Chapter-V

India-Indonesia Trade and Investment Relations

In 1998, India accounted for 2.24 percent of Indonesia's total imports and 1.53

percent of its total exports whereas Indonesia accounted for I. 7 percent of India's total

imports and 1.5 percent of its total exports to the world. 1 The level of exports from India

to Indonesia and imports from Indonesia to India are indicators of low-level relations.

However there are immense scope for cooperation. This chapter has analysed the

economic scenario in Indonesia, various rult:s and regulations, and the areas where the

relations can be expanded.

The growth of India's export/import to/from Indonesia, the rest of the world are

given in Table 6 and 7, respectively. It is evident that the export growth rates to are

higher except 111 the year 1998. However, regarding imports no conclusion can be

reached about the relative growth rates. Out of the five years under observation, the

growth rates to Indonesia were higher in three years and lower in two years compared to

the growth rates to the worlc(!J (

Indo-Indonesia bilateral trade in 1994-95 \Vas Rs.l883.64 crore, and it reached

Rs.4210.45 crore in 1998-99. India faced unfavourable balance oftrade ofRs.l39.82

Wcbs1tc: http:t/w,vw.ascanscc.org.

126

0 ~- S.H. (2000) ·~::·, C:~yCc"''· A'"""'""""·~-: Strtt< Jomml. I crore during 1994-95 with exports at Rs.871.91 crore and imports ath10L.73 crore.

Similarly in I 998-99 exports were Rs.785.55 crore and imports were Rs.3424.90 crore

resulting in a trade deficit ofRs.2639.35 crore. India enjoyed favourable balance oftrade

(Rs.673.52 crore) only during the year 1995-96.

Table below shows the recent Indian exports and imports to and from Indonesia.

India's import from Indonesia for the period 1999 (January to July) is more than India's

exp011s to Indonesia for the same period. India's import from Indonesia experienced a

positive growth rate whereas India's export to Indonesia witnessed a negative growth

rate.

India's Exports and Imports to/from Indonesia in 1999

(US $ Million)

February March April May June July Jan-July Jan-July (Growth Rate%)

Exp011s 25.5 22.36 29.7 29.61 I 74.3 21.16 I 77.62 8.35 lmQorts 68.05 62.16 76.28 74.06 55.51 76.24 451.39 18.81

Source: Indian trade Commissioner's Report on Indonesia

India's major export/import items to/from Indonesia are given in Table 9 and 10

respectively. According to the figures of 1998-99, important items oflndia's exports to

Indonesia included oil meals, primary and semi-finished iron and steel; machinery and

instruments; manufactures of metals; inorganic/organic/agro-chemicals, dyes

intermediaries and coal tar chemicals; cotton yam fabric, drugs, pharmaceuticals

(http:www.tnr. com). ----- I

127

and fine chemicals, groundnuts; and manmade yam fabrics etc made up, the items, which

have registered increase over 1997-98, are only manufcatures of metals, and manmade

yarn fabrics, articles; wood and wood products; artificial resins, plastic materials, etc;

and pulp and waste paper. The items, which have registered signiicant growth over the

year 1997-98, include vegetable oils (edible); metal ferrous ores and metal scrap, wood

and wood products. 4

Investment

According to the data released by the Indonesian Investment Coordinating Board,

India's approved investment in Indonesia till March 1999 was merely US $ 748.9

million, constituting just 0.34 percent of the total approved FDI. The actual amount, of

Indian FDI in Indonesia, curently stood at around US $ 200-300 million in 1999.

Indonesia's FDI in India was US $ 115;32 million till December 1998, just 0.22 of the

total FDI entering India. According to the Ministry of Commerce Annual Report 1999-

2000, out of the total nine hundred and twelve joint ventures of India in 91 countries,

twenty are in Indonesia@

4. lnd1an I rade Journal (2000). "Focus on International I rade-lndones1a , 26lanuary Mm1stry of Commerce, Government of

India. Annual Report ( 1999-2000) PC.TASCD-ROM,UN.

128

India-Indonesia Trade Relation-Export Intensity Index

Values are in US$ Million Symbol 1993 1994 1995 1996 1997 1998

India's total export to the world 36739 India's Total import from the world MI India's total export to Indonesia

543 Total imports of Indonesia from

291851

XI 20259 24196 30537 32325 33248

21100 24845 34484 36055 39080 43458 Xji 200 253 501 569 596

mi 283281 31992 408071 42959 42728

Total world imports Mg 3785700 4318800 5151500 5383900 575870 5611200 Exportintensityoflndia'strade xji 131.9 140.34 205.73 219.13239.96

India-Indonesia Trade Relation-Import Intensity Index

Source: Direction of trade Statistics Yearbook, International Monetary Fund. Note: 1) mji= (Mji/Mj)1 (Xi 1(Xg-Xji)100

2) Values are DOTS world total

India-Indonesia Trade Relation-Growth Rates of Export(%)

Source: Direction of Trade Statistics Yearbook, International Monetary Fund. Note: 1) Year refers to the calender year

2) Vaiues are DOTS world total

India-Indonesia Trade Relation-Growth Rates oflmport(%)

Source: Direction of Trade Statistics Yearbook, International Monetary Fund.

129

Different Revenue Sectors

(a) Tourism

Indonesia has great potential in the field of tourism. It offers a wide vista of

cultural and historical heritage, unique ceremonies and festivals, a wide range of arts

and crafts, a lot of interesting places and fascinating sites accessible to tourists

throughout the year. Tourism, apart from being the third largest industry in Indonesia

is also one of the fastest growing industries. Among the places oftourist importances

is Bali. It has local art and craft and abounds in silver & carved wooden statues, cloth

and bamboo articles and a large variety of f8od !ike fish, fruits and vegetables. Eco

Tourism plays a major role in Indonesia. Originally it was referred to

small scale wild life reserves, but now it encompasses any form of tourism on

social & natural environment.

(b) Agricultural Products Industries

Even at the time of the financial crisis which hit Indonesia in mid-1997, the

production of ::tgricultural industries which utilize domestic resource-base as its raw

material, such as paper, cooking-oil, pulp and manfucatured wood increased. Food

and beverage production increased significantly. Compared to fiscal year 1996/97,

production of cigarettes, liquid milk and sweet, condensed milk etc. increased by an

average of 22% in fiscal year 1997-98. At the same time, wheat and fodder

production decreased by 20%

Manufactured wood products showed a significant development which was

marked by their increased production and generated various derivatives which gave

added values in wood manufacturing which initially relied on plywood and sawe

130

timber. Even though leather goods and leather shoe industries showed an increase in

fiscal year I 997-98, their improvement was slower than in the preceding years. The

paper and pulp industry recorded a remarkable increase by an average of 53.4% as a

result of the high demand for export commodities due to a better market.

(c) Machinery, Basic Metal and Electronics Industries

Generaiiiy, the production of basic metal industry decreased steadily except for

wire rods and hot-rolled coil. This reduction was mainly caused by the need to import

raw-materials and the difficulties in having the Letter of Credit (LIC) accepted. The

production of machin~ry especially saws and grindstone and that of agricultural tools

and machinery such as insecticide sprayers, big tractors and hullers increased.

(d) Basic Chemical Industries

The market of chemical indsutries is mostly directed to fulfi!Eng the

domestic needs, while the surplus is exported. During the monetary crisis, the

production of agrochemicals, urea and TSP fertilizers grew by 5.2% and 13.7%

respectively. Meanwhile the production of organic chemicals including

polypropylene, Polystyrene and vinyl chloride monomer (VCM) showed a

significant progress whereas more stable development in the sector of inorganic

chemicals especially non-metal mining products like Portland cement[}

131

Rules for Foreign Direct Investment (FDJ) in Indonesia

• Permission with regard to I 00 per cent ownership of projects throughout

Indonesia

• Minimum share/equity requirements have been abolished

• The minimum equity holding requirement for Indonesian partners in joint venture

projects has been reduced from the earlier 20 per cent to the present 5 per cent.

• Indonesian Government has also abolished the previous requirement on foreign

investors to divest 51 per cent equity to Indonesian partners.

• Now the foreign investors and their Indonesian partners can determine between

themseleves the modalities for changes in the composition of future equity

ownership.

• Several strategic sectors, including telecommunications, traditional power

generation & distribution, nuclear power, roads, railways, civil aviation, and

• water supply have now been opened up to foreign private investors to have

partnership with state owned firms.

