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Manufacturing needs boost
Source: BPS,World BankThe Trade Ministryâs ambitious target of tripling exports within five years will require an investment of Rp 1
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Source: BPS,World Bank
The Trade Ministry's ambitious target of tripling exports within five years will require an investment of Rp 1.09 quadrillion (US$86.63 billion) in the manufacturing sector, which is a fivefold increase from the current level, and will not be possible without policy breakthroughs.
The manufacturing industry accounts for about 24 percent of Southeast Asia's largest economy and has been key to creating jobs and boosting exports, but its contribution to the economy has declined from about 30 percent a decade ago.
The Industry Ministry has set a target that investment in the manufacturing sector should reach
Rp 447 trillion in the next four years, but an official has said it will need more than twice that figure to match the Trade Ministry's target of tripling exports from the $183.3 billion estimated last year.
'We really need extra effort to triple our exports. Our previous investment goal will not be sufficient to support the target,' said Haris Munandar, the director of the Industry Ministry's industrial climate and quality policy research center.
Additional investment in manufacturing is vital to help expand a wide range of prospective export items, such as chemicals, plastics, textile, metal, pulp and paper and food and beverages.
Along with the investment, a large number of small-to-medium and medium-to-large enterprises would also be expected to proliferate. At least 9,000 new industrial firms could emerge if investment met the figure set in the ministry's plan, on top of nearly 24,000 such industrial firms now.
Indonesian Institute of Sciences (LIPI) economist Latif Adam considered these targets to be unrealistic. 'The government's target of growing manufacturing investment by fivefold to help exports triple is not realistic,' Latif said on Sunday.
To generate investment in the manufacturing industry, the government must achieve specific breakthroughs, including providing basic infrastructure to support industry and incentives to offset poor business conditions, particularly in areas outside Java, he said.
'Fiscal incentives must be flexible ['¦] Simplifying the licensing process for business players should be more realistic,' Latif said, criticizing the government's so-called 'tax holiday' fiscal-incentive policy as too rigid.
The new administration has launched a one-stop licensing system, which has eased the permit process, to attract investors.
The tax holiday ' a policy rolled out under the previous administration led by former president Susilo Bambang Yudhoyono ' gives a five- to 10-year tax break for five sectors, including base metals and oil refining and basic petrochemicals, for investments with a minimum value of Rp 1 trillion.
Indonesia also offers tax allowances that cut taxable income to 30 percent of total investment realized over six years, accelerates depreciation and amortization, charges tax of up to 10 percent for offshore taxpayers and carries forward losses from five to 10 years.
However, investors find these fiscal incentives unattractive because of their lengthy procedures.
Finance Minister Bambang Brodjonegoro maintained that the existing fiscal incentives were adequately flexible.
'We just maybe need to market [the incentives] to companies and ease procedures so that they will be more attractive,' he said on Sunday.
'Manufacturing is always a priority,' Bambang added, citing natural resources, consumer goods and import-substitution as the primary sectors within the industry on which the government would focus.
The Industry Ministry's inspector general, Syarif Hidayat, said his office would continue to spur growth in the downstream industry by adding value to natural resources and agricultural commodities, such as by refining and smelting minerals like nickel and bauxite or processing palm oil, cocoa and rubber.
In addition, it will also further encourage sectors that have traditionally been the main drivers of exports, including textiles and footwear.
'New investment will lead to higher production and the creation of new products, which will enhance our export opportunities,' he said.
But skeptics have warned that the export target is unrealistic given the continuing weak global economic conditions, as major trading partners China and Japan, as well as European countries, struggle to boost economic growth.
Manufacturing has also often been criticized for its low labor absorption. Although it is key to the country's economy, the sector only employed 15.39 million people, or 13 percent of the national workforce, as of August 2014, relatively unchanged over a decade.
