Shedding loads

Indonesia edges away from wasteful handouts

By cutting Indonesia's wasteful fuel subsidies in his very first month as president, Joko Widodo has established his reformist credentials. He has also nudged a flabby economy to place a tentative foot onto the productivity treadmill.

Prices of subsidised gasoline and diesel went up by about 30 per cent across the archipelago from midnight of November 17. The $8 billion that the government hopes to save next year will be diverted to infrastructure, health and education. Such investments could make manufacturing in Indonesia more competitive and reduce the economy's dependence on exporting commodities like coal, minerals and palm oil.

The 2,000 rupiah-a-litre ($0.16) increase in prices will undoubtedly lead to some street protests. But as late as mid-October, the expectation was for a 3,000-rupiah hike. Falling global oil prices are allowing Widodo to cushion the blow for consumers.

The new president's next big task will be to scrap the handouts completely. Doing so will allow Jakarta to embark on long-gestation projects in roads, railways and ports without fretting about running out of money when fickle crude oil prices start climbing higher again. Forcing consumers to face the full burden of energy costs will also curb the sudden spikes in inflation that occur after large and infrequent one-time adjustments in pump prices.

One such surge could take place soon. The government's calculations show that the annual inflation rate may jump by two percentage points to 7.3 per cent this year. But a repeat of the inflation scare that whipsawed the economy after a large adjustment in fuel prices in 2005 is unlikely - global demand for Indonesian commodities is too weak for a wage-price spiral. Any increases in interest rates by Bank Indonesia are also likely to be temporary.

But even if Indonesian borrowing costs start easing in late 2015, a manufacturing-led investment cycle is not guaranteed. Competition for investment dollars in Asia is intensifying. Indian Prime Minister Narendra Modi is hard-selling his "Make in India" campaign everywhere. By using precious fiscal resources to lift sagging labour productivity, Joko Widodo can at least tone up his economy for the coming fitness test.