• The Indonesian Government has also announced tax holidays in certain sectors of

Indonesian economy

• T!-,.:- system of "one roof services" has been reinstated in office of the Minister for

lnvestment/BKPM.

6. Ofhc1at Book ot Indonesia I99 I, Indones1an Embassy, New beth1, pp. /B-Bl.

132

• In order to expedite the process of investment approval in Indonesian country, the

investment approval authority has now been delegated from the Minister for

Investment to the Provincial Governors and Indonesian Heads of Missions

abroad. Now the Indonesian Heads of Mission abroad have been empowered to

provide provisional approval to the foreign investors. 7

Year 1998 1999 2000 2001

Trade between India and Indonesia (in Million US $)

Total 942.03 1,168.51 1,394.98 964.46

Export 154.03 283.77 386.86 303.71

Import 788.00 84.74 1008.12 660.75

Balance 633.97 600.97 621.26 357.04

(Source: Quarterly report oflndustry and Trade Division, Embassy of the Republic of Indonesia, January 2002, New Delhi)

India's Import from Indonesia by Principal Commodities (in million (US $)

7. Sundeep Khanna, AParadmg Sfi.Fts m Pantereny 19 , Busmess today, October 7-21, 1996 i':ew Delha pp. 14-34 See also

Col. Hedrawan, 'India-Indonesia Joint Ventures" (an unpublished dissertation of MBA at Eros Managerr.~nt Shoo I,

New Delhi, 1997 pp.1S-19

Product Vegetable Oils Fixed (edible) Coal, Coke &Briquites Etc. Organic Chemicals Wood and Wood Products Textile yam, Fabrics, madeup Articles Metal Ores &Metal Scrap Electronic Goods Cashew Nuts Pulp and waste paper Dyeing, Tanning, Coloring Materials Non-Fertilizers Manufactured Project Goods Fertilizers Manufactured

133

1998-99 293.31 72.57 34.27 24.53 24.49 42.35 13.7 17.29 21.79 16.86 13.26 2.85 0.87

1999-2000 315.41 83.87 59.82 40.49 40.31 37.97 22.38 21.75 21.75 16.57 14.41 10.88 10.23

Inorganic Chemicals 11.76 9.69 A11ificial Resins, Plastic Materials, etc. 22.5 8.25 Other Commoditi=es"--_________ :::..2_,_,16:!.:. . .!..:72:::...._ __ ~2.!.;78~ . ..:.:.....:.84 Total (including others) 829.12 990.82

(Source: FICCI Yearly report 2002)

India's Export to Indonesia by Principal Commodities (in million US $)

Product Oil Meals Dyes/Intermediates Coal Tar Chemical Processed Fruits and Jices Inorganic/Organic Agro Chemicals Primary and Semi-finished Iron & Steel Cotton Yarn, Fabrics, Madeups, etc. Croundnut Machinery and Instruments Drugs, Pharmaceuticals and Fine Chemicals Manmade Yam, Fabrics, Madeups Manufactures of Metals Aluminium other than prodcuts Transport Equipments Plastic and Linoleum Products Marine Products Other Commodities Total (including others)

1998-99 51.85 1031 1.86 10.35 17.12 9.37 9.45 13.52 8.42 3.74 10.02 0.01 2.48 4.48 2.22 30.08 185.27

1999-2000 51.42 32.29 28.66 24.04 18.8 ! :'5.4 7 13.55 13.01 10.28 9.67 8.54 7.84 7.65 6.34 5.24 73.65 326.45

Source: Industry and Trade Division, Embassy ofthe Republic oflndonesia, New Delhi.

And DGCI&S, Government of India

Scope for India-Indonesia Bilateral Cooperation

Exportable items from Indonesia to India

Edible oil (Palm oil, etc.), Gambier, Gum Rosin, Coai, Urea, Copper, Tin,

synthetic Fibres, Wood Pulp, Paper & Paper Board, Organic & Chemicals, Plastic

Materials (PVC, HOPE, LOPE, PP~ I 134

Exportable items from India to Indonesia

Machine tools, Plant & machinery, Cattle feed, Iron ore & concentrates, Synthetic

organic Dyestuffs, Cotton and cotton yarn, Organic Compounds & their Anhydrides,

Drugs & Pharmaceuticals, Ferroalloys, Automotive parts, etc.

Technologies available in Indonesia for Joint collaboration are Oil & gas drilling,

Tele-communication, Agriculture Bio-technology, Fishery cultivation, Shipping &

marine industry.9 Technologies required by Indonesia for Joint collaboration

machine tools & accessories, Textile machinery, Drugs & Pharmaceuticals, Dyes &

dye intermediates, Re-refining of used lubricants, Rubber products, Heavy electrical

machinery, Integrated castor oil extraction plants, etc.

India-Indonesia Investment Relations

The signing of the Agreement for the Promotion and Protection of Investment

between the two countries in February 1999 could be seen as a proof of the

seriousness of both governments to promote investment cooperation, including joint

ventures. However, the Indian investment in indonesia till today is marginal as

India's approved investment in Indonesia during the period 1997 to June 30, 2001

was US$ 950.4 million on 90 projects. On the other hand Indonesia's investment in

India was also negligible. The cumulative approved Indonesian Foreign Direct

S. See U1e monthly news bullcun ot Embassy ot the Repubhc of JndonesJa, March 2ool

':1. Ibid

135

-:nvestment (FDI) m India between 1991 to August 2001 stood at US$ 121.9

million. 10

BKPM (Badan Koordinasi Penanaman Modal)-Investment Coordinating Board is

an Investment Service Agency of the Government of the Republic of Indonesia.

BKPM performs its functions which, among others, are to access and prepare national

investment policies, and to coordinate and conduct investment promotion.

The investment approval also includes the granting of incentives and facilities.

Investment in this regard refers to any direct capital investment, which is made under

the framework of Law No.1/1967 on foreign Capital Investment and Law No.611968

on Domestic Capital Investment as well as their operational regulations8(

The ten leading sectors (before 1998):

Industries Number of Projects Value {US dollars) 1. Metallic goods 664 9,546.9 2.(million) 2. Chemical 489 34,457.1 3. Textile 444 5,693.8 4. Service and trade 273 1,366.9 5. Food 181 3,945.8 6. Construction 171 938.2 7. Trade 170 1,160.0 8. Wood 156 1,080.3 9. Hotel and restaurant 148 9, 189.7 10. Mining 120 5,120.1 (Source: Badan Koordinasi Penanaman Modal, Indonesia, http://www.bkpm. Go id) and Ministry of Investment Board (BKPM) Republic of Indonesia, "Prospects of the basic chemicals Industries", Volume VIII, No. I, Jakarta 1996, p.341-42

I 0. Sundeep Khanna, '·New Management Prmctples of Partnenng" 9usmess l Oday OCt 7-21, 1996 New Ddht, pp. I 4-15. See

also Sundeep Khanna, "Paradigm Shifts in Business", Business today, October 7-2.i i996 i"ew u~ii11, flp.i~-3.;

136

To invest in Indonesia, an investor would first look at the "Negative List of

Investment" (ON!). The list contains the business sectors that are absolutely closed

and those that are still regulated for investment entries. The regulated business sectors

in this~ refer to those which are still possible to be entered by investors if certain/

requirements are satisfied, such as export oriented projects, partnership with state-

owned companies, technology transfer, cooperation with small business holders, etc.

Foreign companies can invest and operate in Indonesia either independently or in

a joint venture with local partners and with the approval of the Government for a

maximum period of 30 years. Sectors that are open for investment with share

ownership entirely (I 00%) owned by foreign citizens or entities are: construction and

operation of seaport; generation, transmission and distribution of electric power for

the public; telecommunication, shipping, air flight, construction and operation of

potable water; railway transportation and generation of atomic power.

