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In the rapidly evolving Asian investment landscape, India and Indonesia are garnering renewed attention as investors look to leverage the vast opportunities presented by these two Asian giants. A decade ago, both these nations found themselves among the ‘fragile five’ emerging market economies, relying heavily on foreign investment to propel growth.
However, currently, the situation has undergone a dramatic reversal.
Both India and Indonesia have experienced swift economic expansion in recent years, primarily driven by their advantageous demographic profiles. In both countries, a youthful and expanding labour force surpasses the number of dependents. Around 68% of their population falls within the 15-64 age range, while merely 7% of their citizens are aged 65 or above.
This starkly contrasts with more developed regions where the old-age dependency ratio looms larger, with 20% aged above 65 and 64% aged between 15-64, as per data from the United Nations Population Fund (UNFPA).
India alone is projected to host over 1 billion working-age individuals over the next decade, making a substantial contribution of approximately 24% to the overall increase in the global workforce.
All in all, India is projected to outperform China in growth for both the current and the following year, as per the Organization for Economic Cooperation and Development (OECD). In 2023, the OECD anticipates India’s growth rate to reach 6%, with China closely behind at 5.4%. Indonesia is also poised for substantial growth, with a projected growth rate of 4.7%.
Also, the changing geopolitical landscape in Asia, e.g. due to the US-China trade war and the weak economic recovery experienced by China in 2023 has cast a light on India and Indonesia.
“…the fractious relationship between the world’s two largest economies (US and China) has become a global concern…A changing geopolitical landscape in Asia coupled with a desire to partially diversify away from China-based supply chains is creating opportunities in India and Indonesia,” said Nikko AM.
India vs Indonesia – both benefit from favourable government policies
Economic growth in India and Indonesia is a testament to the concerted efforts of both governments to foster economic growth.
For example, the ‘Make in India’ initiative, along with the Goods and Services Tax (GST) and the Real Estate Regulatory Authority (RERA) Act, reflects India’s commitment to streamlining and safeguarding its various domestic sectors. RERA, in particular, serves as a protective shield for both real estate buyers and developers, fostering trust and stability in the market. Furthermore, India’s Production Linked Incentive Scheme (PLI) has lowered the tax rate for new manufacturing projects.
The Indian government has also been actively promoting digitalisation and technological advancements. It has done so to enhance the country’s capabilities in the IT and business process outsourcing (BPO) sectors. These efforts have contributed to India’s reputation as a preferred destination for outsourcing and have propelled its status as the ‘back office of the world.’
On the other hand, Indonesia’s resurgence owes much to strategic investments in infrastructure and profound structural reforms. And now, by imposing a ban on nickel exports, the mineral-rich nation is aiming to pivot from being a mere exporter of raw materials to becoming a manufacturer of higher-value, processed goods.
Along these lines, Indonesia is projected to secure its position as the world’s fourth-largest producer of “green commodities” essential for batteries and grids by 2030. Also, the prudent policies of Bank Indonesia (BI) have further helped the country.
“BI set up its domestic non-deliverable forward foreign exchange program and promoted greater use of currencies other than the U.S. dollar in trade and investment…Meanwhile, government reforms have reduced restrictions for foreign investors, streamlined permitting processes, and lowered foreign investment limits, which helped increase FDI,” writes Stephen Chang, Portfolio Manager at PIMCO.
Comparing financial markets
With increasing interest in India and Indonesia, attention turns to their respective stock market performances. Over the past three years, the annualised return of Indian stock markets stood at 6.1%, only slightly trailing behind Indonesia’s market, which boasts a 6.3% return, according to a study by ASK Investment Managers.
When it comes to the bond market, August 2023 witnessed a significant influx of $1.4 bn worth of global funds into Indonesian bonds, marking the first net addition in six months, while India saw investors favouring rupee-denominated notes with a total investment of $680 mn during the same period, marking a gain in seven months.
Moreover, investors who borrowed dollars to invest in rupiah-denominated fixed-income assets have garnered a return of 4.5% during the first half of the year, in contrast to the 2.1% return observed in India, according to Bloomberg data.
In the currency arena, the Indian rupee has held its ground as the second-best performer compared to its Indonesian counterpart in the first half of the year. However, market experts anticipate a shift.
“Along with other emerging market currencies, the Indian rupee has improved since the beginning of the year, with recent US dollar weakness sitting at the heart of this appreciation… We are inclined to believe that 2023 might be a better year for the rupee than 2022,” said Amundi Asset Management.
Meanwhile, Johnny Chen, Portfolio manager at William Blair Investments opined that given the relatively high weight of commodity-related exports in Indonesia, the Indonesian rupiah may be subject to more volatility.
