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MOSL: Fuel or Engines (Economy)-Consumers v/s Businesses-Who will win? The result will be either bad or worse

​Fuel or Engines (Economy): Consumers v/s Businesses: Who will win? The result will be either bad or worse

“Fuel or Engines” is our new monthly product, in which we intend to expand our consumption v/s investment theme. This is an extension to our ‘India 2020’ report released in June 2016.

Whether demonetization has hurt economic activity or not is an ongoing debate; however, it has certainly hurt sentiment of different participants in the economy. The future expectation index (FEI; based on forward-looking surveys of the RBI) of households dipped in 4QFY17, but it remains considerably higher than that of the business sector. While ~30% of households (the lowest in six quarters) expect the employment outlook to improve, only ~9% of businesses (up from multi-year low of 5.2% in 3QFY17) share this optimism. Further, while ~40% of households perceive better income next year, only 1% of businesses (ironically the highest in six years) expect better profit margin. Contrastingly, while a record-high 85% of households expect to increase spending next year, less than one-third of businesses expect a better order book. As we had discussed earlier, this divergence in expectations of consumers and businesses is one of the key reasons for weak investments amid resilient consumption. Only one of these participants (consumers/businesses) will turn out to be correct, and the other will have to change its expectations. In case businesses turn out to be correct, then consumer spending will moderate, leading to a slowdown. On the other hand, if consumers prove to be correct, then businesses will turn more confident, most likely resulting in higher inflation. The result, thus, will be either bad or worse. We believe that it would be better if consumers alter their expectations as that will lead to more sustainable growth after a transitory phase of slower growth.