What India Must Learn From Indonesia

Unleashing Growth

Although India initiated economic reforms in the early 1990s, more than 20 years after Indonesia's liberalisation under the military dictator Suharto, the countries share a variety of similarities on the economic front.

Over the past decade, both have managed sustained growth in spite of slowdowns in the wake of the 2008 global financial crisis. The average real growth for India was 7.7 percent, while Indonesia grew at 5.5 percent. Both have made considerable strides in opening their economies to global forces, with exports now amounting to one-quarter of GDP. The median age in India is 27, close to the 29 in Indonesia and considerably more youthful than the corresponding 37 in China.

In 2013, the two countries were part of the so-called Fragile Five, a term coined by Morgan Stanley to identify emerging economies with large trade deficits. But since the elections of Modi and Jokowi in mid-2014, investor sentiment has improved. And many analysts argue that both nations now have a window of opportunity in which tough reforms taken by their popular leaders could translate into long-delayed structural changes that open the door to more-rapid growth. 

Ben Bland, then the Indonesia correspondent for the Financial Times, listed "endemic corruption, woefully inadequate physical infrastructure, uneven law enforcement and underinvestment in health and education" as the main factors holding Indonesia back. The lack of ease in doing business in Indonesia and the need for smoother coordination among government ministries and between the central and local governments are the other challenges cited.

It is possible to substitute India for Indonesia and end up with a similar inventory. The World Bank's Ease of Doing Business Index ranks Indonesia 114th out of 189 countries, while India is 142nd. Health care expenditures as a percentage of GDP are a low 4 percent in India and an even lower 3 percent in Indonesia. According to Transparency International's 2014 corruption rankings, India placed 85th out of 175 countries, while Indonesia comes in 107th — major drags on productivity, innovation and capital formation. 

Both countries, moreover, urgently need a boost in manufacturing to absorb the under employed labour flooding into cities in search of jobs. Getting from here to there won't be easy for either, however. The success of Modi and Jokowi in achieving this goal will depend in large part on their skill in balancing protectionist lobbies and subsidy-habituated state-owned enterprises with reforms aimed  at opening up to foreign investment, cutting  red tape and taking on entrenched elites. 
The tumble in global crude oil prices has helped ease the fallout of Indonesia's decision last November to cut fuel subsidies, raising the prices of petrol and diesel by more than 30 percent. The move could save Indonesia $8 billion to $10 billion this year. India, too, stopped subsidising diesel prices (last October) and raised fuel taxes. 

But the way the savings are redirected will be crucial in determining whether there is a positive impact on economic growth. Given the high incidence of poverty in both countries — particularly in India, where more than half the population lives on purchasing power equal to less than $2 a day — using the extra funds to benefit the poor would serve the cause of growth and political stability. Part of the money might go to health, education and transportation. But some ought to be allocated as direct cash payments to poor households, thereby reducing opportunities for corruption by middlemen. 

It will not be easy for either country, however, to confront the endemic problem of corruption. Jokowi has already run into trouble over his nomination of Budi Gunawan, a powerful general, as police chief. Gunawan is a former security aide to Megawati Sukarnoputri, who heads Jokowi's political party, and he is known to be close to her. Three days after his nomination, the KPK, Indonesia's anticorruption agency, named Gunawan as a suspect in a corruption probe.  The police then arrested one of the KPK's five commissioners on perjury allegations relating to a five-year-old case. 
In the process, Jokowi's reputation took a battering. The president suspended Gunawan's nomination, but did not drop it until more than a month later. Consequently, he alienated both popular opinion, which saw him as buckling to the old guard, and many of the political elite who viewed Gunawan as an ally. 

How this will all play out for Jokowi's reform ambitions is unclear. But it underscores how tough it is to curb the influence of the corrupt elite in Indonesia.

The Indonesian president's troubles are deepened by the reality that his party, the PDI-P, is a minority in Parliament. Worse, he cannot even rely on the support of his own party, which is controlled by Sukarnoputri. In contrast, Modi enjoys a strong majority in the Indian Parliament. Nonetheless, his party, the BJP, was trounced in state assembly elections in Delhi earlier this year, winning only 3 of 70 seats. 