II. Badan Koord1nas• Penanaman Modal Indonesmn Investment Coordmatmg Hoard, ]alan lenderal Gatot Subroto No44.

lobrto 12190, Indonesia, h!Jn.!/,w;w.bkpm.go.id

137

Sectors which are closed for investment (in which a part of share ownership is

owned by foreign citizens or entities) are: taxi/bus transportation; local shipping;

retail trade and the like; domestic trade support services; private television

broadcasting and radio broadcasting services and operation of cinema. Sectors that

allwoed for investment on the basis of fulfilment of certain conditions are powdered 1

milk/condensed milk, integrated with dairy cattle raising; sawmill plywood (raw),

printing of valuable papers-postage stamps, commerical paper of Bank Indonesia,

passports, stamped postage's except for State printing enterprise/Perum Peruri;

manufacturing of ethyl alcohol except for the technical grade; explosive materiais

except the state-owned enterprises/PT. Dahana and Pt. Multi Nitrotama Kimia;

aircraft -jet engine or propeller for transportation, helicopt(;r, aircraft engine, piston

combustio engines, turbo jets, turbo propeller, other turbo gas, ram jet, pulse jet, and

turbo fans, aircraft equipment and accessories-aircraft/helicopter propeller and

landing equipment except in co-operation with PT. IPTN; liquor and alcoholic

beverages, new project and expansion project should be allocated in bonded zone or

export oriented production e~trep~; fireworks, new project and expansion project;

should be located in bonded zone or export oriented production ~!repot./

Sectors which are absolutely inclusive are: contracts of forest logging;

casino/gambling; utilisation and cultivation of sponges; consumed or semi-consumed

finished mangrove, wood processing; plantation and processing marijuana and Eke;

veneer manufacturing; manufacture of Penta chlorophenol, dicholoro diphenyl,

trichloro ethane (DDT), dieldrin, chlordane, pulp industries using sulphit process;

138

alkaline chloride industries using mercury process; manufacture of chloro fluoro

carbon (CFC/Freon); manufacture of cyclamate and saccharine. 12

In the past, the domestic investors constitute the large proportion of the entire

investors, which has been governed by the domestic investment law enacted in 1968.

In 1995 the domestic investment (PMDN) approvals had reached a total value of more

than Rps 335,479.6 billion which is equal to US$ 166.5 million at the current

exchange rate. Excluding the oil & gas, Banking and financial services, the ten

biggest domestic investment in number of projects approved by the end of September

1995 were as follows:

Industries Number of Projects

Textile 1,225

Chemical 1,095

Food 880

Metal goods 783

Wood 773

Transportation 696

Plantation 658

Hotel and restaurant 620

Non-metallic mining 358

Paper [!Ul[! 350

11. Mu11Stry of investment Board (BKPM) Repubhc otlndones1a, "Investment opportuntttes tn the ml and ban Sector', Jakarta

1996, r 123-154

139

Based on the investment value, the ten biggest sectors till September 1995 were:

Industries Value

Chemical Rp. 50,306.8 billion

Textile Rp. 41,496.4 billion

Non metallic mining Rp. 36,332.5 billion

Paper Rp. 33,038.0 billion

Plantation Rp. 29,577.0 billion

Hotel and restaurant Rp.25,221.4 billion

Food Rp. 18,233.6 billion

Wood Rp. 13,585.5 billion

Real estate Rp. 12,919.3 billion

Basic RQ. 12,411.3 billion

(Source: Badan Koordinasi Penanaman Modal - Indonesian Investment Coordinating

Board, Jalan Jenderal Gatot Subroto No.44, Jakarta 12190, , Indonesia,

httQ://www.bkQm.go.id)

Foreign Direct Investment Policy

An FDI company is generally established as a joint venture undertaking between

foreign and Indonesian partners. Foreign and Indonesian partners may comprise legal

entity (ies) as w~ll as individual)sJB /

A joint venture entity shall take the form of a Limited Liability Company subject

to the Indonesian Corporate laws, denoted as PT (Perseroan Terbatas). As a general

rule, the natinal partner(s) shall hold at least 5% of the total paid up capital at the time

of the PMA company formation. There is no requirement on the minimum amount of

140

investment (equity plus loan). The amount is up to the parties concerned to decide,

based on their economies of scale and business considerations.

An FDl company in infrastructure projects such as seaport, generation and

transmission as well as distribution of electricity for public use, telecommunication,

shipping, airlines, potable water, public railways, atomic energy reactors and mass

media, should be established by way of joint venture between foreign and Indonesian

partners provided that the Indonesian share is maintained at least 5%. 14

An FDI company may be established as a straight investment, namely with I 00%

foreign ownership. It is required, however, that not later than 15 years of commercial

operation, the company starts to be divested, where a part of its shares are sold to

Indonesian individuals~and/or business entity(ies), through direct placement and/or J

indirectly through domestic stock exchange. 15

An FDI company which has been commercially operational is allowed to set up

new FDI companies under !he same ownership. It is allowed to buy (through direct

placement or through domestic stock exchange) the shares of an existing domestic

company (already commercially operation), as the field ofbusiness concerned is open

for FDI, i.e. not listed in the DNI. The puchased company in this case retains its

corporate status.

13. k Subramanmm. ··investment, Uankmg, Od & Gas 111 lndones1a, (ediled by Saush Chandra, Baladas Ghoshat, "[ndonesm:

A New Beginning). Sterling Publihsers PVT, New Delhi 2002, New Delhi.

14. Ibid.

15. Department of I nfonnation Republic of Indonesia" Indonesia 1996. Oflicial Hand Book" Jakarta 1996 p.89.

141

In the framework of financial rescue and export drive, foreign enterprises and

foreign citizens may buy the shares of oexisting FDI or domestic compaanies through

direct placement or through domestic stock exchange, as long as the field of business

concerned is not listed in the DNI. In this case the original corporate status of the

purchased company may be retained.

The Negative List of Investment issued in June 1993 has reduced the number of

investment sectors from 51 to 33 out of which 8 (eight) are closed for FDI companies

and 6 (six) are closed for any investment (including FDI) such as retail trade, radio

and television broadcasting, casino/gambling, marijuana, ver.eer (rotary) and penta

chlorophenol, dichlorodipheny trichloro ethane (DDT), dieldrin, chlordane. In

addition the DNI also regulates 3 7 project activities reserved for small industries and

business holders which may be co-operated with medium and large scale

industries/businesses.

Import duties on capital goods and raw materials for a year production are

exempted or reduced. Export oriented projects can continue to enjoy the exemption or

refund of import duties and value added tax on raw materials used for the production

of exported products without time limit. On taxation, attractive incentives are

available the form of accelerated double declining balance method of depreciation on

captial goods, carry forward of losses and various deductibles before tax. Income tax

rate is progressive, being 15% as the lowest rate and 35% as the highest. To avoid

double taxation, Indonesia makes agreements with foreign investing countries. 16

16. I he Investment Coordmatmg BOard "lndones1a, A gUide tor Investors", Jakarta l 98 I, pp.345-346

142

is no less restricted. There is no control or restriction whatsoever imposed on the

movement of foreign currencies Indonesia adopts a free foreign currency exchange

system, which is not common particularly among developing countries. Repatriation

of capital. profits, cost related to expatriate employment and expenses such as

principal loan and interest, royalty, technical fee, etc. is free, paving the way for a

smoother investment intlow.

The legal aspects concerning intellectual property rights are also being improved.

Recently laws on copyrights and trademarks have been modified to become more

compatible with internationally accepted standards. On 1 August 1991 and 28 August

1992 the newly established Patem Law and Trademark Law became effective. To

provide security for foreign investment, the Indonesian Government includes

Investment Guarantee Agreement (IGA) with ASEAN governments and 19 other

foreign governments. To deal with foreign investment disputes, Indonesia is a

signata~' member of the international Centre on the Settlement of Investment

Disputes (ICSID); while in dealing with non commercial investment risk, Indonesia

joined the Multilateral Investment Guarantee Agency (MIGA). 17

year is generally the calendar year unless otherwise specified and approved. All/ ----tax payers must register with the Directorate General of Taxes and obtain a taxpayer

identification number. It is the taxpayer's responsibility to obtain, complete and

submit tax returns.

143

Rates of personal and corporate income tax for residents are:

Up to Rps 1- million 15%

From Rps I 0.1 million to Rps 50 million 25%

More than Rps 50 million 35%

Oil and gas companies paid 45% tax for contracts prior to January 1984, and

35% thereafter. Mining companies paid 35% tax for contracts prior to 28 February

1985, 40% after 28 February 1985. Indonesia taxed citizens and residents on gross

income. A non resident expatriate is taxed on income derived from Indonesia.

