The Important Role of Government Policies in Driving the Performance of Indonesia's Manufacturing Industry

Jakarta, INTI - Government policies play a crucial role in boosting the performance of the manufacturing industry. Several policies, especially those related to industrial gas prices, domestic market protection, and inflation, have a significant impact on the manufacturing conditions in Indonesia, alongside the manufacturing conditions of global partners such as China and India.

"Based on the analysis results of the Industrial Confidence Index (IKI) Team of the Ministry of Industry, the manufacturing industry in trading partner countries still receives a lot of subsidy support. Similarly, in Indonesia, they recognize that the manufacturing industry is the main pillar of the economy, having a high multiplier effect, starting from formal employment absorption, increasing people's purchasing power, and leading to national economic growth," said the Ministry of Industry Spokesperson, Febri Hendri Antoni Arif, during the IKI July 2024 release in Jakarta on Wednesday (31/7).

To date, the global economic situation still shows uncertainty, although the US and European economies show strengthening supported by strong consumption and fiscal stimulus in those regions. On the other hand, the Chinese economy is expected not to grow strongly in 2024, although the International Monetary Fund (IMF) in its latest World Economic Outlook report has revised China's 2024 economic growth projection to 5%, up from the 4.6% forecast in April 2024.

The revision is mainly attributed to improved private consumption and strong exports in the first quarter of 2024, related to the increasing global demand. The global inflation condition is marked by a downward trend in inflation in several countries, such as South Korea, Turkey, and Germany. US inflation also slowed in June 2024, falling to 3.0% (y.o.y) from 3.3% (y.o.y) the previous month. The easing inflation rate in the US was positively received by market participants along with the strengthening prospects for a Federal Reserve rate cut.

The Industrial Confidence Index (IKI) in July 2024 reached 52.4, slowing down by 0.1 points compared to June 2024. However, this condition indicates that the industry is in an expansion condition amid global economic instability and the current decline in domestic manufacturing product demand.

In more detail, the IKI value slowdown is influenced by a decline in new orders and still contracted production variables. The IKI value for new orders fell 1.86 points to 52.92, while the production variable increased by 2.45 points to 49.44, still in contraction. Furthermore, the IKI value for product inventory increased by 0.48 points to 55.53. This condition shows that current orders/sales in the manufacturing industry are still fulfilled by product inventory. Moreover, in some industries where new orders are contracting, production is conducted to increase product availability. Most manufacturing industries in Indonesia also still rely heavily on the domestic market.

The order decline occurred in almost all industrial subsectors. Of the 23 subsectors, 15 experienced a decrease in new orders. This is due to the unstable global conditions and the decline in purchasing power in the domestic market. Data from the Ministry of Labor shows a decrease in the number of industrial sector workers or an increase in informal workers. Meanwhile, in terms of expenditure proportion to income, there was an increase in consumption and a decrease in savings, indicating that the public is currently using their savings for consumption.

This condition certainly affects price-oriented purchasing patterns and reduces the courage to speculate on obtaining financing credit. Meanwhile, producers issued policies to reduce production. This explains the still contracted IKI production variable value. "Other factors holding back the IKI expansion rate are the weakening exchange rate and the implementation of import relaxation policies after the release of 26,000 imported containers held at the port by the Coordinating Minister for Economic Affairs and the Minister of Finance. This condition shows the importance of synergistic policies in the development of the manufacturing industry," said Febri.

Furthermore, Febri explained that there are 20 expanding subsectors contributing 93.6% to the non-oil and gas manufacturing GDP in the first quarter of 2024. The highest expansion was experienced by the electrical equipment industry, followed by the apparel industry, and the printing and media reproduction industry. Meanwhile, the subsectors that contracted were the paper and paper products industry, the machinery and equipment industry, and the textile industry. The contraction of IKI in the machinery and equipment industry aligns with the decline in capital goods imports in June 2024. This is a business policy to hold back investments amid foreign and domestic market uncertainties.

He also explained that the IKI value of textile products has not changed and tends to decline, indicating that efforts to secure circulating goods related to the textile industry have not been effective, as the illegal import task force only began working at the end of July. Currently, there are still many illegal imported textile products circulating, so system improvement policies, import control, and relocation of import ports need to be implemented immediately.

Previously, the Minister of Industry had proposed, which was later agreed upon by the Minister of Trade, the relocation of import entry ports for seven commodities subject to restrictions, namely textiles and textile products (TPT), ready-made clothing and accessories, ceramics, electronics, footwear, cosmetics, and finished textile goods to several ports outside Java, such as in Bitung and Sorong ports. The relocation of import entry ports is mainly prioritized for finished goods in these seven commodities and not raw materials and auxiliary materials for the industry. This plan will be discussed at the Cabinet Meeting level. "Changing the import entry port to Eastern Indonesia is also expected to boost the economy in those areas and increase domestic logistics and shipping businesses," explained the Ministry of Industry Spokesperson.

In the paper industry, the contraction occurred due to a seasonal pattern. The new academic year 2024/2025 increased demand for paper for educational purposes in the country. Paper industry production increased before July and then declined in July. Additionally, the contraction was caused by a decrease in the competitiveness of the domestic paper industry due to the influx of imported goods from China after the implementation of the Regional Comprehensive Economic Partnership (RCEP). The weakening exchange rate also affects production costs due to rising raw material and energy prices. Government procurement requiring TKDN and SVLK has not been implemented, adding pressure to this industry in July 2024.

The IKI survey recorded that business optimism for the next six months changed direction this month, from 73.5% in June 2024 to 71.9%. Furthermore, a directional change also occurred in business pessimism for the next six months, which increased from 5.5% to 6.0%.

Subsectors with high and increasing pessimism sequentially are the textile industry, other transportation equipment industry, machinery and equipment industry, and non-metal mineral products industry. Meanwhile, the wood, wood products, and cork industry had high but decreasing pessimism. This condition is a warning and needs to be watched for the future industrial sector conditions.

Febri added that the Ministry of Industry focuses on several policies to increase business optimism. First, for the other transportation equipment industry and the machinery and equipment industry, policies are needed to strengthen the Rupiah exchange rate and increase consumption and investment. Furthermore, the machinery and equipment industry group depends heavily on the expansion of its user industries and government procurement, so TKDN relaxation policies will impact this subsector. Next, for the textile industry, import control policies for downstream goods are needed.