Recent political turmoil notwithstanding, Indonesia has been an economic success story over the past couple of decades. Early to embrace liberalisation and foreign capital, the country was badly bruised during the East Asian Financial Crisis. However, since then this archipelago of 13,466 islands has seen a very stable but high growth rate. If that doesn’t make Indonesia an attractive destination for Indian exporters, millennia old trade ties and the in the last two years, Indonesia has turned a net importer (from almost always running a trade surplus) surely do

Dr. A.K. Sengupta | @TheDollarBiz

Indonesia comprises a group of islands stretching along the equator in South East Asia. The country’s strategic location fosters both inter-island and international trade. The Europeans arrived in Indonesia in the 16th century seeking to monopolise the commercial trade of commodities like spices. It was initially the Dutch in 1602, who established “The Dutch East India Company” and became the dominant European power in the region. The Japanese invasion and subsequent occupation of the island nation during World War II ended the Dutch rule. The Japanese surrender in 1945 and subsequent developments heralded Indonesia’s independence and national leaders like President Sukarno and General Suharto chartered a new course of economic and trade policies designed to help the island nation develop its true potential. ?It was in fact the dispensation of the “New Order Administration” policy brought into force by General Suharto that spurred investment from the Western nations and brought into focus the role of foreign investment as an engine of economic advancement of the country.  

The late 1990s, however, witnessed a major setback to the rapidly growing Indonesian economy when it was hit hard by the escalating East Asian Financial Crisis. In the aftermath of the crisis, the government took custody of a significant portion of private sector assets through acquisition of non-performing bank loans and corporate assets through debt re-structuring processes. Since 1998, the economy has seen an upswing, with stable growth of 4-6%.

Through the flu

 Although Indonesia is regarded as a market economy, the government owns significant amount of the industrial base following the 1997 financial crisis. In fact, the successful structural reform, which followed the 1997 crisis, helped Indonesia escape the 2008 GFC (global financial crisis) almost unscathed. Since peaking in 2005, Indonesia’s unemployment rate has also seen a perceptible decline. Concerns about runaway inflation have also ebbed, with inflation rate running at around 4-5%. The nation’s ?debt-to-GDP ratio has also steadily declined from 83% in 2001 to less than 26% by the end of 2013 – the lowest among ASEAN countries, apart from Singapore, which has no government debt. Indonesia’s GDP per capita has risen almost five-fold in the past 50 years. Foreign trade has played an important role in this remarkable achievement. In the past 25 years, trade as a share of GDP has increased specifically, partly due to the country’s outward-oriented development strategy. Already ranked among the larger economies in the world, Indonesia offers enormous promise for global investors. An integral component of the MINT – Mexico, Indonesia, Nigeria and Turkey – it is an attractive investment destination due to favourable demographics.

Industrial Indonesia

The industrial sector contributes 47% to the GDP of Indonesia. The two most important sub-sectors of the Industry in the country are mining and manufacturing – two pillars of the nation’s economy since the 1970s and the major engines of economic change and development during Suharto’s ‘New Order’ regime. Although the manufacturing sector seems to have lost its momentum after the Asian Crisis, it still is the most popular sub-sector in terms of attracting FDI and is followed by mining. Indonesia’s mining and manufacturing products include coal, oil, gold, automobiles, electronics, footwear, textile products, paper products and furniture items. The first decade after the Asian crisis saw the industrial sector go through multiple periods of recession as foreign investors stayed away. However, successful navigation through the GFC saw foreign investors regaining their confidence due to robust domestic demand spurred by a growing middle-class, low wages and a promising future.

Trade transition

Till the 1970s, Japan was Indonesia’s dominant trade partner accounting for over 40% of its exports (mainly petroleum) and 25% of imports. Although Japan still remains a major partner, other nations have emerged in recent years. However, trade with Netherlands, which was of primary importance in colonial years when Indonesia was known as the Dutch East Indies, has shown a steady decline. The creation of the ASEAN Free Trade Area (AFTA), which encourages trade within the Asian region, is another factor that has given a directional shift to Indonesia’s trade patterns. Indonesia has almost always had a trade surplus in merchandise trade, with large exports to China, Japan, Singapore, Malaysia and US. But rising consumerism, thanks to a burgeoning middle class with high disposable incomes, has ensured that Indonesia has recorded trade deficits  to the tune of $1.63 billion and $4.06 billion in CY2012 and CY2013 respectively from an average surplus of $25.8 billion in the preceding five years.  

