Boston Analaysis - Consumer Sentiments

INDIA WATCH THE BOSTON ANALYTICS CONSUMER SENTIMENT INDEX (BACSI) FOR INDIA—REPORT HIGHLIGHTS JULY 11, 2008

The Boston Analytics Consumer Sentiment Index for India (BACSI)

Consumer Sentiment as an Economic Indicator Household consumption expenditure is a key driver of economic growth. Consumers tend to increase consumption when they feel confident about the current and future economic situation of the country and their own financial situation. Therefore, Consumer Sentiment Indices have proven to be reliable indicators of the economic health of market economies and future economic activity. For assessing consumer sentiment and evaluating how it changes over time, it is important to translate this subjective measure into a numeric index that can be consistently calculated and longitudinally compared. The usefulness of quantifying consumer sentiment is evident in academic economic literature on business cycles. The widespread use of two such indices in the United States – the Consumer Confidence Index and the Consumer Sentiment Index, which report household sentiment numbers on a monthly basis – have established the credibility and usefulness of sentiment as a key leading economic indicator.

Overview of BACSI The burgeoning Indian economy has created strong growth opportunities for domestic and international businesses and investors. In order to make effective decisions pertaining to future economic conditions, policymakers, businesses, and investors need an accurate and reliable assessment of consumer sentiment. The Boston Analytics Consumer Sentiment Index (BACSI) for India is designed to indicate the level of consumer sentiment over time. Inspired by consumer sentiment indices in the developed and emerging world—including the University of Michigan’s Consumer Sentiment Survey and the Conference Board's Consumer Confidence Survey—the BACSI has been carefully designed to reflect the features and conditions of the Indian economy. The monthly BACSI is intended to be the most frequently released consumer sentiment index by an independent research organization in India.

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Consumer sentiment records a marginal increase in June 2008 Exhibit 1 below depicts the performance of the BACSI for India between January 2008 and June 2008 Exhibit 1: Performance of the BACSI Composite for India: January 2008–June 2008 115.0 110.0 105.0 100.0 95.0 90.0 85.0 80.0 75.0 70.0

100.0

95.0

102.7

94.2 96.9

93.6

Jan '08

Feb '08

Mar '08

Apr '08

May '08

June '08

Source: BACSI Survey—June 2008

The Boston Analytics Consumer Sentiment Index (BACSI) for the month of June stood at 96.9, a slight increase of 2.9% from May’s level. As shown in Exhibit 1, consumer sentiment at a nationwide level has increased marginally. Sector-based disaggregation of the data reveals several factors driving this slight increase, including respondents’ confidence in the economy and employment and their high propensity to spend. However, sentiment related to inflation remained very low and acted as a significant offset. Since March the BACSI Composite has remained below the base number of 100 reflecting a generally lower level of optimism among respondents. Exhibit 2 below depicts the performance of the two sub-indices of the BACSI -the BACSI Current Situation Index and the BACSI Future Expectations Index -against the movement of the BACSI Composite. Exhibit 2: Performance of the BACSI Composite, BACSI Current Situation Sentiments Index and the BACSI Future Expectations Sentiment Index: January 2008–June 2008

115.0 110.0 105.0 100.0 95.0 90.0 85.0 80.0 75.0 70.0

106.5 102.7

100.0

99.4

98.1

Feb '08

95.0

93.6 92.8

Jan '08

100.3

95.7 94.2

95.6 94.2

96.9 95.3

90.7

Mar '08 Apr '08 May '08 BACSI Composite Current Situation Sentiment Index Future Expectations Sentiment Index

Jun '08

Source: BACSI Survey—June 2008

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The BACSI Current Situation Sentiment Index stands at 95.3 for the month of June 2008, recording an increase of 5% over the previous month. The BACSI Future Expectations Sentiment Index increased by 4.9% from 95.6 in May 2008 to 100.3 in June 2008. The long-term expectations of stronger economic conditions, stronger job security, and higher household income primarily explain the difference between the higher Expectations Index and the Current Situation Index. At the nationwide level, approximately 78% of respondents expect the nation’s economic conditions to be stronger in the next 12 months compared to the present state. Of these, more than half expect the economy to become much stronger over the next 12 months. There is an increase of almost 52% (compared to the survey results in May) in the number of respondents expecting economic conditions to improve significantly in the future compared to the previous month. Respondents across the metros have expressed a similar level of optimism about the change in their households’ financial condition. Almost 78% of respondents expect their household’s financial conditions to improve in the next 12 months. June saw 48% more respondents expecting a significant increase in their household income in the coming 12 months compared to that of May.

