India-Indonesia Relations: Economic Opportunities in a Strategic Partnership

Advitya Bahl

India and Indonesia share warm and friendly ties spanning over millania rooted in cultural, historical, and geopolitical ties. As a comprehensive strategic partner, Indonesia is an important pillar in India’s “Act East” policy and India’s vision of the Indo-Pacific. The exchange of Hinduism, Buddhism, and later Islam shaped Indonesia's cultural landscape, while shared colonial struggles and independence pursuits fostered camaraderie. Both nations played key roles in the Bandung Conference (1955) and the Non-Aligned Movement, strengthening their commitment to decolonisation and independent foreign policy. Celebrating 75 years of diplomatic ties in 2024, the partnership spans political, economic, cultural, and strategic domains. Milestones like the Comprehensive Strategic Partnership (2018) and joint naval exercises such as Samudra Shakti highlight defence and maritime cooperation. Economic ties have grown, with India importing coal and palm oil and exporting refined petroleum and machinery. However, trade imbalances persist, prompting discussions on mechanisms like Comprehensive Economic Cooperation Agreement (CECA). Cultural exchanges, direct flights, and academic collaborations further enhance people-to-people links. Strategically, the partner-ship is crucial in the Indo-Pacific, aligning with shared goals of stability and regional security. Despite challenges, both nations are committed to fostering connectivity, innovation, and multilateral collaboration, ensuring mutual growth and regional prosperity.

Trade Relations

India's economic liberalisation in the 1990s and its subsequent Look East and Act East policies paved the way for enhanced connectivity with Southeast Asia, particularly Indonesia. Agreements like the ASEAN- India Free Trade Agreement (AIFTA) and the ASEAN-India Trade in Goods and Services Agreements (AITIGA) have significantly bolstered trade by reducing tariffs and enhancing market access. These frameworks facilitated Indonesia's emergence as one of India's top trading partners within ASEAN. By 2022, Indonesia surpassed Singapore as India's sixth-largest global trading partner.

Imports: India's imports from Indonesia surged between 2020 and 2022, driven by policy shifts that reduced duties on crude palm oil and other vegetable oils. This spike was further fueled by disruptions in global edible oil supply chains due to the Russia-Ukraine war. However, imports experienced a 19% decline from 2022 to 2024, attributed to Indonesia's temporary palm oil export ban and India's push for self-reliance through the National Mission for Edible Oils - Oil Palm (NMEO-OP).

Exports: Indian exports to Indonesia displayed resilience even during global downturns, growing by 69% between 2020 and 2022. Key exports included mineral fuels, refined petroleum, and vehicles. However, recent years witnessed a 40% decline, with policy interventions such as bans on rice and wheat exports and export tariffs on vegetables impacting trade flows.

Hence, despite prospects for growth, the India-Indonesia trade relationship faces notable challenges:

·       Trade Imbalance: Indonesia has consistently maintained a trade surplus with India, which widened to $17.4 billion by 2024.

·       Concentrated Trade Portfolio: Trade remains overly dependent on a few commodities like palm oil, coal, and refined petroleum, exposing both nations to sectoral vulnerabilities.

·       Non-Tariff Barriers (NTBs): NTBs affect 70% of Indonesia's tariff lines and 45% of India's, impeding smooth trade flows.

·       Low FTA Utilisation: Despite AIFTA's potential, utilisation remains low at approximately 25%, limiting the agreement's efficacy.

Nevertheless, the trade relationship between India and Indonesia is ripe with opportunities for diversification and expansion:

·       Digital Economy: Both nations have made remarkable strides in digital transformation. Collaboration in digital public infrastructure, MSME digitalisation, and innovation can unlock significant trade and investment opportunities.

·       Sustainable Energy and Infrastructure: With Indian investments exceeding $54 billion in Indonesia, renewable energy and infrastructure projects present avenues for deepened engagement. India's top energy firms can play pivotal roles in these sectors.

·       Diversification in Exports: Indonesia can emulate Singapore's model by diversifying its export portfolio into technology, pharmaceuticals, and manufacturing. Such a shift would reduce its reliance on palm oil and coal while fostering greater resilience.

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Development of Indonesia's New Capital: Opportunities for India

Indonesia is embarking on an ambitious project to relocate its capital from Jakarta to Nusantara in East Kalimantan, Borneo. This shift is driven by challenges in Jakarta, such as severe congestion, environmental concerns, and the city's vulnerability to flooding due to rising sea levels. The new capital aims to be a sustainable, modern, and smart city, reflecting Indonesia's aspirations for long-term growth and urban resilience.

For Indian companies, this massive infrastructural undertaking presents significant opportunities in key areas:

Construction and Infrastructure Development: The development of Nusantara requires extensive construction of residential, commercial, and government buildings, as well as essential infrastructure like roads, bridges, and public utilities. Indian construction firms can bring their expertise in large scale projects, leveraging cost-effective solutions and innovative technologies.

Smart City Solutions: Nusantara is envisioned as a smart city, integrating advanced technologies for energy efficiency, waste management, water supply, and urban planning. Indian firms specialising in IoT (Internet of Things), AI-driven urban management, and green technologies can contribute significantly to this goal.

Urban Mobility Solutions: Efficient transportation systems are a cornerstone of Nusantara's development. Indian companies can offer expertise in:

·       Metro and Rail Systems: Drawing from successful metro projects in cities like Delhi, Bengaluru, and Mumbai.