Resident individuals may enjoy personal allowances for:

The indiviuual Rps 960,000

Married taxpayer who is principal earner Rps 480,000

Up to three dependent relatives Rps 480,000

Occupational support, computed on 5% of gross salary earned during the year, not

exceeding Rps 360,000. contributions to government approved pension funds not to

exceed Rps 120,000. Capital gains and all forms of investment income are taxable but

an employee's benefits in kind such as a house or car are not.

A vaiue Added fax of 10% is imposed on many goods and services and there is a

Luxury Sales Tax levied at the rates ranging from I 0% to 30%. There is a land and

building tax of0.5% on 200/o ofthe taxable value of the taxed object. Stamp duties

range from Rps 500 to Rps I ,000 depending on the type of document. 18

IS. I he consulate general of the repubhc Indonesia m Hong Kong, "Bus mess Indonesia-Hong Kong 1995: Good opportun1t1es

to invest in Indonesia" Jakarta 1995, pp.256-67

144

Residents and foreigners resident in Indonesia are subject to an exit tax ofRps

250,000 ~g by air and Rps 100,000 travelling by sea. The tax is creditable (

against an individuals's tax liability. Visitors pay an airport tax ofRps 17,000 upon

departure and on a scale for departures from domestic airports.

Investment Incentives

In January, 1995 Indonesia issued new tax Jaws, which supported a reduction in

the tax rate on corporate interest earnings to 15 percent. Other major incentive

currently in effect include:

Exemption from import duty and levies for domestic production on:

I. Import of capital goods, especially machinery, equipment, spare parts and

auxiliary equipment.

2. import of raw materials needed during the first two years of commerical

prodcution.

Companies producing 65 percent for export m<Jy apply for registration of import

duties paid on inputs subsequently exported in consumed form. Exemption from

income tax on capital goods imported up to the date of commercial production. For

raw materials, this exemption extends up to a year after the start of commercial

production. 19

145

Deferred payment (up to five years) of the value-added tax and sales tax on luxury

goods for capital goods imported which are directly related to the production process.

This does not include spare parts that have lifetime of more than a year. Deferred

payment (up to five years) of the value-added tax and sales tax on luxury goods for

. capital goods imported which are carried out for hotels, office buildings or shopping

centres or for public transportations.

Exemption on import duties for two years for new machinery and equipment, as

well as raw materials and intermediate products, for firms replacing at least 30

percent of their original machinery and equipment. Various incentives to promote

increased private investment in infrastructure projects are offered under build­

operate-transfer· arrangements.

The Importing System and Procedures

In view of the importance of trade for the Indonesian economy, a presidential

instruction, was issued in April 1985 to smooth inter-insular trade and trade between

Indonesia and overseas markets as well as to ensure greater uniformity and equity in

charges for port services. For example, all imports valued at $5,000 or more must be

accompained by an LKP (clean report of findings) issued by an appointed surveyor in

the port of origin before shipment. The Government of Indonesia pays for the

inspection fee. If the goods pass inispection, then they can enter Indonesia without

customs inspection, except in extraordinary circumstances. Society General de

Surveillance (SGS), registered in Geneva, is the appointed surveyor including all of

its branches, subsidiaires, affiliates, and authorized agents. Indonesia's import system

is one in which market forces are permitted to determine import priorities. There are a

146

few non-tariff trade restrictions, including a prior import deposit system and a ban on

certain imports designed to protect domestic industries and to encourage local

assembly operations. The Government regulates the import of some groups of

industrial products in order to encourage the development of domestic industries and

to ensure a steady supply of goods at reasoable prices.20

Although under current regulations only Indonesian nationals may obtain a

general importer's license, and new foreign investors can still obtain an importer's

license for their own projects both foreign and domestic firms primarily engaged in

indstrial production or exporting, as well as Government agencies, may also import

for their own needs. Goods may only be imported after a firm has received an import

identification number (API) provisional importer identification number (APIS), or

limited importer identification number (APIT). The APIT is issued to foreign

investors by the Investment Coordinating Board on behalf of the Ministry of Trade.

Payment for imports can be carried out by a bank letter of credit opened through a

foreign-exchange bank or through other payments, including consignment agreements

between seller and buyer. The financing of imports can be carried out by using

foreign exchange purchased from Bank Indonesia through a foreign-exchange bank at

current foreign-exrhange rates as well as other sources.21

21 Embassy of the Republic of Indonesia U.S.A., "A trade and Investment Guide to Indonesia" Washington OC, 1994, p. 143-

67.

147

Tariff Structure

The Indonesian Customs Tariff is based on the 1978 version of the Customs

Cooperation Council Nomenclature (CCCN), Import duties are mostly ~c!_~ with/

duty rates ranging from 0 percent up to 60 percent, except for passenger car which is

I 00 percent if imported in completely knocked down condition (CKD) and 200

percent if imported in built up condition. Specific duties apply to certain goods, such

as clothing and some household effects. Rates of import duty apply uniformly

irrespective of country of origin except for goods eligible for ASEAN preferential

tariff.

In addition to tariffs, import surcharges are leived on some goods, e.g. zinc

chloride, file. Import duties and surcharges are levied on the basis of. value of the

goods. Import duties are almost without exception and valorem. The duties are levied

on the value of the commodity converted at the customs valuation rate. There are also

specific duties for certain goods, such as clothing and some house-hold effects. In

addition to tariffs, import surcharges are levied on some goods; 100 percent is the

most common rate, with luxury items and goods competing with domestic products

subject to the highest rates.

The Government's tariff policy has continued to respond to the changing needs of

the economy and has supported industrialization programs by providing tariff

protection to industries deserving such protection. Consideration also has been given

to labor intensive industries, industries using of domestic raw materials, and

148

industries with substantial value-added production in Indonesia.22

Export Regulations

The current export credit scheme originated in Bank Indonesia Decree No.

16/9/KEP/DIR/83 of l June 1983. The interest rate for export credits is fixed at 9

percent. However, regular interest rates will be imposed prior to actual export. After

the exporter has usbmitted documents certifying that the export has been carried out,

the commerical bank will refund excess interest paid to bring the effective interest

rate to 9 percent per year.

Indonesian products have been given a competitive boost on world markets

through streamlined export regulations and easier financing and payment terms. Other

changes have recently been carried out, the comercial bank will refund excess interest

paid to bring the effective interest rate to 9 percent per year.

Indonesian products have been given a competitive boost on world markets

through streamlined export regulations and easier financing and payment terms. Other

changes have recently been introduced to Indonesia's export system, amendments to

foreign-exchange regulations now permit exporters to retain-exchange earnings for

the purchase of capital goods for other tranactions requiring foreign exchange.

As from 1 April 1987 the interest rate for export credits is fixed at 9 percent for

22. ~ore1gn I rade Stat1st1cs otlnd1a, Calcutta: bdci & S, 1994. p 56

149

export of pnmary commodities, and 11.5 percent for export of non-primary

commodities. However, regular interest rates are still imposed prior to actual export.

After the exporter has submitted documents certifying that the export has been

carried out, the commercial bank will refund the excess interest paid to bring the

effective interest rate to 9 percent per year for export of primary commodities, and

I 1.5 percent for non primary commodities. The Government has also introduced

insurance on exports and export credit, which is available at preferential rates through

~ a state-owned insurance company?3 /

Currently, exports to Angola and Israel are prohibited. Exports of certain products

are also prohibited, such as gold ore, silver ore, certain categories of unprocessed or

low-quality rubber, cinchona bark, scrap bronze, copper and iron, antiques of cultural

value, unprocessed logs, green veneer, raw hides, and unprocessed rattan.

