JAKARTA: The government’s push to revive the textile industry through multiple incentives could have a limited impact unless it targets the sector’s underlying weaknesses, particularly outdated machinery and under-investment in upstream production, industry players and analysts have warned.
They also cautioned that the plan to establish a new state-owned textile company should avoid competing directly with existing players, which are already struggling to survive amid a flood of cheap imported clothing.
Rosan Roeslani, chief executive officer of state asset fund Danantara, said the government aims to revive the textile industry by facilitating financing from local banks for machinery upgrades, while considering tax incentives and establishing a special zone to integrate upstream and downstream production.
“We are also considering giving tax holidays again for textile (companies). That is one of the measures,” he said at the Presidential Palace complex on Sept 22.
Regarding a plan to establish a state-owned textile company, Rosan said the government would not necessarily focus on building new facilities but would assess existing textile companies that could be developed through machinery and technology upgrades.
“As long as it creates a significant number of jobs and, since we are Danantara, we continue to prioritise investments that generate good returns,” Rosan said.
Coordinating Economy Minister Airlangga Hartarto said the government was also reviewing technical import rules to ease access to raw materials while addressing imports of used clothing that compete with domestic producers.
It is also reviewing value-added tax arrangements for export-oriented textile and garment companies, as well as contract employment rules to accommodate seasonal orders.
The sector contributes 0.97% to gross domestic product (GDP), employs around four million workers and generates about US$12bil in exports, Airlangga said.
Yusuf Rendy Manilet, a researcher at the Centre of Reform on Economics, said the government’s incentives were a positive signal but might be insufficient to restore competitiveness, pointing to ageing machinery, high energy and logistics costs, dependence on imported intermediate materials and competition from illegal imports.
Financing from state-owned banks should be directed toward more productive areas, such as machinery modernisation and working capital, he said.
“State-owned companies could also serve as partners in modernisation, raw material suppliers or financing facilitators for viable factories.
“If they enter the garment sector (as competing players) instead, which is already crowded, state-backed capital could put pressure on private companies undergoing restructuring,” he told The Jakarta Post on Monday.
The Indonesian Employers Association labour division head Bob Azam noted that while incentives could help companies survive in the short term, they would be inadequate to attract new investments without addressing the underlying problems.
“What we need is not just to survive. We hope new investment will come in. Incentives are good so companies can survive, but we cannot depend on incentives because they have a time limit,” he said yesterday.
He also warned that wage growth is outpacing productivity in the labour-intensive sector, with productivity growing by only 2% to 3% annually, compared with wage growth of around 6% to 7%.
“The increase in wages will eventually be passed on to prices. That’s why we have told the government that for labour-intensive industries, the alpha should not exceed 0.1 to 0.3. Beyond that, they will close,” Bob added, referring to the coefficient that is used to determine annual wage hikes.
The Indonesian Fibre and Filament Yarn Producers Association (APSYFI), which represents upstream industry in the textile sector, also said fiscal incentives would have limited impact unless the government addressed structural problems across the supply chain, particularly its reliance on imported raw materials.
“If imports of raw materials continue to be made easier, the domestic raw material industry will never develop,” APSYFI chairman Redma Gita Wirawasta said on Monday, arguing that easier access to imports could discourage investment in domestic upstream and intermediate industries.
Redma also questioned whether tax incentives would attract new investment, noting that tax holidays had been part of Indonesia’s incentive framework for years but had failed to draw significant investment into the sector.
Higher logistics costs, geopolitical tensions and cheap imported products, including those sold at alleged dumping prices, have added to pressure on domestic manufacturers, particularly upstream and intermediate producers.
“Even if the government offers tax holidays, tax allowances and other tax incentives, they still won’t attract investors,” he said. — The Jakarta Post/ANN
