🧐 India v/s Indonesia: Which is the Better Emerging Market?
India’s economy has been getting a lot of praise recently. But we may be overshadowed by another emerging market soon. And no, we are not talking about China.
India has recently been having its moment in the sun.
Despite the rupee's fall, we are the fastest growing economy, we beat the UK as the world’s fifth-largest economy and the world is betting on our growth.
However, there is an emerging market* country that is giving us tough competition: Indonesia.
🤓 Let’s Talk Numbers
Here are a few cold hard facts that highlight Indonesia’s growth:
Indonesia’s Rupiah is the best-performing emerging market currency, while the Rupee is the second-best.
Indonesia’s exports grew 30% since last year, while India’s exports grew only 9% (however, in absolute terms India exported more goods).
Indonesia currently has a trade surplus (it has more exports than imports) of $34.92 billion, whereas India has a trade deficit (more imports than exports) of $27.72 billion.
Indonesia’s inflation rate is 5.95%, one of the lowest in the world, while India’s inflation rate is 7.01%.
And Indonesia’s growth forecast also seems great. It is expected to grow 5.4% as compared to China’s 4.5% forecasted growth. This is the only metric in which India beats Indonesia, with our forecast of 6.4% growth.
Now, all of these facts beg the question: How did Indonesia manage to achieve this growth?
📈 From Lover’s Paradise to Fast-Growing Economy
For years Indonesia has been seen as Indian couples’ favourite honeymoon destination.
But ever since its latest President Joko Widodo has been elected the country’s reputation has been changing.
Weirdly enough the current change in the economy is facilitated by two things that have brought down other countries: Covid and the Russia-Ukraine war.
Indonesia handled Covid much better than a lot of its neighbours.
It not only gave unemployed people financial support, it also gave
tax exemptions below a certain income bracket
free electricity and fuel subsidies
supported low-cost housing
and reduced corporate tax so companies could pass on the savings to employees and wouldn’t have to lay off a lot of people.
The result of these actions? People’s purchasing power didn’t erode.
This, plus the low levels of inflation (which has been maintained through fuel subsidies), has helped Indonesia maintain robust consumer demand, which is absolutely necessary for a country’s growth.
And the Russia-Ukraine war has helped by increasing demand and therefore the prices of edible oil and coal: two of Indonesia’s major exports.
So, Indonesia is raking in some serious cash, which has helped it achieve a trade surplus for the first time in 11 years.
Plus, as the country’s exports are growing it is rolling in foreign exchange, which is crucial for its currency.
You see, with the dollar constantly rising, emerging markets need sufficient forex reserves to
Be able to import goods that are constantly getting more expensive
Be able to sell dollar reserves in the market to reduce dollar’s demand and provide a boost to their own currencies (here’s a detailed blog about how this works).
So, currency wise also Indonesia is in a much better position than us.
Now, the question remains: Can Indonesia maintain this growth?
🤔 Can Indonesia Keep Growing?
The short answer is Maybe. But we all know you are here for the long-winded answer. So, here you go.
Indonesia in no way wants to let go of its status as the star emerging market.
And the fact that it is a net exporter of commodities (unlike India which is a net importer of goods) and has a number of natural resources only works in its favour.
For instance, Indonesia has 22% of the world’s nickel reserves.
This nickel is needed to manufacture a number of electronics, like EV batteries.
And Indonesia is using this nickel as a bait to attract foreign investment.
It is currently thinking of levying an export tax on nickel to make exports expensive. Wait, how will that help?
Well, Indonesia’s plan is to make nickel expensive enough that companies across the world find it easier to just open factories in Indonesia.
This will give a major boost to the economy and create several jobs.
However, very predictably, a lot of EU companies and countries have opposed this plan.
But this isn’t the only way Indonesia is planning on growing.
Like India, it is also focused on infrastructure development and pledged $400 billion towards this goal in 2019.
This will help it build a number of airports, mass transit projects, and power plants, so the country can further lower the cost of electricity.
It is rethinking its education system to better educate citizens.
However, the country still has a few major issues.
For instance, Indonesia collects less than 50% of its potential tax revenue. This money could be utilised to speed up the country’s infrastructure development.
It also has very low levels of financial literacy, financial inclusion and participation of women in the workforce: all these factors need to be worked on if Indonesia wants to ditch the emerging markets tag.
Despite these drawbacks the country has made considerable success.
And this fact, along with the country’s considerable resources, may convince a lot of foreign investors to bet on Indonesia instead of India as China’s replacement.
So, will India be able to overtake Indonesia any time soon?
🤓 Noob's Corner: *An emerging market is basically an economy that is in the process of turning into a developed country. Examples: India, China, Philippines, Indonesia.
⚡ In a line: With its vast resources and sound economic polices, Indonesia is giving India tough competition as a replacement for China.
💡 Quick question: What other emerging markets do you think pose a threat to India?
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