The Republic of Indonesia is currently the 16th largest economy in the world and is in roads to become the seventh largest by 2030. The population comprises mostly of the mobile youth and middle class as it is around 135 million which will be a strategic value addition in achieving the desired goals of socio-economic prosperity, connectivity, digitalization, qualitative industrialization, modernization and above all more liberalized democracy in the country in the days to come.
Its glorious history is lamented with turbulences and post-colonial times however, because of successive leadership strategic vision, constant implementation of structural reforms, connecting ethnic diversity into unshakable social harmony, shaping political differences into pure and genuine pluralism consisting of democracy, socio-economic development and balanced foreign policy has aided it in becoming a stable economy and functioning democracy in the world.
Critical analysis reveals that Indonesia’s robust annual growth revolves around commodities production, private consumption and fixed investment into manufacturing and production sector transforming its economy, ecology, industry and of course politics in the country.
Experts highlight that the Indonesian economy is anticipated to soar from the heightened public consumption and investment but will also face headwinds, notably from worsening terms of trade in the days to come.
GDP growth is projected to go at an average of 5.1 percent during 2024-26. Consumption will continue to drive growth, supported by an increase in public consumption as new social spending programs from the incoming administration would take effect.
Headline inflation is expected to remain stable, averaging 3 percent in 2024 and would remain stable 2.9 percent thereafter, well within target but facing upward pressure from food and energy prices. With increased social spending and public investment, the fiscal deficit is expected to be higher but would remain within the 3 percent rule. The external position is expected to remain challenging due to sluggish recovery in global trade and financing pressures. 
In recent times, the government is making integrated efforts into developing the country’s manufacturing base and to removing barriers to inculcate business establishment as it seeks to create an environment that promotes healthy competition among domestic players thus promoting the corporate culture of public-private partnership. It is good omen that the inflows of foreign investment contributes extensively to Indonesia’s GDP, export revenues and employment, however market capitalization remains significantly lower than other Southeast Asian economies which needs to be revisited and readdressed accordingly.
It is predicted that the Indonesian economy will achieve further diversification, stability, sustainability and resilience while achieving greater infrastructural development especially after the construction of the new capital. Therefore, integrated efforts should be initiated to gear-up inflows of the FDI and domestic investments in infrastructure development, services, and banking and finance cooperation thus catering the pace of the real estate industry and tourism in the country.
It is recommended that the upcoming government should boost domestic revenue mobilization through the implementation of the “Tax Harmonization Law”. However, given a tax gap of 6 percent of GDP, additional reforms to broaden the tax base, enhance compliance, and reducing the widespread informality among businesses will be important and difficult to achieve.
Additionally, specific reforms could include lowering tax thresholds, removing tax exemptions that are not people friendly, and improving audit mechanisms to ensure compliance. In the medium-term, tax collection could also be improved through third-party data that helps track and verify incomes/revenues.
It seems that Indonesia stands at a critical juncture in its economic development, with the private sector poised to assume a more pivotal role in driving growth and innovation. To transcend its middle-income status, Indonesia must accelerate annual growth to more than 6 percent.
This would require a productivity increase of 3 percent one percent higher than recent averages. Attaining the ambitious goal of high income status by 2045 demands a dynamic and productive private sector.
Indonesia’s private sector is dominated by many small firms, but ironically there is economic dominance of a few large firms. Indonesia’s private sector is vast, home to 66 million businesses, of which only a mere amount 9 million are formally registered. It is predominantly composed of micro, small, and medium-sized enterprises (MSMEs), with a significant presence in wholesale and retail (54 percent), accommodation and food services (20 percent), and the processing industry (14.5 percent). There is an urgent need to further develop public-private partnership in Indonesia so that desired goals of Vision 2045 may be achieved.
Obviously Indonesia offers unlimited opportunities for investments, joint ventures, business & commerce and especially the large availability of resources and labor makes it a hub for foreign investments. However, there is an urgent need for further dissemination of market intelligence which is important as Indonesia is a unique society with a rapidly improving set of policies and regulations.
It is crystal clear that Indonesia is the largest economy in ASEAN and a significant member of the G20. It has a large market potential, greater degree of market openness, and relatively inclusive financial markets. The growth of the Indonesian economy is mainly supported by domestic consumption, exports, and investments therefore successfully mitigating all previous internal shortcomings and external shockwaves. Moreover, its future prospects are promising and a good omen for business thus giving hope of economic stability, sustainability, political maturity, social harmony and the last but not least, green transformation.
In this connection, contractions in export and import, dependency on commodity exports and the role of diversification need to be addressed at the earliest. Indonesia still heavily relies on commodity exports such as oil, gas, and agricultural products. This dependency renders Indonesia vulnerable to fluctuations in global commodity prices, thereby underscoring the significance of export diversification to mitigate such risks. Therefore, export diversification becomes crucial to reduce this dependency and enhance Indonesia’s resilience in the face of external market fluctuations.
The impact of currency appreciation on export diversification currency appreciation should be balanced. Infrastructure, production costs, trade regulations, and market access also wield influence over the country’s capacity to diversify its exports which needs to be harnessed.
It is suggested that to tackle the sluggish pace of export diversification, Indonesia must improve its product competitiveness on the global arena consisting of quality, production efficiency, innovation, and nurturing a robust national brand. Furthermore, proactive trade negotiations with key export destinations can enhance market access.
Interestingly, the Indonesian economic performance of 2023-2024 showcases important structural trends. Firstly, growth has been predominantly driven by the services sector. The transportation and warehousing sector experienced the highest growth at 15.28 percent (yoy), followed by other service sectors at 11.89 percent and the accommodation and food services sector at 9.89 percent. Secondly, sectors such as agriculture, mining, and manufacturing, have grown below the national growth rate. The agricultural, forestry, and fisheries sector grew by 2.02 percent, while the manufacturing sector grew by 4.88 percent. Addressing these challenges necessitates a focus on reindustrialization, as evident from the need to optimize the growth of labor-intensive sectors.
Unexpectedly, Indonesia’s industrial landscape has witnessed a concerning trend of de-industrialization, reflecting the declining proportion of manufacturing industries to the economy since 2002, with the sharpest decrease observed since 2009. This decline has also affected production output and employment, leading to a decrease in the value added by the manufacturing sector and rings bells of danger for achieving Vision 2045.
Moreover, the role of the manufacturing industry in contributing to the GDP has been dwindling since 2008. In the last 15 years, Indonesia’s proportion of manufacturing to GDP is among the lowest in ASEAN, with a contribution of 18.3 percent in 2022, compared to 27.8 percent in 2008 and revival of this should be the utmost priorities of the new government.