As old as the epics

Every year in the eastern Indian state of Odisha, a unique festival called ‘Baliyatra’ or ‘Boita Bandano’ is celebrated with great spirit and fervour. Literally meaning ‘Voyage to Bali’, the festival is celebrated to mark the day when ancient Odia mariners would set sail to Bali, Java, Sumatra and Borneo (all in Indonesia). Similarly, in Bali, ‘Masakapan Ke Tukad’ festival is celebrated and like what is done in Odisha, toy boats are floated in memory of maritime ancestors. In fact, India and Indonesia have shared two millennia of close cultural and commercial contacts. In modern times, both the then Indian PM Nehru and Indonesian? President Sukarno collaborated closely in supporting the cause of Asian and African independence and later, economic cooperation. As a result, modern day trade between India and Indonesia always had a natural edge and has grown five-fold in the last 10 years – from about $4 billion in FY2005 to close to $20 billion last fiscal. What’s interesting though is that India-Indonesia trade has always been in favour of Indonesia, with India’s trade deficit against Indonesia galloping from just $1.3 billion in FY2005 to over $10 billion in FY2014. In fact, a proper look at all of Indonesia’s top trading partners reveals that India not only runs the highest deficit that any country has against Indonesia, but also the number is so large that it was 50% more than the 2nd biggest – the US – in CY2013! Although this might sound discouraging to an Indian exporter, it simply means we haven’t tapped the Indonesian market the way we should have.

Low hanging fruits

A detailed The Dollar Business Intelligence Unit analysis reveals that there are 10 products, where Indian exporters are missing out on at least a billion dollar worth of opportunities by not focusing on Indonesia. To arrive at this list, we analysed all products (broken down to 4 digit HS codes), where Indonesian imports were worth at least $1 billion, Indian exports were worth at least $1 billion and still there existed an opportunity of at least $1 billion in CY2013. Right on top of this list is petroleum oils (HS code 2710), where although Indian exports were worth $67.07 billion and Indonesian imports were worth $27.85 billion, India’s exports to Indonesia were worth just $180.60 million – a $27.67 billion opportunity. Another glaring opportunity is cotton (HS code 5201). In CY2013, while India exported $4.51 billion worth of this commodity and Indonesia imported $1.34 billion worth of the commodity from across the globe, India’s exports to Indonesia were worth just $62.3 million. If this makes you think that Indian exporters are losing big time, here’s are some more products that will strengthen your belief. Other products/commodities that offer such billion dollar opportunities are Wheat & Meslin (HS code 1001), Soybean Oil Cake (HS code 2304), Cyclic Hydrocarbons (HS code 2902), Polymers of Propylene or other Olefins (HS code 3902), flat rolled products of Iron or Non-alloy Steel (HS code 7208), Electrical Apparatus for Line Telephony (HS code 8517), Automobile Parts and Accessories (HS code 8708) and Cars (HS code 8703). If you add the potential export opportunities for Indian exporters in just these 10 categories, you arrive at a number which is over $47 billion – nearly  17% of India total exports to the world in FY2014. Even if Indian exporters tap opportunities in these categories, the ambitious target of $45 billion set for India-Indonesian trade by 2015 can be achieved in no time. In fact, Indian FDI in Indonesia has also seen a steady rise in recent years. Prominent Indian companies/groups such as Tata Power, Reliance, Adani, L&T, GMR, GVK, SBI and Bank of India have already established fully-owned subsidiaries and joint ventures in Indonesia. India and Indonesia had ?entered into an agreement for promotion of investment in 1999 and a double taxation avoidance agreement (DTAA) in 2012. During the 2011 New Delhi visit of the Indonesian President, negotiations for India-Indonesia Comprehensive Economic Cooperation Agreement (CECA) were initiated. India and Indonesia have also recently agreed to expand cooperation in new sectors like film production. Certainly, things seems to be well in place for an exporter who wants to make the most of the opportunities that this archipelago of 13,466 islands offers.And, if history is a guide to the future, Indian exporters just cannot ignore a now-lucrative market that was one of India’s first export destinations. And going by the opportunities-at-hand, we know our ancestors weren’t that wrong!

Dr. A. K. Sengupta Chief Consulting Editor, The Dollar Business; Former Dean of The Indian Institute of Foreign Trade (IIFT), New Delhi