Modi's policies are pro-growth and favourable for India: Marc Faber

We are in a huge asset bubble worldwide, Faber believes

Despite giving a thumbs up to the Union Budget proposals, MARC FABER, a renowned global investor and author of The Gloom, Boom & Doom report tells Puneet Wadhwa that India's spend on infrastructure remains insufficient. For the next 10 years, investors will be better off in emerging markets than in the US, he says. Edited excerpts:

How do you see the Indian economy shaping up in the backdrop of global headwinds and the Union Budget proposals?

The Indian economy is performing relatively well. In India, there is always this debate at what rate is the economy growing - be it 6%, or 7%, or 8%; and what the potential is. Realistically, if countries like India and China can grow in real terms at around 4%, there is a huge increase in the gross domestic product (GDP) over the long term - especially compared to countries like Japan, Europe, the United States (US), which in the long-term, either not grow or will grow at say 2% per annum.

I think that the Indian economy is not showing signs of any problem. The budget was favourable for growth. However, the infrastructure expenditure in India is still insufficient, as compared to China. Last year, China spent around $1.4 trillion on infrastructure. India's spend on infrastructure, on the other hand, is a small slice of the China's pie. I think more can be done for the infrastructure sector in India.

Post demonetisation, economists have lowered the growth projection for India. What is your view?

I don't think the demonetisation overall has much of an impact from a long-term view. The short term impact, is probably negative. However, the impact over the long term will probably be positive. Firstly, the impact of demonetisation is not substantial since 86% of the bank notes have been turned in and have been exchanged for new currency. It is not that India has become a paperless system. There is still cash in the system, but the old bank notes were collected. Secondly, for India, it is desirable to have more efficient tax collecting system. I am never in favour of high taxes.

In general, the most important thing for the tax system is that taxes are equitable. In order to make taxes fair, they have to be levied on each person equally. One cannot have some people not paying taxes at all and some people high taxes. In the long run, the demonetisation process will be favourable, but not in the short run.

How much importance are the markets and foreign investors likely to give to the outcome of the ongoing assembly elections in terms of continuation of the economic policies of the government?

The outcome will show the support or objection to Narendra Modi's policies. I think, in general, Modi's policies are pro-growth and favourable for India. But I don't think elections, in general, have a huge impact on the stock markets in the long run. I think there are other factors that are more important.

I also fail to understand why the media in India attaches so much importance to the impact of elections on the stock market, when 95% of India's population doesn't own any stock! For the 95% of Indians, the stock market is completely irrelevant. What is relevant for those who are not invested in stocks is the value of the rupee, economic growth and GDP per capita. It is only the media that only focusses on the stock market, as if the stock market was important for the lifestyle of the average Indian.

How much room does the Reserve Bank of India (RBI) have to cut rates over the next few quarters given the domestic and global headwinds?

I hope they don't come down because if they don't fall, it will be good for the economy in the sense that the currency will be stable. If the RBI does cut rates aggressively, the currency will weaken again. For the typical Indian, it is not the stock market that is important, but it is the stability of the currency. If the currency is stable, the GDP per capita (in real terms) will go up.

What is your reading of the first few weeks of Donald Trump's presidency?

So far, not much has been actually done. We don't know how far he will actually go towards protectionism. In general, I believe that Donald Trump, by trying to make America great, will rather be negative for the US and its economy. If one looks at the stock market performance since the beginning of calendar year 2017 (CY17), the S&P 500 is up 3%, India has rallied 8%, Singapore is up 9% in dollar terms; the Hang Seng index, too, is up 5%. Practically, everything has outperformed the US. So, the markets seem to be saying that the policies of Trump and the stricter measures may not be actually be good for the US, and may actually backfire.

What is your view on the emerging markets (EMs) now?

I have been maintaining for a year now that one should invest in the emerging markets and not in the US, which I regard as being overpriced. By any historical standard, the US market is very expensive, the US dollar (USD) level is very high; market valuations are very high compared to the earnings and sales.

For the next 10 years, investors will be better off in emerging markets than in the US. In the last one year, the EM have started outperforming the US; so I would essentially advocate a more positive view of EMs. Relative to the US, EMs are inexpensive. Even Europe is relatively inexpensive compared to the US. I am investing in EMs, but have also investments in bonds, precious metals and in real estate. I also hold some cash. Trump or no Trump, I am not changing my investment strategy.

What could be the key risks to the global financial market stability over the next 6 - 12 months?

I believe that we are in a huge asset bubble worldwide. The risk is that the global asset bubble deflates. Cause is unknown, but every bubble built on credit growth eventually deflates.