‘Small benefit': Indonesia's banking on consumers to boost its economy but latest perks fall short, say analysts

CNA28-05-2025

JAKARTA: Indonesia is rolling out a slew of stimulus measures to get its people to spend more in the next two months, but these may not be enough to revive sluggish domestic consumption and lift economic growth, analysts say.
Instead, broader moves are needed to help the country's dwindling middle class and protect businesses from the effects of higher United States tariffs, they add.
With the school holidays set to take place between Jun 28 and Jul 12, the government is looking to boost domestic tourism and consumption.
The government announced on Tuesday (May 27) discounts on electricity bills and transportation costs as well as cash and food handouts to selected households that will begin on Jun 5.
Indonesians will enjoy a 30 per cent discount on train tickets as well as a 50 per cent discount on sea transport. In addition, the government will cover the 6 per cent value-added tax (VAT) on airfares from early June to mid-July.
A 50 per cent discount on electricity bills will be given to around 79.3 million households with a maximum usage of 1,300 volt-amperes from Jun 5 to Jul 31.
The government will also provide 150,000 rupiah in wage subsidy for two months to about 17 million workers earning up to 3.5 million rupiah (US$215) a month.
It will give an additional 200,000 rupiah a month in staple food assistance to 18.3 million households.
With the majority of the incentives set to benefit low-income families and not the middle class, experts are questioning just how effective the stimulus will be.
'It is difficult to achieve the expected consumption boost with such (a) small benefit given to such a small number of beneficiaries,' Achmad Nur Hidayat, an economics and public policy lecturer from the Jakarta National Development University, told CNA.
Almost all of the planned incentives will benefit lower-income households, he noted. According to the Indonesian Statistics Bureau, there are 25.2 million Indonesians who live below the poverty line, surviving on less than 600,000 rupiah (US$36) monthly.
'Houses with 1,300VA (maximum electricity usage) are typically found in housing complexes for low-income families. Workers with a salary of less than 3.5 million (rupiah) are low-income workers,' he explained.
'If the intention is to boost consumption, then the government should target the middle class with disposable income,' he said.
'The middle class has been responsible for much of Indonesia's domestic consumption and their purchasing power has been dwindling for the last few years,' concurred Yusuf Rendy Manilet, an economist from the think tank Center of Reform on Economics (CORE).
'And yet, incentives for the middle class are limited to transportation fares.'
RISK OF MORE JOB LOSSES
Household consumption contributes around 54 per cent of Indonesia's economy, according to official data.
However, consumption appears to be slowing over the last few years.
In the first quarter of 2025, consumption grew by 4.89 per cent compared to the same period in 2024 despite major festivities like Chinese New Year and Idul Fitri occurring during the period.
The year-on-year growth was Indonesia's weakest for a first quarter in more than three years: The rate was 5.11 per cent in 2024, 5.03 per cent in 2023 and 5.01 per cent in 2022.
Indonesia clocked 4.87 per cent gross domestic product (GDP) growth in the first quarter, and is aiming for around 5 per cent growth for the second quarter.
Meanwhile, import of household goods in January and February this year stood at US$1.64 billion and US$1.47 billion respectively. The figures were 10.6 and 21 per cent lower year-on-year, another sign of sluggish household consumption in Southeast Asia's largest economy.
One major factor is the shrinking of Indonesia's middle class population, which has been responsible for around 40 per cent of the country's total consumption.
The country is still reeling from the effects of the COVID-19 pandemic, which caused thousands of businesses to shutter.
The number of people categorised as middle class dropped from 57.33 million in 2019 to 47.85 million in 2024. During the same period, Indonesia's population increased from 267 million to 280 million.
Experts believe that Indonesia's middle class could shrink further with the US' threat of 32 per cent tariffs on goods from Indonesia. The Trump administration has put higher 'reciprocal' tariffs on hold until July.
The Indonesian government's latest economic stimulus incentives will only cut household expenses temporarily, said Tauhid Ahmad of the think tank Institute for Development of Economics and Finance (INDEF).
'But if we want something which is long-lasting, then we need to do much more, starting from creating new jobs to preventing existing jobs from disappearing,' he said.
Indonesia's Manpower Minister Yassierli said in parliament on May 12 that more than 24,000 people lost their jobs between Jan 1 and Apr 23 this year.
He said tens of thousands more are at risk because of the trade war. This is particularly so in the textile and furniture sectors, where goods are mostly bound for overseas markets.
The Indonesian Employers Association (APINDO) has painted a more alarming picture, saying on May 14 that at least 70,000 people have been laid off between January and March.
APINDO warned that if the looming impact of the trade war is not mitigated well, 250,000 people could lose their jobs by the end of the year.
INCENTIVES FOR 'LONG-TERM GOOD' NEEDED
Some experts like Tauhid said it is important that Indonesia gears government stimulus and incentives towards mitigating the impact of a punishing trade war.
But they noted the government funding to be allocated to President Prabowo Subianto's signature programmes like free meals for millions of school children, breastfeeding and expectant women.
This year, Indonesia is earmarking US$7.4billion for the initiative, with plans to nearly double the budget to US$13.3 billion next year.
Aside from the free meal initiative, Prabowo also plans to build 3 million houses for the poor every year, which is expected to cost taxpayers US$7 billion annually.
To cover the costs of the programmes, the government initially planned to increase its VAT from 11 to 12 per cent from Jan 1. The plan, however, was cancelled after fierce public backlash.
Without the VAT hike, these programmes are predicted to cause a government deficit of around US$37billion or 2.53 per cent of the GDP by the end of 2025.
'(These programmes) give little room for the government to provide meaningful incentives to revive our economy,' said Achmad, suggesting that these programmes be postponed or reviewed.
'Must we do them now? Can we scale them down? The government needs to think about these options,' he said.
Tauhid of INDEF suggested also offering help to companies.
'Instead of providing incentives to individuals, why not provide incentives to businesses so they can stay afloat? Why not provide tax breaks so investors are willing to build factories here and create jobs?' he said.
'The plan to provide discounts on electricity bills and distribute cash handouts are popular with the general public and can give quick results but the results are temporary and superficial. We need something for the long-term good of our economy.'
Bhima Yudhistira, executive director of the think tank Center of Economic and Law Studies (CELIOS), said the government could consider reducing the VAT, currently at 11 per cent, to 9 per cent.
'By keeping prices low, people will be encouraged to spend more on goods and services," he said.
"This will in turn help small and medium enterprises providing these goods and services,' Bhima said, highlighting that many countries like Ireland and Germany have lowered their VATs to aid recovery from the effects of the pandemic.

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