India’s consumer confidence has taken two years to recover from demonetisation

• The results of Reserve Bank of India’s latest consumer confidence survey, for December 2018, showed a significant rise in consumer sentiment.
  
• In fact, the overall score on the future expectations index reached near a level seen before the demonetisation in November 2016.
  
• The recent recovery in consumer sentiment may be due to the fact that inflation hit a 18-month low in December, as oil prices plummeted and the rupee appreciated.

The results of Reserve Bank of India’s latest consumer confidence survey, for December 2018, showed a significant rise in consumer sentiment.

In fact, the overall score on the future expectations index, which measures respondents’ optimism about the economic scenario within a year, reached near a level seen before the demonetisation in November 2016.



Despite the government’s attempts to window-dress the negative impact of demonetisation, It is widely understood that it wreaked havoc on the economy. In the quarters following the note ban, a number of small businesses shut down due to lack of working capital, farmers weren’t able to sell their produce, normal banking operations were disrupted and investment plummeted.

The recent recovery in consumer sentiment may be due to the fact that inflation hit a 18-month low in December, as oil prices plummeted and the rupee appreciated.

These confidence surveys are seen as a proxy measure when it comes to gauging aggregate demand in the short term and assessing people’s views on the economy. A positive trend indicates the possibility of higher spending by consumers in the short-term and that may boost growth.

While a household survey for December 2018 showed that 76% of respondents expect inflation to rise in the coming fiscal year, the consumer confidence survey indicated that people expect a rise in income and employment opportunities in the same time period. The effects of this already showed in January, as sales of passenger vehicles rebounded.

The government and the RBI may hope that the rate cut on February 7 will add fuel to fire up consumption further, and that will see the economy stay buoyant through the upcoming elections in the summer.


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