Commodities that have priority for domestic consumption are permitted for export

only :f there is excess ~· These include sugar, maize, palm oil and its j

derivatives, soyabeans, rice, cattle and meat, copra and coconut oil, fertiliser, salt,

tiP~s, asphalt, paper, cement concrete steel and wheat flour. To encourage exports of

further processed commodities, and export tax has been imposed on certain partially

!Jrocessed goods, such as saw tim~Jer, rattan (washed and sulphured), pickled and wet

blue hides and palm kernel oil. In January 1982, the Government issued a package of

regulations with the purpose of promoting the export of Indonesia's non-oil and gas

23. Indonesian Uthc1al Book 1991, I he lndones1an Embassy, New DCih1, pp.45

150

products. Among the regulations was a directive of the Central Government

Purchasing Team linking Government import procurements to the export of

Indonesian commodities. Under this directive, firms that wish to participate in

international tenders for purchases by the Government must undertake to purchase

Indonesian non-oil and gas commodities equal to the value of the purchase to state-

financed contracts in excess of R.500 million (about $303.951 ). Projects financed by

the World Bank, the Asian Development Bank, and through other soft loans are

exempt from compliance with this directive.24

Potential areas for the investment in Indonesia f9r Indtan entrepreneurs

Since the Foreign Direct Investment Law No.1 was enacted in 1967, 1995 foreign I

investment approval reached a total value of more than US$ 105.8 billion in 1995 ------···-... --~-·-·

covering 3,360 projects excluding Oil & Gas Mining, Banking and Financial

Services, FDI laws are now considered to be compatible with Indone::;ian needs. As a

legal basis, the Law is fairly accommodative to various deregulatory policies and

measures that has been adopted from time to time. With the increasing comp~tition

among developing as well as with developed countries in attracting the limited

amount of world's investment funds and to stay competitive, Indonesia obviously has

offered more incentives both in the degree of equity ownership relaxation and more

24. Embassy of the Kepubhc of lndones1a, "lndonesJa I rade F 1gures', New beth1, 199).

151

business opportunities. In business opportunities, Indonesia has continuously reduced

its Investment Negative List (ONI) broadening the investment opportunities for

foreign investors. Indonesia has continuously took new deregulation measures in

order to enhance favourable investment climate. The areas of deregulation that

Indonesia has made are not only investment laws but also about manufacturing,

trade, finance, transportation and services as well. In the area of investment, a number

of deregulatory measures have been introduced covering such aspects as the foreign

ownership, the simplification of procedures, the employment of expatriates and so

The Government of Indonesia on 3 June 1991 promulgated a deregulatory

package liberalizing trade regulation, adjust import duties and loosen the Investment

Negative List (DNI). The deregulatory packages have stepped up the participation of

the people in economic development in the form of business expansion and new

investment, while the role of the non oil sector in the Indonesia economic structure

has also increased, especially industries, followed by the strengthening of agricultural

sector and financial/banking sector. 26

On 23 October 1993 the Indonesian Government announced a new deregulation

package which is aimed mainly at curbing the long bureaucracy in licensing process

26 Jomo. K.S.(ed ). Tigers in Trouble: Financial Governance, Liberalization and Crisis in East Asia, Zed Books Ltd.,

London, 1988, ppJ04

152

at the regional level and relaxation of foreign equity. However 7 months later the

Government of Indonesia took new measures in order to attract foreign ~/

Through the latest deregulation package on FDI referred to as the Government

Regulation number PP-20/1994, Indonesia has made a significant step towards a

much more conducive and open up more attractive investment opportunities for

Foreign Direct Investment in Indonesia.

The minimum amount of capital required to be invested in foreign owned

company within Indonesia is no longer prescribed. The new regulation provides the

amount of capital to be invested is to be decided by the investing parties themselves.

Foreign investment companies are free to choose the location in Indonesia where

they will set up their operations, as long as the factories are established in areas zoned

for industry. Besides the deregulation mentioned above there are many incentives

provided for export manufactures. Some of those sectors are as Telecommmunication

products, chemicals - methylene chloride, ethylene glycol, soda ash, caustic soda,

phosphate, sulphide salts - steel cables, tanned leather goods, textiles, machinery,

women fabrics,soybean oil-cakes, wheat and iron oxide.

Indonesia's trade with India has been increasing but it has yet to pick up

momentum. Indonesia's exports to India increased marginally from US$ 46 million in

I 980 to US$ 60 million in 1990, declined in 1991 to US$ 56 million, and rebounded

slightly to US$ 59 million.27

2 7. India Indonesia I rade, News Bulletm of Indonesian Embassy, New Delhi, January 1994, p.l2

153

Indonesia suffered trade deficits of US$ 29.9 million in 1989, US$ 89.6 million in

1990, T.JS$ 170.18 million in 1991, US$ 145.92 millionin 1992, and US$ 235.47

million in 1993.

There are some constraints in the way of trade expansion between India and

Indonesia. The India - Indonesia Joint Business Council, has recognized the

important issues as follows: 28

a. Restitution (drawback) of import duty and import surcharge on the

importation of goods and materials needed to manufacture the

finished products.

b. Exemption from value Added Tax and Sales Tax on Lu_xury Goods

and material 'purchased domestically, to be used in the

manufacturing of the exported products.

c. The company can import raw materials required regardless of the

availability of comparable domestic products.

Indonesia is attractive to foreign investor as it offers natural resources and conducive

environment with an attractive range and combination such as:

• A vast, fertile country endowed with rich national resources.

• A large population numbering about 230 million living in harmony and

dynamically adaptive to progress, constituting a huge potential market as well as a

competitive workforce.

• A strategic location on the crossroad oftwo great continents and ocean controlling

vital international sea communication lanes.

28. Rev1ew of fConom1c Development, lndones1an EConomy at Stake: Up or Down, Department of EconomiCS, Cs!S, I he

Indonesian Quarterly, Vol.XXIX/201, No.2, p.l13.

154

• A politically stable country

• An open and market-oriented economy, with free foreign current exchange

regime.

• A government committed to continuously providing a favourable business and

investment climate especially for the private sector, with consistent prudence in

its macro economy management and maintenance of its high international

financial credibility. 29

Existing India-Indonesia joint ventures

Till Janl!ary 1995, ther~ were 16 India- Indonesia Joint Vei1tures in operation in

Indonesia (Table VI. I.) . The total investment in Indoneisa till March 1996 was

U$151 ,346.02 million of which U$ 798.3 million (0.53) is shared by Indian

investment (see table V1.2). The Industries covered; Textiles, Textile yarn, Wire

Rods for Steel Bars, Solvent Extraction, Viscose Staple Fiber, Furniture security

Equipment, Machinery & Equipment for Textile, Ferro Alloys, Manufacturing of

plastic Tires, ColdRolling Mill, Manufacturing and marketing of Pesticides, :md

Aluminium.30

29. Eatwell, John, lntenrahonal Fmanc1ai L1berahzallon: 1 he Impact on World Development, DiscusSion paper

series, Office of Development Strategies, UNDP,l\'ew York, May 1997.

30. James W.C. Tomlinson, The Joint Venture process in International Business, the M.I.T. Press, the Massachusetts

Insatiate of Technology, 1970, U.S.A. pp. 123-143

!55

Indonesia and India presently give utmost emphasis to trade and investment ties.

India's basket of exports to Indonesia include cotton, iron ore, chemicals, textile

machinery, machine tools, automobile components, and engineering products (see

table India's major exports to Indonesia). For its part, India has been importing

spices, vegetable oil, leather and coal from Indonesia (see table India's major imports

from Indonesia). It would appear then that overall trade between the two countries is

largely of the traditional type and is meagre. Trading volume could be increased by

greater interaction through trade fairs, workshops, commodity buyers and sellers

meetings as well as sub-contracting and ancillary exchange programs. P.K. Sandell,

Director of the rndep Group of Companies, recognized some core areas for business,

such as computer software, processed foods, telecommunication products, chemicals

- methylene chloride, ethylene glycol, soda ash, telecommunication products,

chemicals - methylene chloride, ethylene glycol, soda ash, casutic soda, phosphate,

sulphide salts -steel cables, tanned leather goods, textiles, machinery, woven fabrics,

soybean oil-cakes, wheat and iron oxide and has found that Indonesia would have a

comarative advantage in dealing with India, relative to other countries. 31

Indonesia's trade with India has been increasing but it has yet to pick up

momentum. Indonesia's exports to India increased marginally from US$ 46 million in

31. I eongzon, Jose L, nie Economies of Southeast Asia, I he Growth and Development of AS fAN Economics, fdward

Elgar, Cheltenham UK, 1998, p.I00-10

156

1980 to US$ 60 million in 1990, decliend in 1991 to US$ 56 million, and rebounded

slightly to US$ 59 million. 32

The imports at US$ 43 million in 1980 to US$ !51 million in 1980 crossed US$

226 million in 1991, US$ 253 million in 1992, and US$ 335.39 million in 1993. Thus

after a surplus itt the biiateral trade balance of US$ 31.5 million in 1988, Indonesia

suffered trade deficits of US$ 29.9 million in 1989, US$ 89.6 million in 1990, US$

170.18 million in 1991, US$ 145.92 million in 1992, and US$ 235.47 million in

1993.

