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Declining middle class contributes to Indonesia's deflation, experts say

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Jakarta Globe - October 7, 2024

Vinnilya, Jakarta – NH Korindo Sekuritas warns that the ongoing deflation trend poses urgent concerns for the Indonesian economy, suggesting that the working class has limited disposable income for spending.

Indonesia reported a year-on-year inflation rate of 1.84 percent for September, a decrease from 2.12 percent in August. September's 0.12 percent deflation marks the fifth consecutive month of deflation since May 2024.

"Economists believe this could hinder Indonesia's gross domestic product (GDP) from maintaining a growth rate of 5 percent if reliant solely on consumer spending," NH Korindo Sekuritas stated in a report on Monday.

In response to these economic challenges, President-elect Prabowo Subianto and Vice President-elect Gibran Rakabuming Raka are urged to take immediate action upon taking office. Suggested measures include providing incentives and organizing market operations to promote micro, small, and medium-sized enterprises (MSMEs).

NH Korindo also recommends reevaluating policies related to downstream investment in capital-intensive sectors, which are perceived to have a limited impact on job creation.

The sustained deflation and a contracting Purchasing Managers' Index (PMI) can be attributed to a declining middle class in 2024, followed by an increase in impoverished individuals. The middle class plays a critical role in stimulating domestic economic activity.

Sutrisno Iwantono, Chairman of the Public Policy Association of Indonesian Entrepreneurs (Apindo), remarked that this trend indicates an increasing concentration within Indonesia's industrial sector.

"This means that larger entities are growing larger, smaller ones are diminishing, and the middle class is declining," Sutrisno said during an interview with Investor Market Today on Monday.

He noted that this situation adversely affects government revenue, particularly since the middle class is the largest contributor to tax income. With the diminishing middle class, Indonesia's already narrow tax ratio faces further constraints.

"Smaller businesses are challenging to tax, and given our low tax ratio, the government must generate sufficient revenue from taxes. However, a shrinking tax base complicates this," he explained.

To address these disparities, Sutrisno advocated for a reduction in concentration within the manufacturing sector and called for an increase in the number of medium-sized enterprises. He emphasized the need to narrow the economic gap not just among businesses, but also between regions, particularly between Java and the outer islands.

"By doing so, we can revitalize our economy and foster better growth for the middle class, focusing not only on the middle-class population but also on middle-class economic actors," he concluded.

According to the National Socioeconomic Survey (Susenas), as of March 2024, Indonesia's middle class comprised 47.85 million people (17.13 percent), with an additional 137.50 million people (49.22 percent) on the verge of entering the middle class, representing a combined 66.35 percent of the population.

Over the past five years, the proportion of formal middle-class workers has slightly decreased, from 61.71 percent in 2019 to 59.36 percent in 2024. Currently, the middle class and those transitioning into it contribute 81.49 percent of national consumption.

Source: https://jakartaglobe.id/business/declining-middle-class-contributes-to-indonesias-deflation-experts-sa

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