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Indonesia readies incentives to keep consumption intact
Publication Date : 12-08-2013
The Indonesian government is mulling several fiscal incentive options to maintain domestic consumption.
According to Finance Minister Chatib Basri, his ministry is currently considering the possibility of introducing fiscal incentives.
“We are exploring all options so that consumption or the ‘keep buying strategy’ can continue,” he said at an Idul Fitri gathering in Jakarta recently an Idul Fitri gathering.
One of the incentives being considered is to implement tax postponement on labour-intensive industries on the condition that companies will not lay off employees.
“We implemented the same policy back in 2008. Workers will still have purchasing power because they are able to keep their jobs, therefore, domestic demand is sustained,” he said, adding that another option would be introducing a tax discount.
The government would opt to implement a fiscal incentive because it is now less likely to rely on foreign direct investment (FDI) to spur economic growth, as FDI growth has continued to slow, according to Chatib.
Exports — facing issues due to fluctuations in commodity prices — are also unreliable for maintaining growth, he added.
Based on the latest data from the Investment Coordinating Board (BKPM), even though FDI remained the biggest contributor to the country’s realised investment figure in the second quarter of 2013, FDI only grew by 18.9 per cent year-on-year to reach US$7.2 billion, which made it the lowest growth since 2010.
Chatib said, however, that the government might not implement any option at all should consumption remain high after the Idul Fitri holidays. “As many as 110 trillion rupiah [US$10.69 billion] was spent on consumption during Idul Fitri. That will surely boost consumption growth. The most important thing is to keep the fiscal incentive options on standby,” he said.
Separately, Industry Minister MS Hidayat said that under the considered tax postponement incentive scheme, labour-intensive industrial sectors — particularly textile, garment and footwear — would be exempted from the obligation to pay income tax for its workers, which would later be paid off by the government.
“It is one way that we can act to help firms avert layoffs at a time of economic hardship like now. If we do not act, the situation will be detrimental to our economy and add social costs associated with layoffs,” he said.
The planned fiscal incentive is also part of the government’s efforts to design a new reference for tripartite negotiations in setting a nationwide minimum wage increase each year, aiming to prevent a rise to a level that cannot be shouldered by the labour-intensive industry, which employs more than three million workers.
For the past few years, talks to set annual minimum wage increases have been contentious battles between labour unions, employer associations and local administrations in Southeast Asia’s biggest economy, with worker unrest escalating during periods of talks.
The fight over wage increase found its dramatic moment late last year when some local administrations finally approved significant hikes beyond the levels agreed on by the National Wage Council.
Jakarta Governor Joko “Jokowi” Widodo, for instance, instructed firms to push up the provincial minimum wage by 44 per cent to 2.2 million rupiah per month.
Despite the government’s gradual strategy in raising wages, many labour-intensive firms — both local and foreign — decided to terminate employment.
The Korean Chamber of Commerce and Industry reportedly recorded that Korean firms in the labour-intensive industry have laid off more than 60,000 workers this year.
The Indonesian Footwear Manufacturers’ Association points out that roughly 50 foreign and local footwear makers in Greater Jakarta, Banten, West Java and East Java had already laid off 44,000 employers as they could not afford the minimum wage increase.