A

fter growing an average 7.5 percent year-on-year (yoy) over the past decade, the Indian economy finally stumbled as it grew only 5.0 percent in the last fiscal year.

This this may sound as if it is only of marginal interest for most of us, except that there are many eerie similarities between India's troubles and the current state of the Indonesian economy.

To be sure, Indonesia's growth remains above 6 percent thanks to consumer bullishness, but investment growth has slowed in the last few quarters, just like what happened in India.

There, domestic investment has been choked off by high interest rates, a consequence of stubbornly high inflation (over 8 percent yoy since 2009). Indonesia's inflation is still milder at 5.5 percent, but it is ' just as in India ' already higher than the prevailing deposit rates.

This negative real return has prompted savers to switch to real assets such as gold and real estate, pushing up banks' loan-to-deposit ratio (LDR) and further constraining credit growth.

Domestic and foreign investors are also increasingly adopting a wait-and-see stance toward both countries, concerned about macro stability, especially the twin deficits (fiscal and current account).

The 'big 3' rating agencies have maintained negative outlooks on India since last year, threatening a downgrade to 'junk' status should the government fail to address the problems. Similarly, Standard and Poor's (S&P) revised its outlook on Indonesia to negative last month, citing uncertainty regarding fuel price policy.

Amid the current account (CA) deficit and reduced foreign investment, the rupiah and rupee have become two of the three worst-performing Asian currencies in the last two years. This is despite the glut of excess liquidity washing onto Asian shores post-quantitative easing (QE).

In both countries, the CA deficit grew along with the investment boom, due to the need to import capital goods.

India's CA deficit, at 5.5 percent of gross domestic product (GDP) last year, is certainly more extreme, given its dependence on fuel imports and the extraordinary popularity of gold as a dowry and inflation hedge. Indonesia is better endowed with natural resources, but as commodity prices fell, so this advantage has evaporated, leaving us with a CA deficit of 2.7 percent of GDP.

Being large, multi-party democracies with plenty of poor citizens, unsound but populist-sounding economic policies are potent weapons in both countries' politics.

It might have worked, but at the cost of excessive consumption and money stock growth, which sparked inflation. Similarly, the Indian government's efforts to lift rural welfare through an employment guarantee program backfired as it shifted villagers away from farming, hiking farm wages which in turn caused food prices to spiral upward.

But India's and Indonesia's biggest problem is subsidies, which reduce funding for infrastructure and account for the bulk of their fiscal deficits (5.8 percent and 2.2 percent of GDP, respectively, in the last fiscal year). As the more rural country, India devotes two-thirds of its subsidies on food and fertilizer.

But on the flip side, its fuel subsidies are more manageable than ours, due to two factors: fuel prices are adjustable every two weeks, and gasoline has no longer been subsidized since 2010, meaning there is less misallocation toward private car owners and more direct benefits for poor citizens who depend on diesel fuel, liquefied petroleum gas (LPG) and kerosene.

The similarities become more apparent still as we dig behind the numbers. India's growth, focused as it were on the IT and service sectors, failed to lift its manufacturing industries as strongly due to inadequate infrastructure and complicated labor laws, which greatly restrict companies' ability to hire and fire once they employ over 100 workers.

India's industrial competitiveness fell vis-à-vis other Asian countries, even in fields such as textiles where it traditionally excelled ' clothing exports from upstarts like Vietnam and Bangladesh have surpassed India in the last few years.

Without large-scale manufacturing growth expansion, as happens in China, India's decade of growth mostly created an army of ill-paid security guards and chaiwallahs (people who serve tea in offices) out of the less-educated youths. Lack of opportunities in the cities discourages urbanization, keeping India the most rural of emerging economies by far.

Indonesia's advantage over India lies in its better demographic shape and the fact that manufacturing comprises a greater share of recent foreign direct investment (FDI) projects than in India (53 percent vs 34 percent).

However, the share of population working in manufacturing is still comparable to India's (13 percent vs 12 percent), while the lack of competitiveness of our products is highlighted by our worsening trade balance against ASEAN-China Free Trade Area (ACFTA) trading partners.

Poverty numbers have declined, but the 80 percent of Indonesians who are of lower- or lower-middle income are still highly vulnerable to the vagaries of food and fuel prices, which is why fuel subsidies are perennially popular.

In short, while Indonesia's problems are milder than India's, they ultimately boil down to the same roots: infrastructure bottlenecks, supply-side weaknesses and unequal development. Also similar are the institutional deficiencies, with politicians preoccupied by short-term and more populist objectives.

As elections loom in both countries next year, the political cost of genuine reforms is rising and the sitting government will likely be focusing mainly on stopgap measures and yes, this includes fuel price hikes.

While a fuel price hike is certainly needed to remedy Indonesia's fiscal deficit, it provides only temporary relief and is far from a cure-all. The reduction of fuel imports might cut the trade deficit by 20-30 percent, but otherwise the CA deficit is likely here to stay given China's declining appetite for raw materials and sluggish global growth.

A fuel price hike will also push up inflation and judging from India's experience so might its controversial counterpart, the temporary direct assistance (BLSM). Ultimately, we need to overhaul the current decision making process on fuel prices, which not only is highly-politicized, but also causes uncertainty regarding the timing and size of the fiscal deficit.

A more frequent adjustment within a certain band (á la India) or a mandated cap on subsidies could improve fiscal health and reduce market convulsions associated with a fuel price hike.

Similarly, cash transfer or other assistance schemes that only increase consumption should not be the government's default option given its inflationary potential. Instead, welfare should increase commensurately with productive capacity, which means infrastructure projects and job-skills training for the jobless are likely to be the more humane and sensible way to go.

Finally, since manufacturing is a stepping-stone out of poverty for any labor-rich country, the government needs to accelerate infrastructure development and incentivize investment on labor-intensive industries, as opposed to the current value-based incentives, which tend to favor capital-intensive ones.

It also needs to provide clear guidance on labor negotiation, for example by setting up an industry-specific productivity index as a benchmark for wages, in order to halt the slide of Indonesia's competitiveness against other rising economies.

David E. Sumual is chief economist of BCA Group, of which Barra K. Mamia is an economist.