In Life of Pi, Martel suggests that fiction is the selective transforming of reality. How valid is this assertion?

There are many different opinions of what fiction is, but this is not an unrealistic explanation of what it is. The selective transformation of reality means that there is a grain of truth in fiction, but it is distorted to make a different story. In many ways, all fiction has some semblance of reality in it, no matter how fantastical it is.
Think of stories as outlandish as The Lord of the Rings or the film Avatar, and you can find the real world hidden beneath the surface. The Lord of the Rings follows, in part, a fictionalization if the author’s experience in World War I with his three closest friends, which can be seen in the story. Avatar, the film, while even more outlandish, is a critique on real-world practices of environmental destruction and the harming of native cultures for profit. So it can be seen that fiction is always surrounding a kernel of truth. In this way, that quote is sound.