Elections bring a test of foreign credentials

The Indonesian and Indian elections have produced contrasting outcomes for foreign investors.
Joko “Jokowi” Widodo
Joko “Jokowi” Widodo

Making the trains run on time is one thing; ensuring they are fit for service is quite another.

When it comes to foreign investment, this appears to be the main difference between the elections this year in Indonesia and India.

One country appears ready to embrace foreign investment to overhaul its rickety infrastructure and revitalize industry, while the other looks set to pursuit populist policies that will keep things ticking over as before and protect local vested interests.

India, perhaps somewhat surprisingly, completed its business with a minimum of fuss, electing BJP leader Narendra Modi as its prime minister. It was the first time in 40 years that a single party won enough seats to govern without the support of others, raising the prospect of a decisive investor-friendly government.

By contrast, hopes of a landslide win in Indonesia for favourite Joko “Jokowi” Widodo were dashed after his party received less support in parliamentary elections than expected, forcing a weakened coalition government ahead of the presidential vote on July 9.

The differences are similarly striking when it comes to the foreign investment outlook of both countries.

Whereas India’s new BJP-led government is expected to further open up the country’s industries to foreign capital to help boost the economy, Indonesia continues to put up as many roadblocks as open doorways. 

Modi workout
India, which for years has attracted scorn for its red tape and punishing climate for foreign business, looks set to adopt a more mature attitude, from the bottom up.

Modi has already pushed for small family-owned businesses, the bedrock of the Indian economy, to embrace competition. 

“We should not worry about the challenges from global trade,” Modi told a gathering of the Confederation of All India Traders in New Delhi before the election.  

The bottom-up approach matters in India as these same small businesses hold an iron grip on various sectors and have, in large part, been to blame for the various protectionist policies of previous governments. 

But times change and, at last, India seems willing to change with them to kick-start a flagging economy.

Indian economic growth has slowed to less than 5% in the last two financial years from 8.4% at the start of the decade. Economists believe 8% growth is needed to provide enough jobs for India’s vast population.

The government also needs to plan for $1 trillion in infrastructure spending in the five years to 2017 and is likely to fast-track 125 projects worth $64 billion, according to a report by risk consultants Kroll.

In its manifesto, Modi’s BJP said it would allow foreign direct investment wherever it was needed for job and asset creation. That pledge appears to have some weight, with the government seen likely to allow some FDI in online retail as early as this summer to circumvent restrictions on India’s notoriously well-guarded retail sector.

Of course with India it remains a case of seeing is believing; foreign investors have probably heard it all before. But the noises made by India’s new PM — before, during, and after the election — have been very encouraging.

That’s more than can be said in Southeast Asia. Indonesia’s governing coalition received less of the popular vote than the opposition.

Foreign investors are also faced with a limited choice in terms of  who will lead the country as president. 

Jokowi, who had been the clear frontrunner prior to the parliamentary elections, had his wings clipped after his party failed to secure as many votes as expected. His rival, former special forces general Prabowo Subianto, has made up a lot of ground.

But in truth neither candidate is encouraging for foreign business.

Jokowi has set his stall out with nationalistic rhetoric. In a local media article in May, he said that “liberal economic policies which put emphasis on market forces have entrapped Indonesia in its dependence on foreign capital”. However, he has also said he will pursue market-friendly policies but just how these will benefit foreign groups is unclear.

Prabowo, meanwhile, is regarded as even more nationalistic. Backed by the political elite, including the influential Bakries, his party — the Gerindra party — was forced in May to deny he would nationalise foreign assets if he took power. 

However, both candidates have made big promises.

Jokowi has pledged to deliver 2,000 kilometres of new roads, 10 new seaports, 10 new airports and 500 markets; while Prabowo is offering 3,000 km of roads, 4,000 km of railroads and 15 million homes for the poor.

This all clearly requires a lot of investment and it is not as if foreign groups aren’t interested. Private equity groups, banks and industrial groups are eager to take part in what has been described for many years as a market with huge potential.  It’s about time that potential was realised.

New governments offer the best chance of such reform, which is why the current slate is such a disappointment

Foreign groups invest and operate in the country but uncertainty is the watchword when it comes to Indonesia.  In April the government updated its rules on foreign investment, easing restrictions on some sectors but tightening others, while closing others altogether. 

“Few foreign corporate boards will be rushing to commit to significant investment in the country until there is greater policy clarity by the new administration,” Xavier Jean, corporate rating analyst at Standard & Poor’s, said.

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