State Budget Review: Incentives Yet to Lift Manufacturing Sector

Photo by Industry Ministry

JAKARTA (TheInsiderStories) – Various incentive packages granted by the government have yet to trickle down to higher manufacturing activity and reverse a corrosive pattern many consider as Indonesia’s ‘de-industrialization’.

Minister of Industry Airlangga Hartarto places the blame for the country’s abundance of natural resources as the reason for the so-called ‘de-industrialisation trend’.

In the State Budget for 2018, the government expects the manufacturing and other industrial sectors could contribute the higher revenues for the country. Next year, Indonesia targeting the State revenues could reached Rp1.878,45 trillion (US$139.14 billion).

Indonesia’s manufacturing sector grew an average of 4.79 per cent annually from 2001-2014, a drastic recovery from the period before the 1997-1998 crisis, during which the manufacturing sector grew around 11 per cent annually and outpaced economic growth.

Against this, last year Indonesia’s manufacturing sector grew only 4.25 per cent, lower than the 4.79-per cent overall economic growth.

The administration of President Joko Widodo has set an ambitious target for the manufacturing sector, aiming to account for 30 per cent of the nation’s GDP. Currently, the sector is responsible for an estimated 20.8 per cent of the nation’s economic activity.

‘We depend too much on agricultural produce such as CPO, mineral fuels such as coal and other raw materials. These three compose nearly 60 per cent of our exports. We fell asleep during the commodity boom of the past decade and neglected to upgrade our manufacturing capability,’ Hartarto complained to TheInsiderStories.

Therefore, the government has introduced various incentive packages, such as tax holidays and allowances, and lower gas prices. The government has also established five new special economic zones outside Java, namely Sei Mangke (North Sumatra), Morowali and Palu (Central Sulawesi), Konawe and Bantaeng (South East Sulawesi), in the hope that industrial activity will benefit from the proximity of raw materials.

The government has also granted a tax allowance facility, in the form of a six-year, 30 per cent cut on corporate income tax. The government proposes to alter the threshold for qualification for the facility to $100 million/1,000-strong payroll from a current $200 million / 500 staff.

Hartarto pointed out how Indonesia’s manufacturing-to-GDP ratio was still below that of South Korea (29 per cent), China (27 per cent) and Germany (23 per cent): Indonesia needs to develop more added value capabilities, such as labor-intensive consumer goods and automotive components.

‘We are fully aware that our manufacturing industry need to be rebuilt, requiring private sector investment, instead of depending on the state budget. Our ministerial budget is only around Rp2.8 trillion, and this is simply not enough,’ he said.

He expects to secure Rp1,759 trillion in foreign direct investment and domestic direct investment during 2015-2017, to develop higher value-added sectors like chemicals, industrial products, machinery and wood manufacture (commodities).

Hartarto said Indonesia’s reliance on low labour wages in attracting investment in the manufacturing sectors means that the nation is not yet on the same ground as such high value-added economies as South Korea and Taiwan, as well as its peer Thailand (which posts around $200 billion in annual processed agriculture product exports, compared to Indonesia’s $23 billion).

Thus, since early 2017 the government has promoted what it terms ‘Industry 4.0’, intending it to be implemented in manufacturing industries to cut production costs by 12-15 per cent through the application of technology.

In addition, there are other contemporary technologies such as big data, autonomous robots, cloud and augmented reality that can boost manufacturing productivity. Cement, petrochemicals, food & beverages and automotive are among the sectors ready to implement Industry 4.0 technology.

Coordinating Ministry of Economic Darmin Nasution explained that policy to rebuild manufacturing has been implemented through 16 economic policy packages that focus on basic metals, petrochemical and pharmaceuticals – most of which is still imported.

In the last three years, Indonesia has processed 65,000 tons of ferro nickel and nickel matte into stainless steel, with 2 million tons of capacity per year, and this figure is expected to rise to 3 million tons per year through a Kalimantan smelter site run by state-owned alumina producer PT Indonesia Asahan Aluminium.

In last year’s Economy Policy Package XI, the government opened up the pharmaceutical sector to offshore investors when it revised its Negative Investment List, allowing 100 per cent foreign ownership in pharmaceutical companies (from a previous 85 per cent).

‘We want to increase the domestic production of raw materials for medications, particularly for five product categories (namely biotechnology, vaccines, herbal extracts, active pharmaceutical ingredients, and medical devices) through drawing up a new roadmap for the pharmaceutical industry.’

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com