There are some constraints in the way of trade expansion between India and

Indonesia. The India- Indonesia Joint Business Council, in a report, recognized five

consti·aints, as tollows: 33

• Doubts regarding India's reliability as a business partner persist. The apparent

problem relates to India's inability to stick to delivery schedules, after-sales

service, poor quality of goods and so on;

• Lack of direct shipping links between India and Indonesia and delays and

expenses involved in trans-shipment via Singapore, as India exports meant for

Indonesia are first shipped to Singapore;

32. India· Indonesia I rade. News Bulietm ollndonesm.l t:mliassy, N'C"WDeihi, January 1994, p.\12

33. Rev1ew of Economic Development, Indonesian Economy at State: Up or Down, Department of Economics, CSIS, The

Indonesian Quarterly. Voi.XXIX/2001, No.2. p.ll3.

!57

• Indian exporters provide only limited amounts of loans or concessional credit to

Indonesian importers;

• India's export of capital goods to Indonesia has suffered a decline since the mid­

eighties; and,

• Both countries produce similar agricultural goods, such as tea, coffee, cashew

nuts, pepper, spices, fruit and vegetables, and thus there is limited scope for

expansion of two-way trade.

These constraints suggest a need for diversifcation of exchanges in traditional

items, and policy-makers on both sides are attending to this problem with due care. In

the area of investmeni ties, Indians were collaborating with their indonesian

counterparts in joint ventures in producing cotton and synthetic yam, enginering

goods, billets, furniture, steel pipes, 11.4bber rollers, tubes and rayon in the past but

after 1992 the number of joint ventures increased only marginally to 16. When

Indonesian Minister for Industries Hartato visited New Delhi in March 1992, three

new joint-venture agreements were production of paper and rayon and it in the a

global market. Mr. Hartrto envisaged great scope for Indian joint ventures m

Indonesia, particulariy in forest-based industries (including pulp for rayon, and

paper), marine-based industries, oil and gas industries, the textile sector, and small­

scale industrial plants (including handicrafts). He invited Indian entrepreneurs to take

advantage of the growing capital goods import market in Indonesia - which amounts

to US$ 4-5 billion annually - by setting up joint ventures in Indonesia for the

manufacture of equipment required by that country. Indian Minsiter of State for

industry, P.J. Kurian, and Hartrto also agreed to sign a memorandum of

158

understanding (MOU) to co-operate in the fields of small-scale industries, capital

/~ goods and the newsprint secto!\Y

The quality of Indian products is appreciated by Indonesians and new areas of

growth are being identified for greater investments. Indonesian investment in India up

to the end. of 1994 was negligible. Indonesia is, however, cautiously moving to

explore investment opportunities in India where reforms have been introduced to

attract foreign investments. India is interested in evolving a healthy external

economic environment and is gearing up its economy to the challenges of the global

market-place. It is moving step by step. It has already reduced requirements for

obtaining an industrial licence for manufacturing activity to only fifteen sectors of

strategic, social and environmental concerns. It has allowed full foreign equity in

certain sectors, and foreign investments are tackling in. There are some investors who

would like to see more transparency in investment procedures and these are now

being paid utmost attention. The iiberalization has popular backing, and major

political parties, including the ruling Communist Party of India (Marxist) in West

Bengal, are supporting it. For example, West bengal signed seventeen MOUs in I 994

for foreign investments, and more are likely to be signed.

Cumulative Approvals, R2.nking of Investment by foreign countries (1967 -

MARCH I 5, 1996) To!al Investment

No. Country Projects Value %

(US$ Million)

I. Japan 834 30,348.8 20.05

2. United Kingdom I 81 21,325.2 14.09

3. Hongkong 340 17,111.8 11.31

159

4. Singapore 506 16,318.6 10.78

5. USA 226 11,685.4 7.72

6. Netherlands 141 9,085.6 6.00

7. Taiwan 435 8,766.3 5.79

8. South Korea 381 6,818.7 4.51

9. Australia 207 5,939.6 3.92

10. Germany 91 4,991.4 3.30

II. Bahama 7 2,869.4 1.90

12. Malaysia 116 2,605.7 1.72

13. Thailand 27 2,249.3 1.49

14. Luxembourg ') 1,804.4 1.19

15. France 55 1,664.9 1.10

16. Canada 30 1,186.0 0.78

I 7. Switzerland 54 !,033.8 0.68

18. Liberia 11 917.2 0.61

19. Bermuda 1 873.2 0.58

20. India 27 798.3 0.53

21. Panama 25 686.1 0.45

22. Philippines 14 430.2 0.28

23. ltalv 19 364.8 0.24

24. Belgium 26 308.7 0.20

25. Norway 9 254.4 0.17

26. PRC 29 185.8 0.12

27. Brunei 1 178.9 0.12

28. So:::! in 6 139.2 0.09

29. Denmark 16 134.5 0.09

30. Sweden 8 64.5 0.04

31. Finland 5 63.1 0.04

32. New Zealand 9 41.9 0.03

160

33. Austria 5 41.4 0.03

34. Ireland 2 13.3 0.01

35. Russia I 12.8 0.01

36. Czechoslovakia I 8.6 0.01

37. Tunisia 0 6.5 0.00

38. Nigeria .,

3.0 0.00 .)

39. Yemen 4 2.8 0.00

40. Pakistan 2 3.1 0.00

41. Ceylon 2 2.1 0.00

42. Saudi Arabia .,

1.5 0.00 .)

43. Jordan 1 1.0 0.00

44. Ghana I 1.0 0.00

45. Mauritania I 2.4 0.00

46. Lebanon I 0.5 0.00

47. Papua New Guinea I 0.2 0.00

48. Vanuatu I 0.2 0.00

Total 4,2011 151,346,020 100.00

(Source: a news bulletin of IIFA (India-Indonesia Friendship Association)February 1996, and Badan Koordinasi Penanaman Modal - Indonesian Investment Coordinating Board, Jalan Jenderal Gatot Subroto No.44, Jakarta 12190, Indonesia, http://\Vww.bkpm.go.id) Including 333 projects of joint countreis. Cumulative figure for total projects is the number of new projets +merger+ change of status- revocation, whereas cumulative figure for investment value 1~ the investment from new projects+expansion+alternation+merger+change of status+revocation.

I6I

Financial Crisis in Indonesia

The Indonesian economy found itself in a state of near collapse in January 1998,

in the midst of the Asian economic crisis that had been triggered by the devaluation of the

Thai Baht in July 1997. There is no.shortage of explanations for Indonesia's crisis: from

instabilities in international currency markets to unsound macroeconomic management to

domestic corruption. When the Asian crisis began in mid 1997, Indonesia's

macroeconomic situation was satisfactory.

Explaining the financial crisis in Indonesia, Reisen argues that current account

deficits even higher than 8 percent of GDP could be sustainable if account is taken of a

country's existing external debt, advantages in productivity growth and the extent to

which its capital inflows are of the more stable variety, such as foreign direct investment

with the breakdown of Indonesia's financial system, maintaining its previously high level

of direct foreign investment inflows has become problematic.35 As it has been noticed in

available data, the FDI inflow to Indoonesia was $ 4346, million in I 995, $6, I 94 million

in I 996, $4677 million in I 997, $-356 million in 1998 and $-4550 million 2000.

As in Thailand, the increase in short-term debt was due to a complicated set of

factors, mostly related to the financial liberalization process. High domestic interest rates,

brought about by the authorities efforts to maintain modest increases in money supply in

35. Jomo, n.l, p.172.

162

the face of persistent capital inflows, encouraged further capital inflow into short-term

instruments. In this situation, the alternative would have been to let the rupiah appreciate

even more, which would certainly have weakened the fundamentals. 36

On 6 October 1997, Indonesia used US$0.65 billion to defend the currency, and

on 8 October, announced that it was turning to the IMF and external donors for assitance.

