It has been observed that CEOs and CFOs who present corporate quarterly earnings have spoken of this year's second and third quarters being critical periods that would turn the tide, as the first quarter was quite lacklustre in terms of growth in sales. But this story has been repeated over the years; the forward guidance is always sanguine, and so much so that it has become a rolling hope that pushes optimism to the next quarter. One view is that this simply has to be done, as no CEO can say that the future does not look bright, for that will impinge on the company's share price, which has become the most critical indicator of success.

At the official level, too, there is a lot of data to indicate that things are on the right track, but this tune played out in 2022-23 as well. So, what is one to make of these gung-ho themes that play out on a regular basis?

If one looks at high-frequency data, the picture is positive. The Purchasing Managers Index (PMI) for manufacturing has been at over 57 for all six months of this fiscal year, while the services PMI has been above 58.5. These numbers indicate that companies are selling more of their goods and services, employing more people, and so on. However, last year too these numbers averaged 54-55, and for a period which saw sales driven by pent-up demand. Therefore, while these numbers are very good, all this has not quite brought about a change in the profit-and-loss accounts of companies.

The Index of Industrial Production numbers have also been quite remarkable this fiscal year, with growth of 6% at the aggregate level for the first 5 months. However, growth for durable and non-durable goods has been at -1% and +7.4% respectively. The higher growth in non-durable goods comes over a negative growth rate last year—the famous base effect.

The other indicator which is used as a clinching argument to show that consumption is on a high growth path is India's goods and services tax (GST) mop-up. As this is a consumption-based tax, if its collections are increasing, it suggests higher consumption. Growth in these first 6 months has been around 11%, which comes on top of 32% growth (which was a blip because of the 2021 covid lockdown). However, if consumer goods sales are not growing quite as rapidly, then it is possible GST collections are high because of inflation (which has been high this year) and increased tax compliance (which is clearly evident). Hence, the picture appears to be fuzzy on consumption trends so far.

On the other side, red flags have been raised. The first one is inflation. This has averaged 6.3% in the last three years and 5.5% in the current year, which spells a cumulative rise in the cost-of-living of almost 25%. Retail prices have risen relentlessly. Higher inflation lowers household spending power, and higher apparent consumption outlays have resulted in a decline in household financial savings. This is from Reserve Bank of India data, which showed that the financial savings of households came down to 10.9% of GDP in 2022-23 from 11.1% in 2021-22 and 15.4% in 2020-21.

The second is the pent-up demand phenomenon that provided an impetus in the last two years but could be getting exhausted now. After covid lockdowns, people went out of their way to spend money in a burst of 'revenge spending.' This cycle lasted two years, for sure. In 2021-22, it was manufacturing that got a boost, as households went out shopping in a big way. Crowds at shopping centres were witnessed across the country. In 2022-23, it was manifested in services, with people travelling to various destinations. Dining out also gained frequency, resulting in crowded restaurants and hotels. The hospitality industry received a boost and the severe losses it made during lockdowns were reversed. The question now is whether or not these effects will hold up this festive season. In fact, if diminishing pent-up demand as a factor is combined with high inflation, a boom in this sector might be too much to expect. Also the fact that the cricket World Cup is been staged in India during the same season could mean that one-off-event spending on tickets, travel and food can lower the capacity of people to splurge in traditional ways over the next few months.

Third, it has been pointed out that down-trading is the norm today; people are buying smaller quantities of goods or opting for cheaper alternatives than before. This is a reflection of both high inflation and a trail-off in pent-up demand as financial realities sets in.

Fourth, sales of automobiles are considered a good signal of the consumption of durables. The sales growth of passenger cars and two-wheelers, at 6.7% and 4% respectively in the first half of the year, has declined. In 2022-23, growth ranged between 25% and 35%, thanks to pent-up demand.

Putting both sides of the argument together, it becomes difficult to judge whether consumer demand has revived or slumped, as there is data to support both cases. Corporate commentaries tell only one side of the story because a large part of the demand for goods and services is met by the unorganized sector, which they do not capture.

Consumption has been a persistent challenge for India, as it affects capacity utilization rates, which in turn determines the pace of private investment. This was a conundrum even before the pandemic. The answer for the present is a shoulder shrug at best, until a clearer picture evolves in the next 3 months.