Moreover, the big winner was the newbie Aam Aadmi Party (AAP), which is led by a former anticorruption activist who ran on a platform of increasing market-distorting subsidies for electricity and water. It is not easy for any government, even one with a strong mandate at the center, to enact structural changes in a country like India, where voters tend to short-term sops.

Contrast in Leadership 

Compared to India, Indonesia is a new democracy. General Suharto’s three-decades- long dictatorship was dismantled in 1998. However, the two countries are already political doppelgangers. A multiplicity of parties, noisy rallies, demanding trade unionists, and a free and assertive press are part of the public landscape in both nations — a far cry from the annual meetings of  China’s National People’s Congress that are usually orchestrated into rigor mortis.

Last year’s elections saw the elevation of a new breed of popular leader in both countries. Voters were clearly disenchanted with traditional elites. Modi, whose family ran a tea stall, has risen from near the bottom of India’s caste and class hierarchies. Jokowi is from a similarly underprivileged back ground. The son of a carpenter, he was a furniture seller before becoming the mayor of Solo, a midsised city in central Java. 

These similarities should not obscure trenchant differences in temperament and policy inclinations that divide them. But it is these divergences that are what will make the India- Indonesia comparison so interesting to observe in the coming years. 

As a leader, Modi is dominant and combative, while Jokowi is consensual and conciliatory. In his long reign (2001-14) as chief minister of Gujarat State, Modi acquired a reputation for governing with a firm hand as he pursued an aggressive, pro-business agenda. And since taking charge of the country, he has concentrated power in the prime minister’s office. Ministers are left with little elbow room. 

In contrast, Jokowi is unassuming in manner. As governor of Jakarta (a post to which he was elected in 2012) he avoided the tangible trappings of power like fancy cars and security details. He often walked around public markets listening to people's concerns first hand, and was known for attending popular city events like rock concerts and marathons.

While Modi's reputation in Gujarat was built on the back of large infrastructure projects, Jokowi's derives from his stint as mayor of Solo, during which he transformed a formerly crime-ridden city into a center for regional arts and culture. It was there that he demonstrated his mediation skills in relocating street vendors from a park in the city center. 

Modi is an economic reformer with capitalist instincts. His achievements in Gujarat included attracting substantial investments into manufacturing and power projects. He introduced business-friendly policies aimed at cutting red tape and making land acquisition easier than in other parts of the country. 

As prime minister, he has yet to make any dramatic announcements on the reform front, but he has made a raft of more modest proposals, including relaxing foreign investment rules for insurers, military contractors and real estate companies. A broad tax overhaul is also underway. And in recent months, India's growth has matched China's for the first time.

Jokowi, on the other hand, is a communitarian.In Jakarta, as in Solo, he made societal welfare a consistent priority. His sympathies lie with small-business owners, like the street vendors of Solo. As governor of Jakarta, his flagship projects included free health care and education funds for the poor, the shifting of thousands of squatters out of flood catchments into low-cost apartments, and the restarting of a much-delayed public transport overhaul. As president he has widened the policy of smart cards for accessing free health care and education for the poor. 

Through a glass darkly

Analysts have forecasted six-plus percent growth for India and five-plus percent growth for Indonesia this year. Although faster than the recent norm, growth at this level is not enough to be truly transformative for either nation over the medium-term — China's  growth at this stage of development was in the range of 10 percent. New Delhi and Jakarta must lift millions out of poverty, a task that will require them to innovate and invest on a much larger scale. 

Some of the prerequisites for the sustained growth needed to reach upper-middle- income status are clear: openness to foreign investment; suppression of corruption; regulatory streamlining; and reforms in education, health and infrastructure. But there are a variety of imponderables — among them, rising  income inequality, ethnic conflict, helter-skelter urbanisation, air and water pollution and climate change — that will complicate navigation from here to there. Both India and Indonesia seem poised to make up for lost time, but the road to success is bound to be long and tortuous.

This piece was written in collaboration with Tan Chin Hwee and was first published in the Milken Institute Review. Pallavi Aiyar is an author and journalist based in Jakarta. Chin Hwee Tan is a founding partner in Asia of Apollo Global Management.