This was generally seen as a positive, pre-emptive move with the start of the IMF

programme on 31 October 1997, 16 commercial banks were closed. Instead of improving

confidence in the banking system, the clsures had the opposite effect to that intended, the 1

closures accelerated deposit withdrawals from the remaining banks and forced the central

bank to provide liquidity beyond the IMF ceilings.37

Indonesia negotiated and signed a new IMF programme on 15 January 1998. This

programme contained sweeping reforms including the dismantling of state and state-

enforced monopolies, the removal of consumer price subsidies and further liberalization

of external trade. But the rupiah continued to slide as doubts spread as to whether

Indonesian corporations and banks would be able to service the debt obligations they had

accepted (from abroad) during the high tide of financial liberalization. As feature of

financial liberalization these were debts between private parties and were not easy to

36 Sundararaman. Shankari, Post Financial Crisis Indonesia· The Challenge of Survival, Strategic Analysis, Vol .XXV,

No.6,1DSA, New Delhi, p.809

37. Ibid, p.173

163

consolidate. Even ifthe debt could be consolidated, the government were to guarantee or

accept the debt, it would create private wealth from public finances for external .creditors

and favored Indonesian parties.

By early 1998, Indonesia's economic profile was fading and it had a huge debt

burden of US$ 115 billion with many investors and large companies gaining access to the

international capital markets after the early nineties, there was an increase in the debt

burden which has been placed at US$ 137 billion. The pertinent part was the closure of

some monopolies such as wheat, flour, soyabeans and garlic, and the cut on the control

and subsidy of tuel and cement. The long-term effect of these policies was evident in the

growing resentment among many sections of society which was to have a bearing on the

political system and this forced Suharto to resign. 38

While the value of rupiah remains low, it has helped to stimulate a boom in the

export sector and the earnings .for the year 2000 was about $ 60 billion. GDP growth for

the year 2000 was initially placed at about 4 percent which was re-assessed at 4.8

percent. The most crucial sign of economic recovery has been the increase in the output

of food product- while it remains far from positive, the fear of a food crisis is

38. Sundararaman, Shankan, Post hnanc1al Cns1s lndones1a: I he Challenge of Survival, Strategic Analysis, Voi.XXV,

No.6, IDSA, New Delhi, p.809

164

over. An important indicator is the fact that as of September 2000, Indonesia's

external debt stood at US$ 140.8 billio.n which was about US$ 8 billion less that

what it was in December 1999.39

The economic crisis was related to a banking crisis and an external debt crisis.

Both external and internal factors caused the economic crisis. The six-months before

President Suharto's fall from power in May 1998 was a wasted period because the

government could not decide amongst the alternative solutions to the economic crisis.

The quality of decision-making had declined because of the erossion of the quality of

technical competence and integrity of President Suharto's cabinet ministers as he

relied increasingly on his family members and cronies for advice.

Following the crisis, the authorities had to find other sources of revenue to finance

the budget deficits in the following year since 1998. These new sources included

revenue from asset recovery by the Indonesian Bank Restructuring Agency (IBRA),

proceeds from privatization of state-owned enterprises and flotation of government

bonds in the domestic market. The authorities have also introduced various measures

to raise revenue from taxation. The efforts have met with limited success because the

tax system in Indonesia, as in most emerging economies, is inflexible, inefficient and

less progressive.

The government's budget revisions included increasing fuel and electricity prices

by 30% and 20%

165

respectively in mid-June 200 I. Weak currency had also been the major source of high

inflation. Although beneficial to exports, the weak Rupiah also made the .country's

imports more expensive. In 200 I April, money supply grew by an average 18% on

. 40 the year-on-year basts.

The interest rates are quite IO\v and as the real interest rate is not enough to halt

inflation and will have to rise. Two fold problems are likely to arise as a result of the

increased interest rate. First, most of the banks will highly depend on the interest from

the bonds used to recapitalize them, whereas half of the bonds pay a fixed rate

interest. In case of higher increase in the interest rates, the banks will be in trouble,

which will generate more risks to another banking coliapse.

Second, the burden will be put on the government budget, as interest rate

increases. A one-percentage point increase in interest rate would cost the government

an additional Rp 2.2 trillion in interest payment on variables rate bonds.41 The

Indonesian government has ta;-get to divest its equity in the domestic bank by the year

2004. however, the sale of the equity is not taking place at the pace needed to

promote banking recovery

Imports of all categories of raw materials and intermediate inputs have declined

since their peak in NovPmber 2000, especially intermediate inputs for industrial

® ReVIC\\' of EconomiC Development, Indonesian Economy at Stake: Up or Down, Department of EconomiCS, csls,

The Indonesian Quarterly. Voi.XXIX/200 I, No.2, p.Il3.

40. !bid, p.I04.

166

purposes. Imports of capital goods continue to increase slighty and import of

consumer goods have declined slightly. Both capital and consumer goods, however

make up a small portion of the total imports. On the other hand, Indonesia is still

experiencing a huge private capital outflow, both in terms of foreign direct

investment and short term capital, of about US$ I 0 billion, with US $ 33 billion in net

capital outflows in the three years since crisis. Even with regard to FDI outflow it was

$ 1,319 million in 1995, $ 178 million in 1997, $ 44 million in 1998, $ 72 million in

1999 and $ 150 million in 2000 as given in Table I. this shows that there is

resurgence in outward FDI and the situation might be attributed to f1ow of capital.

Even with regard to FDI as percentage of GOP, it was 25% in 1995 while 46.2% in

1999 owing to the investment by international organizations like IMF, World Bank

etc. While outward FDI percentage remained meagre 0.'6% in 1995 and 1.6% ;n 1999

as percentage ofGDP.

In the overall context, the situation is limping back to normal but political stability

and strong fiscal and monetary decisions are required. A sound economy like that of

Indonesia plunging into a debt-net and a financial crisis gave a few serious lessons for

the economic managers of developing countries like:-

1. Short-run stabilization measures and medium and long-run economic

reforms require politically credible and technically competent government.

2. Sound macroeconomic management and a healthy banking system are the

two main pillars of macroeconomic stability.

167

3. Micro weaknesses (such as high debt/equity ratio and over dependence on

unhedged short-term external borrowing) can undermine macroeconomic

strength.

4. Financial fragility is increased when banks and the corporate sector

engage in large amounts of external borrowing denominated in foreign

currency and invest the funds in unproductive economic activities.

5. Careful attention must be paid to the real effective exchange rate (REER).

6. The deregulation of the financial sector should have been accompanied by

improvement in bank supervision and in enforcement of ruels and

regulations.

7. To reduce the burden of a recapitalization programme, the non-viable

banks should be liquidated immediately and a clear signal of support

should be given to the viable ones.42

Expenditure on investment and imports and intermediate inputs decrease, and

consumer and business confidence remain weak. Monetary policy is till tight enough:

without significant intervention, increases in fuel and electricity prices, and the

weakening of the Rupiah will increase inflationary pressure in the year 2002. The

impeachment of President K.H. Abdurrahaman Wahid and Subsequently the

installation of Megawati Sukarnoputri as the new President oflndonesia which took

168

place on 23 July 2001 has ensured a new era in democratic politics oflndonesia and it

is expected that "Mutual Help" Cabinet could serve the country and the nation better

than the previous governments.

In the new political climate, IMF has stipulated its disbursement of loan to four

economic reforms:

I. The amendment of Central bank Law

2. Responsible fiscal decentralization

3. Progress on asset privatization, especially on two banks under

IBRA's ownership (BCA and Ban Niaga)

4. The handling of debt restructuring.

The April 2000, the government reached on agreement with the Paris Club

(Australia, Canada and France) to reschedule over 20 years the US $ 5.6 billion

Indonesia owes it.43 Though the Indonesian economic situation is fragile but it can

still recover to a certain extent with wide ranging reforms and financial

restructuring. 44

FDI Composition for Indonesia (Millions of Dollar)

FDI 1989-1994 1995 1996 1997 1998 1999 2000 (Annual Avg.)

%of GDP -- 25.0 -- -- -- 46.2 --In ward -- 0.6 -- -- -- 1.6 --Outward --

Source: UNCT AD, World Investment Report 2001, Promoting Lmkage Bookwell Publishers, Delhi 200 I.

