Strengthening India-Indonesia Economic Ties: Trends and Prospects

Posted by Written by Guest Contributor - Farzad Ramezani Bonesh Reading Time: 7 minutes

India and Indonesia, connected by a deep-rooted history and strategic partnership, are rapidly advancing their economic cooperation. This includes robust trade ties, increased bilateral investment, and initiatives such as the Economic and Financial Cooperation Dialogue (EFD) to address shared development goals. With a focus on technology, pharmaceuticals, agriculture, and infrastructure, both countries are aiming for a trade target of US$50 billion by 2025. These efforts underscore their commitment to mutual growth, presenting a promising outlook for India-Indonesia trade relations.

India and Indonesia share a deep-rooted historical connection that spans over two millennia, with formal diplomatic relations established in 1951. Their geographical proximity, coupled with a history of collaboration in international forums like the Non-Aligned Movement, has fostered enduring peaceful relations. Over the years, these nations have engaged in defense, political, and parliamentary exchanges, solidifying their partnership.

The strategic alliance between India and Indonesia, forged in 2005, has played a pivotal role in strengthening their ties. India’s foreign policy objectives, geared towards assuming a more prominent global role and competing with major players such as China, have led to a strategic focus on Jakarta. Simultaneously, Indonesia’s foreign policy aligns with its aspirations for development, capital transfer, engagement with global powers, and ambitious infrastructure projects.

In the face of China’s economic slowdown impacting Indonesia’s trade and tourism sectors, India emerges as a promising new market. Both countries have showcased remarkable resilience, navigating challenges and positioning themselves as strategic allies. This shared determination ensures not only mutual growth but also prosperity in the evolving global economic landscape.

Economic collaboration between India and Indonesia

Aligned with their national interests, India and Indonesia are actively seeking opportunities to expedite their development, enhance global influence, promote multilateralism, and strengthen bilateral ties. Noteworthy milestones in their economic collaboration include key events like the Biennial Meeting of Ministers of Trade (2011), the Meeting of CEOs (2013), the Health Cooperation Memorandum (2016), and intensified economic interactions in sectors such as pharmaceuticals and information technology (2018). A significant leap was marked in 2022 with the signing of a Central Bank India-Indonesia mutual agreement (MoU), highlighting the deepening economic ties and mutual commitment to fostering prosperity.

India-Indonesia bilateral trade and investment trends

Trade trends

India and Indonesia initiated their trade relations in 1978 through the signing of trade agreements, followed by the establishment of a double taxation avoidance agreement in January 1986. The Indo-Indonesia Joint Commission (JCM) was formed in September 2003, and the Double Taxation Avoidance Agreement (DTAA) was endorsed in 2012. Specialized working groups were created to further strengthen their economic and commercial ties. Both nations have set an ambitious goal of achieving US$50 billion in bilateral trade by 2025, as part of their broader strategic partnership and their collective efforts to access the Comprehensive Economic Cooperation Agreement (CECA).

Remarkably, in 2021, the total value of trade between Indonesia and India witnessed a remarkable increase of 48.48 percent. This positive momentum continued into 2022, with a further uptick in trade volume. Bilateral trade between India and Indonesia has been on a significant upward trajectory, predominantly due to the India-ASEAN Free Trade Agreement (FTA). In fact, trade between these two countries has surged eightfold since 2005, reaching a substantial US$38 billion in the financial year (FY) 2023.

Exports from India to Indonesia

India exported a diverse range of 4,165 commodities to Indonesia in FY 2023. Leading exports from India to Indonesia included petroleum products (US$3.87 billion), motor vehicles and cars (US$523 million), sugar (US$435 million), ships, boats, and floating structures (US$400 million), and iron and steel (US$389 million).

Imports from Indonesia to India

India imported 2,221 commodities from Indonesia in FY 2023. Key imports from Indonesia to India consisted of coal, coke, and briquettes (US$14.58 billion), vegetable oils (US$5.63 billion), iron and steel (US$1.59 billion), bulk minerals and ores (US$969 million), and cosmetics and toiletries (US$632 million).

Strategic partnership

Indonesia holds a crucial economic position for India, serving as the largest trading partner in ASEAN. India, in turn, ranks as the fourth largest export destination for Indonesia. There remains substantial untapped potential for expanding trade in various sectors, including agriculture, pharmaceuticals, automobiles, engineering, information technology, and biotechnology.

Indonesian investment in India

India’s robust economic growth, status as the world’s most populous nation, rank as the fifth-largest global economy, impending approach to a US$5 trillion economy, technological advancements, a thriving startup ecosystem, and a diversified industrial landscape have piqued Jakarta’s keen interest in the Indian market.

While Indonesian investment in India remains relatively modest, standing at about US$647 million, Indonesian companies have started establishing their presence in various sectors.

Among the Indonesian companies operating in India, seven are engaged in agriculture and food, while others are active in diverse sectors such as highways, airports, oil refineries, infrastructure, banking, and transportation. Indonesia holds the 33rd position in terms of foreign direct investment (FDI) inflows to India during the period spanning April 2000 to March 2023.

Indian investment in Indonesia

India’s investment in Indonesia stands at US$54 billion, primarily channeled through Singapore, with Indian companies like Tata Power, Reliance, Adani, and L&T making significant investments in various sectors, including infrastructure, power, textiles, steel, automotive, mining, machinery, banking, and consumer goods.

Indonesia has actively encouraged Indian companies to invest in the country, particularly in the development of the new capital, and has provided assurances to this effect. As a result, India’s presence in Indonesia has been on the rise, with new players entering the market.

