Aditya Suharmoko and Rendi A. Witular, The Jakarta Post, Jakarta
With the fuel prices hike imminent, the government should provide incentives to labor-intensive industries that will be the hardest hit by the policy, says the Indonesian Chamber of Commerce and Industry (Kadin).
"The government must give incentives to the labor-intensive manufacturing industry, such as by reducing income tax,to ensure employment in the industries," said Kadin chairman Mohammad S. Hidayat on Tuesday.
"Do not let the manufacturing industry lay off its workers."
Hidayat said if the industry was unable to continue to employ its workers, it would result in more unemployment and a reduction in people's purchasing power.
The government has announced plans to raise fuel prices soon to help cap soaring fuel subsidy allocations amid the high-flying global oil prices.
As compensation for low-income households who will suffer most from the hikes, the government plans to distribute Rp 11.5 trillion (US$1.24 billion) in direct cash transfers.
The country has about 38 million people living in poverty, of a total population of more than 220 million people.
Hidayat said the government should provide cash for such households for at least six months to maintain people's purchasing power.
Sofyan Wanandi, the Indonesian Employers Association (Apindo) chairman, said a successful cash transfer scheme would boost people's purchasing power in driving the real sector.
"People can use the money obtained from the scheme for consumption, which will help drive the real sector," said Sofyan.
On the impact of the hike in fuel prices, Sofyan said businesses might increase the price of their products by a maximum of 2 percent, as they had raised prices in the first quarter of 2008 due to the rise in oil and commodity prices.
Businesses do not have access to subsidies and must pay market prices for fuels.
Industry Minister Fahmi Idris said industrial output growth would likely be lower than 6 percent given the fuel prices increase.
In March, the Industry Ministry revised industrial output growth from 7.4 percent to 6 percent as skyrocketing oil prices pushed up production costs.
"All industries will be hit by the hike in fuel prices," it said.
Last year, industrial growth reached its lowest point in the past three years at 5.2 percent. In 2005, growth was 5.9 percent, and in 2006, 5.3 percent.
The ministry's director general of small and medium enterprises (SMEs), Fauzi Aziz, said SMEs would suffer from the rise in fuel prices, especially those using diesel.
Finance Minister Sri Mulyani Indrawati said the economy would likely grow only by 6 percent this year, lower than the 6.4 percent targeted in the revised 2008 state budget.
Sri Mulyani also said the inflation rate would probably reach between 8.5 percent and 9.5 percent this year, far higher than the government's target of 6.5 percent.