Double-digit inflation spells fear for the consumer India’s inflation accelerated to a 13-year high after concerns about surging global crude oil prices pushed the Government to hike domestic fuel prices. Survey respondents were asked to express their sentiment about the current state of inflation along with their expectations regarding inflation one year from now. Nearly 44% of respondents observed a significant increase in current price levels compared to the past 12 months, an increase over survey results in May. In the June survey, approximately 53% expect a significant increase in prices in the next 12 months compared to 42% in the May survey. Exhibit 3 below depicts the performance of the BACSI Composite and the BACSI Inflation Sentiment Index between January 2008 and June 2008. Exhibit 3: Performance of the BACSI Composite and BACSI Inflation Sentiment Index: January 2008–June 2008 150.0 127.1

130.0 110.0

100.0

95.0

102.7

90.0

94.2

93.6

70.0

96.9

57.4 48.4

50.0

42.7

36.2

30.0 Jan '08

Feb '08 BACSI Composite

Mar '08

Apr '08

May '08

Jun '08

BACSI Inflation Sentiment Index Source: BACSI Survey—June 2008

The BACSI Inflation Sentiment Index has fallen by nearly 37% since March 2008. The index has fallen by almost 15% in the last month from 42.7 in May 2008 to 36.2 in June 2008. Significant metro–wise differences in opinion were also noted. (Details are available in the full–length BACSI report.)

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Employment sentiment records a marginal increase The combination of high job security and an increase in the level of confidence in creating alternative means of employment has lead to a marginal increase in the BACSI Employment Sentiment Index. Exhibit 4 below depicts the performance of the BACSI Composite and the BACSI Employment Sentiment Index between January 2008 and June 2008 Exhibit 4: Performance of the BACSI and BACSI Employment Sentiment Index: January 2008–June 2008 Source: BACSI Survey—June 2008

115.0 110.0 105.0 100.0 95.0 90.0 85.0 80.0 75.0 70.0

102.7 100.0 93.6

95.0

94.2

96.9

84.6 79.8

Jan '08

Feb '08

BACSI Composite

Mar '08

77.5 Apr '08

71.1 74.6 May '08

Jun '08

BACSI Employment Sentiment Index

The BACSI Employment Sentiment Index, which had been declining since January, increased by 4.9% to 74.6 in June. There has been an increase of about 23% (compared to the survey results for May) in the number of respondents expecting job security to increase in the next 12 months. Furthermore, respondents’ confidence in their ability to create alternative means of employment if they lose their current job or business has also increased by 12% during the past month. However, nationwide, the number of respondents expecting an increase in unemployment levels also rose during June. The positive impact of increasing job security and confidence in creating alternative means of employment outweighed the negative impact of an expected increase in unemployment. The survey results also indicate that opinions among respondents in Kolkata were significantly different compared to other metros. Detailed coverage of this can be found in the full–length BACSI report for June 2008.

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Real Estate Perceptions Index is upward bound It is evident from recent news that the real estate sector in India has been hit hard by high interest rates, rising input costs, and the credit crunch. There are signals of realty prices easing across the country, though the change is gradual and concentrated in certain regions within cities. Exhibit 5 below maps the BACSI Real Estate Sentiment Index against the BACSI Composite between January 2008 and June 2008. The rise in this index reflects the fact that a greater number of respondents have observed and are expecting construction activity to increase. Exhibit 5: Performance of the BACSI and BACSI Real Estate Sentiment Index: January 2008–June 2008 115.0 110.0 105.0 100.0 95.0 90.0 85.0 80.0 75.0 70.0

110.6

100.0

102.7

94.8 93.6

Jan '08

Feb '08

Mar '08

BACSI Composite

96.5

97.0

98.4 96.9

95.0

94.2

Apr '08

May '08

Jun '08

BACSI Real Estate Sentiment Index Source: BACSI Survey—June 2008

Consumer Spending Sentiment Index shows a major jump Exhibit 6 below tracks the movement of the BACSI Consumer Spending Sentiment Index against the movement of the BACSI between January 2008 and June 2008 Exhibit 6: Performance of the BACSI Composite and BACSI Consumer Spending Sentiment Index: January 2008–June 2008 115.0 110.0 105.0 100.0 95.0 90.0 85.0 80.0 75.0

