India-Indonesia engagement vital for multi-polarity in Asia

Indonesian president Susilo Bambang Yudhoyono’s visit, as chief guest during India’s 2011 Republic Day Celebrations, has lent much needed substance to the strategic partnership initiated by the two nations during his previous visit in 2005.

The two are neighbours as the northern most island of Indonesian archipelago is just 167 kilometers away from India’s Great Nicobar Island.

The bilateral merchandise trade in 2009-10 stood at $12.5 billion, equivalent to 5.9% of Indonesia’s and 3% of India’s global merchandise trade.

India has signed a preferential merchandise trade agreement with Association of South East Asian Nations (Asean) of which Indonesia is a key member.

The target is to double trade to $25 billion by 2015. Though the details of the analysis behind such an ambitious trade target are not available, it is encouraging that such a vision is being articulated.

The two countries have agreed to commence negotiations on a bilateral comprehensive economic cooperation pact to broaden partnership to encompass services, investments, technology, manpower flows, and regular communication between various stakeholders.

There are several compelling reasons for urgency in instilling substantive content into the strategic partnership between the two nations. Indonesia is a pivotal state in Southeast Asia and is exhibiting determination to play a much more active regional role, including the South China Sea.

First, the Indian Ocean has become more contested. Nearly 90% of the global trade is sea-borne, and of this roughly two-fifth pass through four Southeast Asian Straits, three of which belong exclusively to Indonesia.

Managing  these sea lines to minimise any disruptions to trade and logistics supply chains, and to undersea cables vital for digital connectivity is not only important for these two strategically located countries, but also to many other Asian countries.

India’s total international trade in goods and services in 2009 stood at $579 billion (44.2% of GDP). This is projected to increase to $1,500 billion by the second half of this decade.

The corresponding figure for Indonesia was $252 billion (46.7% of GDP). The share of merchandise trade in total trade is, however, much higher for Indonesia (84%) as compared to India (71%).

Both countries thus have vital geo-economic interests in ensuring smooth functioning of the Southeast Asian Straits.

Second, there has been considerable activity and interest in expanding economic and strategic linkages among low and middle income countries to diversify global risks.

This applies particularly to infrastructure, manufacturing, energy, supply chain and logistics, space and satellite-related services and various types of IT-enabled services.

India projects its need for infrastructure at $1,000 billion for five years ending in 2017; while Indonesia aims to attract $150 billion in infrastructure investment.

Both India and Indonesia are keen to attract investments from each other. Tata Motors plans to set up an automobile plant in Jakarta to produce Nano, reflect potential investment opportunities.

As a recent CII (Confederation of Indian Industry) working paper suggests, they, however, also need to take measures to reduce costs through improving physical and digital connectivity, and process improvements; by addressing regulatory and systemic for example land acquisition regulations and environmental clearance procedures; and by addressing costs and availability of human resources.

The new air-services pact, facilitating multiple airlines to serve India-Indonesia routes, is a welcome step in improving connectivity. Visa on arrival for Indonesians to India (such facilities have been available for Indians visiting Indonesia) should facilitate tourism and business visitor flows.

India has recently implemented several measures to reduce transaction costs associated with international trade transactions.

The main measures include 24X7 custom clearance at key ports, rationalization of fees for screening express cargo and courier shipments, and greater accessibility at reduce cost for pre-shipment credit to exporters.

The estimated reduction in transaction cost is, however, only around 3% of the total estimated to be $13-15 billion, suggesting further scope for such unilateral measures.

Third, there is considerable scope for collaborative initiatives between the Indian and Indonesian energy sector. Indonesia is already a favoured source for coal imports for thermal power plants located on India’s eastern coastline.

Both countries can also consider joint initiatives in the nuclear energy sector. Although Indonesia does not currently operate any commercial nuclear plants, it has retained a significant expertise in basic nuclear science and research for nearly four decades.

Indian experience in the civilian nuclear energy programme can be a source of collaborative projects with the Indonesian scientific community as it prepares to lay the foundations for a civilian nuclear energy programme.

In particular, Indian construction and operational experience in the heavy water reactor programme can contribute to Indonesia’s effort to build a civilian nuclear power programme through a joint venture.

Besides significantly reducing capital and construction costs, such ventures can facilitate deeper engagement among the two scientific communities and higher educational institutions.

Fourth, India and Indonesia have large physical expanse and population and, therefore, face similar challenges in managing globalisation dynamics and in addressing their development and governance challenges.

The two nations, for example, need to address regional inequalities, develop institutions, and social and political norms which are more conducive in progressing towards status as higher income countries over the next three to four decades.

Indonesia’s relatively better performance in health and education sectors should be of particular interest to India.

Both belong to several common international forums such as G20; East Asian Summit (EAS), comprising 16 countries in the Asia and the Pacific; and the Asean Regional forum. Indonesia is to chair expanded EAS, including US and Russia, during later part of 2011.

The joint meeting on business opportunities arising from inclusive growth policies of India and Indonesia at January 2011 Davos meetings is positive for broadening communication between the policymakers and business sectors of the two countries in international gatherings.

The Indonesian President’s visit has led to the establishment of a Trade and Investment Forum, and an Energy Forum between the two countries to facilitate regular communication in these key areas.

The decision by the two neighbours to set up an Eminent Persons Group (EPG) to shape agenda for bilateral relations over the next several years holds promise.

It is hoped that it will be used to implement a coherent and forward looking strategic partnership between India and Indonesia, and thereby provide impetus to multi-polarity in Asia.

(The author is professor of public policy, National University of Singapore. Views expressed herein are personal. E-mail: sppasher@nus.edu.sg)