction, electricity, gas, water and other utilities and mining (in decreasing order of share in overall GVA) which lost momentum compared to September. In fact, agriculture and allied activities saw an increase in growth and services as a whole saw a decline of just ten basis points. One basis point is one hundredth of a percentage point. Now that the RBI has brought down its growth forecasts for both the December and March quarters of the ongoing fiscal year, it remains to be seen whether the slowdown proliferates to services as well. When read from the expenditure side, the slowdown was broad based, with both Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF) losing growth momentum between the June and September quarters. These two components, which capture consumption and investment demand in the economy, account for more than 90% of overall GDP. See Chart 1A: scatter plot of GVA and GDP

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  Consumer sentiment fell across income categories between the June and September quarters but it was more pronounced among the poor

  This gives an important insight into what might have happened. Consumer sentiment, as seen in the RBI’s Consumer Confidence Survey (CCS) fell between the June quarter and the September quarter of the fiscal year. The CCS conducted only one round in the June quarter; in May 2024, while it had two rounds in the September quarter, in July and September. Net current sentiment which measures the difference between share of respondents who report an improvement and worsening on a given indicator compared to a year ago was lower than the May 2024 readings in both July and September rounds on the important indicator of general economic situation, income, employment and spending. What is even more important is the fact that net current sentiment went from being positive in the May round to negative in both July and September rounds. Because the CCS is only conducted in urban areas, it cannot tell us anything about rural consumer sentiment. Private Final Consumption Expenditure (PFCE) growth fell from 7.6% in the June quarter to 6% in the September quarter. A fall in consumer sentiment and GDP growth including in PFCE in the same quarter suggests that an adverse feedback loop was at play in the economy. What is even more worrying if the fact that consumer sentiment continues to remain weak in the November round of the CCS. See Chart 2: net current sentiment chart

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  What is even more important is the class-divide in consumer sentiment in the economy

  This is another important insight from the CCS numbers. RBI releases unit level data from the CCS with a time lag. The latest unit level data which is available is from the September round of the CCS. Among the best things is about the CCS is that it also collects income characteristics of the respondents in the CCS. If one were to compare the movement in current sentiment on general economic situation between the May 2024 and September 2024 rounds by income class a disturbing pattern emerges. While consumer sentiment has fallen across the board, the deterioration is significantly more pronounced for the low-income categories than the high-income ones. To be sure, a class-asymmetry in consumer sentiment was present even during the May 2024 round, however things have only become worse. See Chart 3: net current perception on general economic situation by income category

• A sustained recovery in private consumption, which is crucial for a recovery in investment demand will take an improvement in consumer sentiment among the poorer sections of the economy. This is easier said than done given the fact that larger fiscal stance is towards consolidation and the proliferation in politically motivated cash transfers across states have not done the job so far.