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Home / Companies / People /  India’s economic growth may be strongest in the world: Marc Faber

Mumbai: The Indian economy has the potential to grow at the fastest pace in the world, provided the reforms process does not hit political hurdles, according to Marc Faber, editor and publisher of The Gloom, Boom & Doom Report.

“I think that Indian growth will be among the strongest in the world, along with maybe Vietnam and Cambodia," Faber said in a phone interview from Chiangmai in Thailand without giving a timeline.

Asia’s third largest economy is set to grow by 8.1-8.5% in 2015-16, up from an estimated 7.4% in the financial year ending on 31 March, and accelerate to a double-digit pace in a couple of years, according to the Economic Survey released on 27 February. The estimates are based on a revised way of calculating gross domestic product adopted recently by the government’s statistical arm.

“Will it be 6.5% or 6% or 8%, who knows? Also, GDP (gross domestic product) is not a very relevant statistic in my opinion. More relevant is GDP per capita in real terms, inflation-adjusted," Faber said, adding that the well being of people and an improvement in productivity are the more relevant factors.

Investors have been expecting a pick-up in the Indian economy due to cyclical factors and an expectation that the Narendra Modi government will be able to revive investments in the economy. A fall in inflation levels and lower interest rates are also expected to boost the economy. In anticipation of that pick-up, foreign investors have bought into the Indian equity markets aggressively. After investing nearly $26 billion in stocks in 2014, foreign investors have bought a net of another $5 billion so far this year.

A lot still depends on the political scenario, said Faber.

“In general, if you can grow at just 4%, it’s a huge growth rate compared to Europe and the US. So, relatively speaking, I am positive about the Indian economy, but there is a lot of political resistance to implementation of the reforms at the pace Mr Modi would probably like to do and with the intensity he would like to do," he said.

According to Faber, reducing subsidies, dismantling rural labour empowerment laws and cutting down on bureaucracy are some of the steps that need to be taken, even though resistance to these reforms remain.

In the long run, Indian equities look promising and more attractive than US equities, he says.

Since the start of 2014, India’s benchmark Sensex has gained 38.78%, while the MSCI EM Index lost 2.63%, and the MSCI World Index advanced 6.01. Over the same period, the S&P500 Index and the Dow Jones Industrial Average gained 9.17 % and 13.53%, respectively.

“My sense is that if you look at the world, and if you break it down into the US, Europe and emerging economies, then the US market is the most expensive market," Faber said

“If you have to invest your money in the next 5-10 years, your choice is the US, Europe and, say, Asia and India, then I would say I would rather have money in India than in the US," he said, adding that there is some concern around the valuation of Indian stocks.

“I think the overall market in India is probably at that relatively high valuation because the blue-chips stocks like Nestle, they sell at close to 50 times earnings," he said. “On the other hand, you have many sectors in the market that are not that expensive and where the shares may move up further in 2015."

The Sensex currently trades at 19.33 times one-year estimated price-to-earnings ratio, a substantial premium to its five-year average of 15.7 times, according to Bloomberg data.

China’s Shanghai Composite Index, Brazil’s Bovespa Index and Russia’s RTS Index are trading at 12.71 times, 11.56 times and 6.08 times one-year estimated earnings, respectively, while the US Dow Jones Industrial Average is trading at 16.84 times.

One potential risk emanates from a reduction in liquidity from sovereign wealth funds from the Middle East. A fall in oil prices could squeeze the flow of liquidity from wealth funds of oil-rich nations, some analysts have speculated.

“I think that most sovereign wealth funds will have significantly lower inflow in the next few years, than they had between 2007 and 2014, when their assets essentially doubled from around $3 trillion to over $7 trillion. But, I don’t believe there will be a huge selling pressure from sovereign funds," said Faber. “In fact, my impression would be that sovereign funds will rather reduce their positions in US treasuries and US equities because that’s where they are overweight. They are not overweight really in emerging markets."

Since mid-February, Brent crude has traded around $60, rebounding from a six-year low of about $45 hit in January. Faber expects crude oil prices to settle in the range of $40-60 in 2015.

Separately, Faber is of the view that the US Federal Reserve (Fed) will not hike interest rates this year. At most, the Fed will hike rates by a quarter percentage point by the end of 2015, he said.

A stronger dollar is expected to keep the Fed cautious about hiking rates at a time when other developed regions such as the European Union and Japan are persisting with loose monetary policy conditions.

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