44. Sundararaman, Shankari, Post Financial Crisis !ndonesia: The Challnege of Survival, Strategic Analysis, Vol XXV, No.6,

lDSA, New Delhi, p.809

169

Indian Investors

Indian products and investments have found a place in Indonesiain the past few

decades. Tata and Bajaj exported trucks and three-wheelers/two-wheeler and Bajaj

was even assembling the three wheelers in Indonesia. In the 80s three major turn key

projects were executed: tool room-cum-training centre in Surabaya by HMT, sugar

mill project in Camming in South Sulawasi by Triveni Engineering and cement

project in Padang, West Sumatra by PEC and WIL. Aditya Birla group, Bombay

Dyeing and Gokak Industries established a presence in the textile sector. Aditya Birla

group has 4 manufacturing units producing viscose, rayon staple fibre and blended

yarn located in Purwakarta and Bekasi, not far from Jakarta. Gokak industry's

spinning mill is located near Bogor (60 kms from Jakarta) and produces cotton,

polyester, viscose, and blended yams. Bombay Dyeing has its manufacturing unit in

Bandung. JK Industries have a hand-tool manufacturing unit in Surabaya,

manufacturing a variety of hand-tools including files, high-speed drills, spanner and

wrenches. The Essar Group put up a cold-rolling steel mill with a capacity of200,000

tons in 1994 and are planning to double its capacity. The Lohias, Mittals, Kewalram,

Tofqram have a major presence I Indonesia. Indorama Synthetics ofthe Lohia group

started operations in 1976 and has a substantial turnover in polyester chips/stable

fibres/filament yarn, etc. The group also has various other interests in Indonesia such

as in property, oil, etc. The units of Tolaram and Kewalram groups were set up in the

seventies and are also involved in textile businesses. LNM group has a steel wire rod

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manufacturing plant m Surabaya with a capacity of 600,000 tons, established m

1976.45

There are around 16 Indian manufacturing joint ventures in Indonesia with direct

Indian participation or financed by overseas Indians. These joint ventures are in the

fields of synthetic fibre, textile, gannents, steel, hand tools, etc. As per Indonesian

Investment Coordination Board (BKPM), Indian investment in Indonesia stood at US

$ 800 million Most of the existing joint ventures were set up in 1970s and 80s.

ESSAR steel set up a cold-rolling plant in mid 90s. It is interesting to note that up to

1985 India figured amongst the top five investors in Indonesia.

WAPCOS, IRCON, STUP Consoultancy India Ltd., TCIL, PUNJLLOYDS, KEC

INTERNATIONAL, TELK Ltd., BHEL, Bharat Heavy Plates, RITES, etc, have been

involved in supplying equipment & undetaking projects/consultancy work in

Indonesia. IRCON undertook construction of two fly-overs as well as Railway

electrification project at Bekasi and Menggarai. STUP Consultants were involved in

road project under ADB financing.· KEC International has been involved in various

transmission projects for PLN including JAVA Transmission Network. TELK Ltd,

won a contract from PLN for supply of power transformers. TCIL has undertaken

projects in Java and Kalimantan.46

IRCON, after completing its projects in Indonesia, closed its office in 1998.

W APCOS too has followed suit. In the area of

45 lndmn Busmess and Urgan1zat1on, News Bulletm, lndones1an Consluate General, Bombay, 1995.

46. See the Y car Report of I RCON I 986, p.26.

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Projects, the companies presently active are: PUNJLLOYD (in the area of laying

pipelines) and KEC International (in the area of setting up transmission lines for the

PLN) and TClL is propsecting for new opportunities m Bali in the

telecommunications sector. NIIT, APTECH and LCC Infotech have established

computer education centres in Indonesia and are in the process of increasing their

network. Kirloskars and Thermax have sale representative offices in Indonesia. Bajaj

and Hero Honda is trying to enter the local market and have appointed

representatives. Tata is once again looking at the Indonesian market. Other

opportunities that have arisen from the sale of assets by the Indonesian Bank

Restructuring Agency (IBRA) have also been circuiated to CII and FICCI, and it has

generated some response in Indian business houses. Reliance Industries has decided

to open a representative office in Jakarta. STC and MMTC have also beea active in

Indonesia in commodities such as tin and crude palm oil. KIOCIL had a contract with

Krakatau Iron and Steel of Indonesia for supply of iron pellets to the Indonesian

company and the supplies continued till 1995-96 when they got disrupted because of

quality problems. KIOCL is seeking to resume supplies to Krakatau Mills after they

have upgraded their facility. STC is also seeking to pruchase large quantities of

cement from Indonesia.

Though economics have assumed prime importance in bilateral relations, new

vistas of friendship and co-operation are emerging in India-Indonesia relations. These

developments are evaluated below. Firstly, Indonesia can provide immense support to

India in the success of its economic liberalization programme. Both countries have

faced similar problems of development after discarding the socialist path. Indonesia

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made its currency fully convertible at the beginning the "New Order" and

subsequently simplified investment procedures. Presently, Jakarta has placed

emphasis on structural diversification of the economy to reduce dependence on crude

oil and, in particular, on the development of export-oriented and labour-intensive

industries in the agricultural and manufacturing sectors. On the other hand, New

Delhi is encouraging foreign investment through a tax holiday on income in certain

sectors and has announced depreciation allowances, customs and excise concessions,

while also trying to simplify investment procedures. Proposals for investment

ventures involving 51 percent foreign equity require only the Reserve Bank's

approval. As a first step towards the p1 ivatization of 24R state-ovvr.ed corpomtions,

selected public sector enterprises are being allowed to raise funds through equity

ISSUeS.

In short, India and Indonesia might find complimentarities in their economic

objectives. Secondly, India and Indonesia are leading exporters of textile goods and

close co-operation between them could result in evolving joint strategies which could

prove mutually advantageous. Further India is interested in the joint exploration of oil

and natural gas in the Andaman Sea, and might benefit from Indonesia's experience

in oil exploration and exploitation. Moreover, Indonesia's success in family planning

has been phenomenal, and India might learn from Indonesian experience in that area.

Thirdly, India has certain advantages in science and technology and it is not averse to

transferring its knowledge. India has nucle<ti k(,u\v-:.vw and, in the field of missile

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technology, has intennediate range ballistic missile systems. There is therefore wide

scope for interaction in scientific and technological collaboration.47

In their joint endeavours to give a further boost to trade exchanges and develop

economic cooperation, Indonesia-India joint Business Council (JBC) organized its

fifth meeting in Jakarta on 19 March 1996. to coincide with the JBC meeting a

seminar on "India and Indonesia Partners in progress" was also arranged. On this

occasion ITPO organized an Indian Trade Exhibition. Top government officials and

leading businessmen from both sides participated in these programmes. From the

Indian side Mr. Deepak Bamker, President, Federation of Indian Chambers of

Commerce and industry, Mr. Tajender Khanna, Secretary, Ministry of Commerce and

Mr. K.K. Mathur, Chairman, ITPO, among others, took part in the deliberations.

Indonesia side at these meetings was led by Mr. Rustam Effendi, Co-Chairman of

JBC. Speaking at a luncheon meting organised by Indonesian Chamber of Commerce

and Industry, Minister Coordinator for Production and Distribution Hartrto said "this

event can serve to discuss issues and opportunities as well as bringing Indonesia and

India into closer relations." With regard to business issues, it might be necessary for

us to know Indonesia economic perfonnance the Minister said.

The Indonesian government offers much scope fc:- investment in various sectors.

The fast growing population coupled

47. Khanna, Sundep "New Management Prmc1ples of Partnenng" Bus mess today Oct 7-12, I 996 New Oelh1, pp.23-24.

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with the envisaged growth at 7.8% attract mean increased demand of consumer and

industrial products and hence a ready market for manufactured goods. In addition to

this, government incentives, protection of local industries and export's to adjoining

and overseas countries provide an added attraction to potential investors.48

India-Indonesia relations entered a new phase after India became a dialogue

partner of the ASEAN. It is hoped that cooperative relations will grow in the ASEAN

framework . If both the countries would give priority to resource - based and export

oriented industries, particularly on small - scale rather than large - scale

manufacturing industries, it would prove beneficial. The Indonesia economy is still

developing and establishment of heavy industries and sophisticated technology are

needed in the light of rapid modernisation. The effort should be made to ensure that

the stipulation of the Joint Venture agreements are adhered to. This particularly refers

to the training of local man power by the foreign collaborators. Cases have come to

light where deliberate attempts are advertently made so that the top management post

is held by expatriates. This has led to frustration of some able and aspiring natives.

The governments should keep an eye on unscrupulous management which engage in

restrictive production and trade, hoarding and smuggling, tax evasion, mistreatment

and exploitation of labor etc.

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