income

Consumer Confidence in the Economy has Diminished

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The Reserve Bank of India recently released the consumer confidence survey, which had some interesting insights. The survey was conducted in May with a sample drawn from the 6 major cities of New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad. So, we must be aware of the extreme urban bias of the survey. Nonetheless, consumer perception about their current state and their expectations about the future can sometimes capture what the statistical data cannot.

In short, 48% of the population believe that the overall economic condition has worsened from a year ago, while 32% believe that their situation has improved. The rest believe that there is no significant change.

These tables from an article in Mint captures the summary of the consumer confidence survey.

Similarly, nearly 44% believe that their job situation has worsened and a majority of people believe that their incomes have remained constant in the last one year. This should ring alarm bells for the ruling government. In a fast growing economy, it should be worrying if a majority of people believe that there is a worsening or even a status quo of their income, job prospects and overall economic conditions.

The perception of those surveyed are contrary to the data. While GDP growth in the latest quarter has been the highest in the past two years, people believe that the economy is siding. Inflation perception does not correlate with the data as well. People largely believe that the inflation situation has improved in the past year, though CPI has been rising continuously.

The question, then, is whether we can take the results of this survey seriously. The answer is yes. People make decisions based on their perception and expectations of the future. They do not necessarily follow data released by the Central Statistical Office. Those decisions can result in a self-fulfilling prophecy. If enough people believe that the economic situation will worsen, they will postpone investment and big consumption decisions, and will choose to save instead. This will result in reduced demand and slack in the economy.

On that note, it is slightly reassuring to note that people are quite optimistic about the future. A majority of the people believe that all 4 of the parameters spoken above will improve in the coming year. However, the article also points out that the numbers were higher in 2014.

The Lure of the Government Job

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The Hindustan Times carried a piece on April 22nd which said that the Indian Railways is set to carry out the world’s largest recruitment drive, one that will fill ninety thousand vacancies from a pool of 2.5 crore applicants.

What struck me most was this seemingly innocuous quote by one of the applicants:

I am anxious for a job and a regular income.

This rather simple statement fits into a hypothesis we have developed over the last few weeks: employment can affect income in two orthogonal dimensions – through income stimulation and through income stabilisation. Income stimulation happens purely because the budget line of an unemployed individual shifts to the right once she becomes an employee. By income smoothening or stabilisation, we mean that the employee is reasonably certain that she will receive her employment wage over the next few payment cycles. For example, a job like the now famous Pakoda seller demonstrates an income stimulation effect but lacks income stability. A software engineers’s job at a large firm by contrast does better on both income stabilisation and income stimulation.

Now, the simple observation by the railway job aspirant shows that the lure of a government job is that for less well-paid jobs, a government service leads to income stabilisation as well as income stimulation which is not the case with a private job for the same skill level. At least that is how the perception is. And this is essentially the lure of a government job. What this means is that for any meaningful rise in employment in India, private sector jobs will have to compete with government jobs on both these dimensions.