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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 94.2
100.0 102.7
95.0
96.9
90.0 93.6
85.0
80.0
75.0
70.0
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
110.0 106.5
105.0 100.0 102.7
98.1 100.3
100.0 95.7 95.6
95.0 96.9
95.0 93.6
99.4 94.2 95.3
90.0 94.2
92.8 90.7
85.0
80.0
75.0
70.0
Jan '08 Feb '08 Mar '08 Apr '08 May '08 Jun '08
BACSI Composite
Current Situation Sentiment Index
Future Expectations Sentiment Index
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 96.9
90.0 94.2
93.6
70.0 57.4
48.4
50.0 42.7
36.2
30.0
Jan '08 Feb '08 Mar '08 Apr '08 May '08 Jun '08

BACSI Composite 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
105.0 102.7
100.0 100.0
95.0 94.2 96.9
95.0 93.6
90.0
85.0
84.6
80.0
79.8
75.0 77.5 71.1
70.0 74.6
Jan '08 Feb '08 Mar '08 Apr '08 May '08 Jun '08
BACSI Composite 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

115.0 110.6
110.0
105.0
100.0 100.0 96.5 98.4
102.7 97.0
94.8 96.9
95.0
90.0 93.6 95.0 94.2
85.0
80.0
75.0
70.0
Jan '08 Feb '08 Mar '08 Apr '08 May '08 Jun '08

BACSI Composite 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

114.8
115.0
110.0 107.6 106.8
104.5 104.6
105.0
100.0 100.0
102.7
95.0 96.9
93.6 95.0 94.2
90.0
85.0
80.0
75.0
70.0
Jan '08 Feb '08 Mar '08 Apr '08 May '08 Jun'08

BACSI Composite 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 IndiaWatch@bostonanalytics.com, or contact

In India: In the US

Shirin Bagga Ted Thorbjornsen


Boston Analytics Boston Analytics
3rd Floor, PIant # 19A 175 Federal Street
Godrej & Boyce Complex 14th Floor
LBS Marg, Vikhroli (W) Boston, MA 02110
Mumbai 400 079, India 617.457.7888 ext. 302
+91 22 25182092

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 Shirin Bagga
indiawatch@bostonanalytics.com indiawatch@bostonanalytics.com
175 Federal Street, 14th Floor 19-A, 3rd Floor, Godrej & Boyce Complex
Boston, Massachusetts 02110 Gate No. 4, LBS Marg
Tel: +1–617-457-7888 (Ext: 302) Vikhroli (W), Mumbai – 400079
Fax: +1–617-457-7889 Tel: +91-22-25182902
Fax: +91-22-6714-0101
www.bostonanalytics.com

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