Home / Opinion / Views /  The star emerging market economy of the moment isn’t India

In August 2013, an analyst at the global financial giant Morgan Stanley coined the epithet 'Fragile Five' for emerging market economies that had become too dependent on fickle foreign investments to finance their growth ambitions and were thrown into volatility by the US Fed-triggered taper tantrum. A Fragile Five economy alongside India and others was Indonesia.

The global economy is in tumult once again, with the advanced economies teetering on the verge of sharp slowdown or even recession. Russia’s war, food and fuel crises, supply chain disruptions, China’s zero-covid havoc and financial tightening led by the US Fed’s monetary tightening are making it tough for nearly all economies. Low-income ones, such as Sri Lanka and to an extent Pakistan, are battling sovereign debt crises.

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While many Asian economies, including India, in general aren’t looking as bad, one Southeast Asian is proving to be a star. Indonesia (smaller than India with population of 274.8 mn and GDP of $1,065 bn) is recovering from covid disruptions at a brisk pace.

Indonesia, Southeast Asia’s largest economy, performed better than estimated in the quarter, April to June, powered by a commodity-led exports boom and robust spending, defying global inflation pressures, financial market volatility and the tapering of fiscal stimulus measures taken during the covid crisis—its 5.4% GDP growth compared to a year ago beat all forecasts, and is the fastest growth in four quarters. The economic recovery picked up speed in late 2021 and is strengthening this year, supported by domestic demand as well as favorable global commodity prices.

Its inflation, which averaged 1.6% last year, and was 4.7% this August, is among the lowest in the world. Rupiah is the best-performing Asian currency this year (India’s rupee is the second best-performer but mainly because the central bank has been hectically spending dollars from its foreign exchange reserves to defend it against a strengthening dollar).

India, meanwhile, although the world's fastest growing economy at the moment, has been growing below potential for years. Its programme of economic reforms started in 1991 has been in reverse gear, with the government in office rolling back liberalisation policies in trade and looking to reintroducing quasi licence-permit-raj-type measures, such as those in the draft telecom bill for services such as Gmail, WhatsApp and Signal.

The Asian Development Bank (ADB) expects Indonesia’s economy to grow by 5.4% in 2022 and by 5% in 2023. ADB finds Indonesia is coping well with threats to growth, and consumer spending is robust. The Asian Development Outlook 2022 Update just out says robust consumer demand has more than offset lower government spending. Inflation is projected to be 6% through June 2023 (because of higher commodity prices and the recent fuel price increases) and to ease to below 4% by end 2023.

Exports are booming (exports grew 30% to $28 bn in August compared to last year) for a second year in a row. Not only because commodity prices are too (Indonesia is a big exporter of coal and palm oil), but because Indonesia’s exports of textiles, garments, footwear, machinery, furniture and electronics are also growing. Its trade surplus widened to $15.55 billion in the June quarter, up nearly 150% from the same period a year ago, in spite of a temporary export ban on palm oil.

Travel and private consumption spending, which contributes to half of GDP, gained momentum during Eid festivities, as lockdowns were eased.

The country’s fuel subsidies have helped suppress inflation due to which Indonesians haven’t lost spending power as much as people in other countries. With inflation in control, Indonesia’s central bank raised interest rates for the first time in three years in August to 3.75 per cent, as inflation crossed the target level in sync with global trends of rising prices.

How did Indonesia, with an unenviable record on corruption and environment protection, and longstanding challenges, including low tax revenues and shallow financial markets, put itself on the road to prosperity?

The Indonesian economy’s resilience is ascribed (by the International Monetary Fund, among many) to policies for maintaining macroeconomic and financial stability despite the severe impact of the pandemic, helped by substantial policy buffers accumulated over years of strong macroeconomic performance.

The country’s response to covid was a bold and comprehensive, and well-coordinated, policy package that has successfully maintained economic and financial stability. With the recovery underway, they began withdrawing the exceptional support measures in time.

Indonesia's ambitious structural reform agenda underway includes the passage of the tax reform law, a carbon tax for climate change mitigation, and a commitment to return to the pre-pandemic budget deficit ceiling of 3 percent of GDP by 2023 without too steep expenditure adjustments. Like India, Indonesia is striving for digitalisation too.

Indonesia’s policymakers want its reserves—a third of the world’s total and as large as the largest in Australia—of nickel, the mineral required for making batteries, to be used for developing a global electric vehicles manufacturing base. Foreign companies have started refining nickel ore in the country after Indonesia banned its export in 2020. The country is building eight plants for producing EV battery-grade nickel. South Korea’s LG and Hyundai are building the country’s first EV battery cell plant. Hyundai is building an EV plant. Indonesia has its eyes set on Tesla’s Elon Musk for big-bang investments in EVs, the next big global industry.

In five years, Indonesia’s nickel-dependent exports have zoomed from $1.1 bn to nearly $21 bn.

The country is also focusing on building human capital for which it has roped in businesses to reform education institutions and state-owned firms that dominate sizeable chunks of its economy. Its reformed labour regulations to spur job creation have, in fact, brought foreign investment inflows from manufacturing firms looking to locate some of their production facilities outside China.

Indonesia is also building physical capital—toll roads, airports, ports and new dams.

The centrepiece in Indonesia’s transformation is the new capital being built, Nusantara, four times the size of the present capital Jakarta, which sinking due to the rising sea waters. By its centennial in 2045, Indonesia hopes to be the world’s fourth-biggest economy.

Yet, challenges remain: improvements to education, women’s labour force participation, and governance frameworks, as also on energy subsidies.

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