·       Electric Vehicles (EVs): Providing sustainable transportation options, given India's progress in EV technology and manufacturing.

·       Urban Planning Technologies: Leveraging data-driven approaches for traffic management and smart transport networks.

Renewable Energy Projects: To ensure sustainability, Nusantara plans to rely heavily on renewable energy. Indian companies specialising in solar, wind, and bioenergy solutions can support the development of green energy infrastructure for the city.

This collaboration aligns with Indonesia's goal of attracting international expertise and investment while giving Indian companies access to a rapidly growing Southeast Asian market. By participating in the capital development, Indian companies can strengthen bilateral economic ties, expand their regional presence, showcase their capabilities in smart city and infrastructure projects on a global stage.

India-Indonesia trade relations stand at a critical juncture. While geopolitical disruptions, domestic policy interventions, and sectoral dependencies pose challenges, the resilience and mutual goodwill between the two nations indicate a promising future. By leveraging shared strengths, addressing trade imbalances, and fostering innovation, India and Indonesia can ensure a mutually beneficial economic partnership that stands the test of time.

Defence Relations

While, Indonesian President Mr. Prabowo Subianto has ensured continuity with the earlier regime's policies vis-a-vis the traditional principles of non-alignment (bebas dan aktif),  his military background and focus on national security suggest a pivot towards a more robust defence and security policy. He has emphasised prioritising modernisation of the armed forces and enhancement of maritime capabilities, acting upon his campaign assertion that "national power must be military power."

This shift provides India with an opportunity to collaborate in defence modernisation, leveraging its growing expertise as a global defence exporter.

India and Indonesia's defence cooperation has been progressively institutionalised through initiatives such as:

·       The Comprehensive Strategic Partnership (2018): Establishing a framework for expanded defence and maritime cooperation.

·       Bilateral Naval Exercises (Samudra Shakti): Fostering interoperability and strengthening maritime security.

·       The Shared Vision of Maritime Cooperation in the Indo-Pacific (2018): Affirming mutual commitment to a free and open Indo-Pacific.

With President Prabowo's focus on bolstering Indonesia's naval and air forces, India's capabilities in shipbuilding, radar systems, aerial drones, and maritime patrol aircraft make it an ideal partner.

The India-Indonesia Defence Industry Exhibition-cum-Seminar, held in Jakarta in April 2024, which showcased 36 Indian defence companies, was a promising step forward.

Opportunities for Collaboration

Maritime Security and Capacity Building: Indonesia's geographical location as an archipelagic nation and its overlapping claims with China in the Natuna Sea make maritime defence a critical priority. India, with its advanced naval technologies and shared interests in maintaining a rules- based maritime order, can:

·       Provide patrol boats, frigates, and radar systems.

·       Collaborate on maritime domain aware-ness through joint exercises and information-sharing.

·       Support Indonesia's efforts to deter illegal fishing and assert its sovereignty in disputed waters.

Defence Modernisation and Technology Transfer: President Prabowo's defence modernisation programme, with a projected $46.6 billion expenditure for 2024-2029, focusses on upgrading equipment and building a domestic defence industry. India can:

·       Supply advanced defence systems such as the BrahMos supersonic missile, which has already proven its value in the Philippines.

·       Offer co-production and technology transfer agreements to boost Indonesia's domestic manufacturing capabilities.

·       Partner on cutting-edge technologies, including AI and autonomous systems for defence applications.

Joint Defence Development: The underutilisation of Indonesia's air force and naval modernisation targets presents an opportunity for India to:

·       Offer training programmes and joint development initiatives.

·       Explore collaborations in aerospace technologies and defence aviation.

Strategic Relevance in the Indo-Pacific

A stronger India-Indonesia defence partnership aligns with both nations' strategic objectives in the Indo-Pacific. Indonesia seeks to deter China's assertive actions in the South China Sea, while India's Act East Policy emphasises enhancing its strategic footprint in Southeast Asia. A collective maritime security posture would enhance regional stability, etrengthen ASEAN's centrality in Indo-Pacific geopolitics, and reaffirm India's role as a credible security partner in Southeast Asia.

Challenges to Address

While opportunities abound, challenges must be navigated:

·       Non-alignment Policies: Indonesia's cautious approach to alliances could limit the scope of defence cooperation.

·       Trade Barriers and Procedural Delays: These may hinder the smooth implementation of defence agreements.

·       China's Influence: Indonesia's economic ties with China might influence its policy decisions, necessitating enhanced strategic diplomacy on India's part.

By taking proactive steps, such as institutionalising regular dialogues, expanding defence trade, and investing in joint maritime initiatives, India can solidify its position as a key strategic partner to Indonesia.

As Southeast Asia's largest economy and ASEAN's most influential member, Indonesia is pivotal to India's Indo-Pacific strategy. Strengthening defence relations will not only enhance bilateral ties but also position India as a leading security partner in the region, contributing to a stable, prosperous, and rules-based Indo-Pacific.

India and Indonesia, united by geography and shared challenges, must now work towards transforming potential into tangible outcomes for mutual benefit. The Prabowo administration offers a promising horizon to elevate this partnership to unprecedented heights.

(The author is Correspondent of a leading national daily. Feedback on this article can be sent to feedback.employmentnews@ gmail.com).

Views expressed are personal.