Inflation positive for rural income growth: Vindi Banga

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India's inflation concerns would impact the FMCG sector which will hamper the spending capacity for Indian consumer and the products in the space. Hindustan Unilever (HUL), in a recent interaction, pointed out that India is one of the toughest markets on a competitive basis for players in this space.

Vindi Banga, Senior Partner of Clayton Dubilier and Rice (CD&R) and former CEO of HUL spoke to CNBC-TV18's Sonia Shenoy and Mitali Mukherjee, where he said that inflation will eat into the disposable income of ordinary consumers in the end. He also believes that it would have some benefits from increasing food prices, as this will lead to greater growth in rural income which are dependent on the farm sector.

He further stated, "Companies will pass on some of the commodity costs to the consumer. Most companies are not planning to pass on the entire cost. They will have to find innovative ways of reducing the total system cost."

India's growth story seems to be heading nowhere and has been getting quite a bit of bad press lately. However, when asked Banga whether it would be a good option to invest in the Indian market, he said, "The Indian market has been growing at 8-9% GDP growth. Therefore, everybody's eyes are on India from around the world."

Below is the verbatim transcript of the interview. Also watch the accompanying video.

Q: What do you see in terms of the competitive environment for FMCG players in a country like India?

A: I don't keep a track of it, but HUL has done a remarkable job of not only protecting itself but also growing. The results that declared for last year had a very good growth rate. The company seems to be doing very well to exploit the full potential of the Indian market place.

Q: The conscious shift in the HUL strategy is that they have moved from protecting margins into increasing market share, something that they were struggling with competitors like P&G . Do you think that will be the likely strategy for it to move ahead, focus and regain in terms of market share?

A: Market share is the best predictor of future cash flow which is hugely an important thing. Gaining market share means that you are growing faster in the market. If you do that consistently over time, your profitability will rise. Growing market share is the best way to sustainable profit growth.

Q: There are concerns that India's inflation and the kind of impact it would have on the sector would hamper the spending capacity for Indian consumer and FMCG products. What is your view on that?

A: That is a real challenge. Inflation in India is a big issue, both in the area of food prices and energy prices. In the end, this will eat into the disposable income of ordinary consumers.

On the other hand, there are some benefits that come from increasing food prices because this will lead to greater growth in rural income amongst those who are dependent on the farm sector.

There is a little bit of a silver lining there, but net all off, inflation is a concern for the government.

Q: Rising commodity cost and higher consumption of raw material seems to be such a persistent issue for FMCG and consumer goods companies. From a macro perspective, how will businesses be able to battle this commodity inflation and re-emerge with stable margins?

A: Companies will pass on some of the commodity costs to the consumer. If you read the statements from most companies, they are not planning to pass on the entire cost. The difference will come through innovation.

They will have to find ways of reducing the total system cost. The best companies will manage to do this and use the inflationary crisis to spur themselves on to even greater efforts.

Q: While demand may not get crimped significantly; the fear, in phases like these when inflation is high, is that many FMCG companies will have to live with down trading. Could it be a real outcome of the environment we are in?

A: There is always that pressure, but successful companies will compete with that by improving their products, innovations and continuing to capture consumers' attention.

In the end, prices are not important. The only thing that is important is the value. Value is a combination of quality and price. If you improve the quality, you will have a much better chance of competing and succeeding in an inflationary environment.

Q: You are part of a private equity (PE) organisation now and India has been getting quite a bit of bad press lately. Is it a market that you are looking at carefully in order to invest in?

A: Yes, of course. India is one of the few markets that has been growing at 8-9% GDP growth. Therefore, everybody's eyes are on India from around the world. They all want to participate in that growth and find a way of playing in it.

Q: As PE firms allocate further capital to emerging economies, what type of presence will Clayton Dubilier have in India over FY12 to FY14? Within that, what specific sectors would be of interest to you? As of now, Clayton Dubilier has not directly invested into the Indian markets. When do you think that time will be?

A: Today, we operate our two offices. We have an office in New York and London. We generally invest in global portfolio companies. At the same time, we are looking to engage more directly in the economic progress of a country like India. We are thinking about ways to do that.

Q: There will be a new person at the helm in Tata next year. There were some talks that you were one of the possible candidates. Would you care to comment on that?

A: I have recently taken on this position with Clayton Dubilier about a year ago. It's a fantastic firm and I am enjoying it thoroughly.