Indonesia is considering various investment opportunities, including industrial and service activities, the development of the automobile industry, and marketing Indian pharmaceutical products in the country. The aim is to attract more investments and diversify trade, building on positive economic trends and improving indicators.

Key areas of cooperation 

India and Indonesia have identified key areas of collaboration based on their mutual interests and potential for shared benefits:

  • Energy sector: Recognizing the increasing energy demands and the necessity for infrastructure development, both countries are focusing on cooperation in coal, oil, gas, renewable energy, and energy conservation. They aim to enhance the security of these sectors and participate in the global energy transition by 2030. India has a notable presence in Indonesia’s oil and gas sector, and Indian companies have made substantial investments in Indonesia’s coal industry, with India being one of the largest buyers of Indonesian coal.
  • Technology and medicine: India’s impressive digital infrastructure, home to nearly 75,000 startups and bolstered by the Indian government’s infrastructure stimulus initiatives, has created a wealth of opportunities. Encouraged by New Delhi’s proactive endeavors, Jakarta holds a favorable outlook on India’s capabilities. Both countries have engaged in constructive discussions concerning mutual investments and the enhancement of public digital infrastructure, digital transformation, and information technology (IT) sectors. Notably, Indian IT giants like TCS, Tech Mahindra, and HCL have established operational units in Indonesia. The interest of Indian entrepreneurs in investing in Indonesia, particularly in infrastructure and IT development projects, surged by an impressive 158 percent in 2022 when compared to the previous year. In addition to the Memorandum of Understanding (MoU) on health cooperation inked in May 2018, India has established a noteworthy presence in Indonesia’s pharmaceutical and healthcare industries. Collaboration within the pharmaceutical sector is on the rise, and the potential for India to engage in pharmaceutical manufacturing within Indonesia is a developing prospect, contributing to the growth of this important partnership.
  • Food security and agriculture: Cooperation in agriculture and food security is growing. The focus is on improving access to strategic food products and expanding food exports while enhancing food security. Climate change and related food security challenges provide further impetus for collaboration. Both nations are exploring agreements, such as India potentially supplying one million tons of white rice to Indonesia annually. Additionally, trade relations are strengthening in the spice sector, with Indonesia serving as an essential market for Indian spice buyers and India being a major importer of spices from Indonesia.

These cooperative efforts underscore the shared goals of India and Indonesia, emphasizing their dedication to strengthening their strategic partnership and promoting economic and technological collaboration.

Exploring new business opportunities 

  • Economic and Financial Cooperation Dialogue (EFD): India and Indonesia, possessing similar economic structures, have embarked on a transformative journey with the Economic and Financial Cooperation Dialogue (EFD). The EFD sets the stage for India and Indonesia to fortify their trade and investment cooperation, fostering mutual growth and prosperity. By addressing shared challenges, these nations aim to enhance economic performance on a domestic and global scale. Under the EFD framework, both nations are proactively addressing critical development issues, including climate change, public health, economic growth, job creation, and poverty reduction. By emphasizing bilateral and multilateral cooperation, policymakers are collaborating to maintain high economic growth, ensure domestic development needs are met, and foster job opportunities.
  • Facilitating real-time payments and local currency trade: India and Indonesia are actively collaborating on establishing a real-time payment mechanism and promoting trade in local currencies. India’s digital payment systems, including the widely acclaimed Unified Payments Interface (UPI), are gaining global recognition. With the proposed framework for bilateral trade settlement with Indonesia, the UPI system presents a significant opportunity for business expansion. Creating trade exchanges between India and Indonesia in local currencies can yield substantial mutual benefits, further nurturing economic ties.
  • Special Economic Zones (SEZs): Indian Special Economic Zones (SEZs) and their Indonesian counterparts offer foreign investors unparalleled business benefits. From tailored human resource training to simplified visa issuance and work permits for skilled labor, these zones provide an attractive investment landscape. Moreover, the presence of a significant Indian-origin population in Indonesia further strengthens the cultural and economic ties between the nations.
  • Elevating trade and tourism through enhanced air connectivity: Improved air connectivity, including the launch of direct India-Indonesia flights and the expansion of airline networks, is enhancing trade prospects and boosting international tourism. This enhanced accessibility opens doors to a myriad of business opportunities, making it easier for entrepreneurs and investors to explore and expand in both markets.

Navigating challenges and seizing opportunities in the India-Indonesia business landscape

In the face of potential negative geopolitical shifts, a looming recession, and global demand adjustments, the business landscape between India and Indonesia remains resilient but not without challenges. Indonesia boasts a trade balance heavily in its favor, although concerns over a trade deficit with India have been raised, exacerbated by issues such as import restrictions, export limitations, and anti-dumping duties.

However, amidst these challenges, there is an optimistic outlook fostered by Indonesia’s positive perception of India’s influence. New Delhi’s proactive support for Indonesia, along with variables like both countries’ joint participation in the G20, the WTO, and the ASEAN-India FTA, along with the examination of the benefits of regional cooperation in the Indo-Pacific Economic Framework (IPEF), presents a dynamic outlook for future trade.

Crucially, factors such as India’s robust GDP growth, a youthful population in comparison to China, ongoing structural reforms, expectations of increased FDI, and rapid digitalization efforts have the potential to further enhance trade prospects. The economic ties between India and Indonesia have diversified significantly, and efforts to expand trade into new sectors through mutually beneficial cooperation are underway.

This diversity and collaboration not only align with India’s aspirations to become the world’s third-largest economy by 2027 but also resonate with Indonesia’s vision for 2045, aiming for the fifth position in the global economy. With this shared ambition and the ongoing joint efforts, the trade relations between India and Indonesia have the potential to escalate significantly, possibly reaching an impressive US$50 billion in the coming years.

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