114.8 104.5 100.0

107.6

106.8

104.6

102.7 96.9 93.6

95.0

Mar '08

Apr '08

94.2

70.0 Jan '08

Feb '08

BACSI Composite

May '08

Jun'08

BACSI Consumer Spending Sentiment Index Source: BACSI Survey—June 2008

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The BACSI Consumer Spending Sentiment Index has recorded a significant increase during the last month. The current index value for June stands at 114.8, an increase of about 9.7% over the level in May. The index is based on the respondent’s expected expenditure on consumer durables, automobiles, and homes. The ascending graph indicates that consumers are spending despite inflationary pressure and interest rate hikes. One reason that might justify increasing propensity to consume is the expectation of an increase in household income. Our survey reveals that almost 77% of respondents across the four metros expect an increase in household income over the next 12 months. There is an increase of almost 29% in the number of respondents expecting a significant increase in household income over the next 12 months. There exist interesting city–wise differences underlying the aggregate consumer spending index. For a detailed discussion on these differences refer to the full-length report for June 2008. Perceptions regarding expenditure on basic necessities have been a strong contributor to the index value. At a nationwide level, about 85% of the respondents are expecting an increase in expenditure on basic necessities over the next 12 months. There has been an increase of about 20% in the number of respondents expecting a significant increase in expenditure on basic necessities compared to the previous month. This might be due to the inflationary impact on the basket of goods while assuming no major change in consumption behavior. While there is a general belief that interest rate–sensitive sectors such as auto and real estate would face selling pressure under inflationary conditions, the survey reveals contradicting results. More than a third of respondents expressed their desire to buy durable/white goods and/or a vehicle within the next 12 months. Despite the perception of increasing real estate prices and rising interest rates, a third of respondents indicated their desire to buy a house in the next 12 months. The number of respondents wanting to purchase a house in the next 12 months has increased by 27%. The survey revealed that more than a third of respondents are likely to buy durables within the next 12 months. Furthermore, close to 39% of respondents also expressed a willingness to buy a durable in the next six months, while 36% indicated willingness to purchase a vehicle (car/two-wheeler) in the next 12 months.

Methodology The Index is derived from a monthly survey of 3,000 respondents across four major Indian metropolitan areas—Delhi, Mumbai, Kolkata, and Chennai. A stratified sampling process was adopted for this survey, with the strata based on the socio-economic conditions of the respondents in order to ensure a proper representation of the population. All data is collected via face-to-face interviews. The BACSI is computed from 25 questions of the Boston Analytics questionnaire covering various variables affecting a consumer’s consumption sentiment. As a first step towards computing the index, diffusion values (representing the positive bias in responses) are computed for each question. Secondly, the Grand Index is computed from the ratio of weighted sum of the diffusion values of the current survey and the base survey. The weights are based on the importance of each variable on a consumer’s sentiment.

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Sample Distribution Gender: The survey comprised 67% males and 33% females. Age: In the survey, 16% of the respondents fell into the 18 years to less than 25 years age group; 30% in the 25 years to less than 35 years age group; and 22% of the sample were in the 35 years to less than 45 years age group. The age group of 45 years to less than 55 years was represented by 21% of the respondents; and 11% represented the 55 years and above age group. Annual Household Income: Of the total respondents, 9% had an annual household income less than Rs 2.5 Lakhs; 18% recorded between Rs 2.5 to 5 Lakhs; and 32% comprised the Rs 5 Lakhs to 10 Lakhs category. The higher brackets of Rs 10 to 20 Lakhs and more than Rs 20 Lakhs were represented by 31% and 10% of the respondents, respectively.

Monthly BACSI Reports and Executive Summaries The executive summary of monthly indices report are available for download at www.bostonanalytics.com//india_watch/india_watch.html. The full reports are available for purchase as a subscription or individual reports, and customized disaggregated reports can be produced by Boston Analytics to meet clients' specialized requirements.

The executive summary of the Boston Analytics Consumer Sentiment Index for India Report is available for download. The full report is available for purchase, and customized disaggregated reports can be produced by Boston Analytics to meet clients' specialized requirements. To learn more, or to purchase a complete report or subscription, visit www.bostonanalytics.com, e-mail [email protected], or contact In India:

In the US

Shirin Bagga Boston Analytics 3rd Floor, PIant # 19A Godrej & Boyce Complex LBS Marg, Vikhroli (W) Mumbai 400 079, India +91 22 25182092

Ted Thorbjornsen Boston Analytics 175 Federal Street 14th Floor Boston, MA 02110 617.457.7888 ext. 302

Core Team: Dr. Sam Thomas, Ted Thorbjornsen, Shirin Bagga, Debopam Chaudhuri, Anand Kalyanraman, Shyam Sundar Kundu, Rahul Razdan, Amit Gill, Shalaka Pradhan, Ena Sahni, Abhishek Tupe Student Intern: John Thomas, University of Pennsylvania (Wharton School)

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Ted Thorbjornsen [email protected] 175 Federal Street, 14th Floor Boston, Massachusetts 02110 Tel: +1–617-457-7888 (Ext: 302) Fax: +1–617-457-7889

Shirin Bagga [email protected] 19-A, 3rd Floor, Godrej & Boyce Complex Gate No. 4, LBS Marg Vikhroli (W), Mumbai – 400079 Tel: +91-22-25182902 Fax: +91-22-6714-0101

www.bostonanalytics.com 9

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