Over the past decades, Indonesia's manufacturing industry has developed from a significant growth engine (for the whole economy) into a less significant one. Prior to the Asian Financial Crisis in 1997-1998, non-oil & gas manufacturing accounted for 30 percent of Indonesia's gross domestic product (GDP). Today, however, the figure is around 18 percent. If we add the oil & gas industry, then the figure rises only slightly to 19.9 percent.
De-industrialization is among the factors that caused the sliding role of manufacturing within the Indonesian economy. Another (related) factor is the lack of infrastructure development (this has particularly been felt since the era of Reformation) that gives rise to high logistics costs and therefore makes the industry less appealing to investors. Meanwhile, the quality of Indonesia's human resources is also regarded inferior compared to human resources in countries such as China and Vietnam.
More recent factors include protectionist policies in countries like the United States and India. Meanwhile, domestically, logistic problems, the reliance on imported raw materials, and the insufficient power supply form bottlenecks for development of Indonesia's manufacturing industry.
In 2017 the contribution of non-oil & gas manufacturing toward Indonesian GDP is estimated to have slid further to 19.9 percent (from 21.4 percent in the preceding year). Still, the Indonesian government remains optimistic that a rebound is to occur soon.
In full-year 2018 the government wants to see a 5.67 percent year-on-year (y/y) growth pace for the manufacturing industry, higher than the estimated 4.7 percent (y/y) growth pace in 2017.
Indonesian Industry Minister Airlangga Hartarto said accelerating growth in Indonesia's manufacturing industry is expected to occur on the back of strong growth in the (1) food & beverage sector, (2) chemicals, pharmaceuticals & traditional medicines sector, and (3) metal goods, electronics & electrical equipment sector.
Meanwhile, the government will provide the manufacturing industry three tax incentives in an effort to boost the industry. It involves a 200 percent tax allowance for those investors who want to invest in vocation programs to improve training and skills for their workers. Secondly, a 300 percent tax incentive (from the value of the investment) will be offered to those who invest in innovative products. Thirdly, those who invest in labor-intensive industries that focus on exports can also expect to obtain a tax incentive (the exact amount depending on the number of workers employed in the company).
Haris Munandar, Industry Ministry Secretary General, said the government can aim for higher growth of the manufacturing sector in 2018 because infrastructure development is well on its way since the arrival of Joko Widodo as president. New harbors, toll roads, airports as well as industrial zones and power plants are being build and some are (nearly) ready. This will reduce logistics costs and make the investment climate more attractive.
Contribution Manufacturing Industry to Indonesian Economy:
Source: Bisnis Indonesia