India-Indonesia trade and investment ties

This article is authored by Rahul Mishra and Prisie L Patnayak.

The year 2025 marks a critical juncture in the trade relationship between India and Indonesia. In 2019, both nations ambitiously set a target of achieving $ 50 billion in bilateral trade by this year. While the current trade volume has reached $ 29.4 billion, the gap underscores the need for enhanced economic cooperation. Both nations share aspirations of becoming global economic powerhouses—Indonesia aims to become the fifth-largest economy by 2045, while India targets the third spot by 2027.

Republic Day 2025: President Droupadi Murmu (L) with guest of honour, Indonesian President Prabowo Subianto (R) leave after the 76th Republic Day parade in New Delhi.(AFP)

The foundation of India-Indonesia trade relations in contemporary times dates back to 1978, followed by the signing of a double taxation avoidance agreement in 1986, later revised in 2012. Bilateral trade has shown remarkable growth, climbing from $ 50 million in the 1980s to $ 29 billion in 2023. Notably, Indonesia has surpassed Singapore as India’s largest trading partner in the Association of South East Asian Nations (ASEAN).

Indian investments in Indonesia, primarily channelled through Singapore, stand at $ 54 billion, with companies like Tata, Reliance, and L&T playing significant roles. However, Indonesian investments in India remain modest. This imbalance highlights the untapped potential for deeper economic ties.

To streamline trade and investment, the Reserve Bank of India (RBI) and Bank Indonesia (BI) signed multiple Memorandums of Understanding (MoUs). These include a 2022 agreement to enhance information exchange and regulatory cooperation for Anti-Money Laundering and Combating the Financing of Terrorism (AML-CFT). In 2024, a framework was established to promote bilateral transactions using local currencies, aiming to reduce dependency on the United States (US) dollar and facilitate smoother trade.

Indonesia's vast coal reserves and renewable energy ambitions present significant opportunities for Indian investment. India’s energy companies, such as National Thermal Power Corporation and Adani, could collaborate on renewable energy projects, including solar and wind energy, to meet Indonesia’s growing demand for sustainable power. Indonesia’s ambitious National Energy Policy aligns well with India’s expertise in green energy, paving the way for joint ventures and technology transfers.

Infrastructure remains a cornerstone of Indonesia's development strategy, particularly with the relocation of its capital to Nusantara. India’s L&T is already involved in the Jakarta Mass Rapid Transit (MRT) project, and similar partnerships could expand into the development of ports, highways, and urban transit systems. With Indonesia ranked third globally in Belt and Road Initiative (BRI) infrastructure projects dominated by China, Jakarta is eager to diversify and attract investments from countries like India.

Indonesia’s burgeoning digital economy is another area ripe for collaboration. The country’s digital transformation efforts, supported by its government, align with India’s advancements in IT services, digital identity systems, and e-governance. India’s success with Aadhaar, UPI, and digital payment ecosystems could serve as a model for Indonesia’s digital government initiatives. Indonesian communications minister Meutya Hafid recently expressed interest in collaborating with India in these areas.

India’s robust health care sector has already begun making inroads in Indonesia. Apollo Hospitals is collaborating with the Batam Special Economic Zone to develop a world-class health care facility, Mayapada Apollo Batam International Hospital, scheduled for completion in 2026. Such partnerships can bolster Indonesia’s health care infrastructure while promoting India’s medical expertise abroad.

Despite promising opportunities, several obstacles hinder deeper economic engagement:

• Unlike Malaysia and Singapore, Indonesia lacks a Comprehensive Economic Cooperation Agreement (CECA) with India. This has limited its ability to compete in key sectors like palm oil. For instance, while Indonesia is the world’s largest palm oil producer, Malaysia’s CECA with India gives it a competitive edge.
• Bilateral trade between India and Indonesia currently relies on the ASEAN-India Trade in Goods Agreement (AITIGA), but its utilisation rate is only around 25%. Moreover, the trade balance remains heavily skewed in ASEAN’s favour.
• India’s protectionist stance in certain sectors has deterred Indonesian investments. For example, Indian textile associations oppose the entry of cheaper Indonesian Viscose Staple Fibre (VSF), fearing competition with domestic producers.
• Under President Joko Widodo, Chinese investments overshadowed Indian investments in Indonesia. In 2024, Indonesia signed business agreements worth $ 10 billion with China, reinforcing its position as Jakarta’s top trading and investment partner.

Indonesia has shown a willingness to enhance trade ties with India, inviting New Delhi to expedite a Preferential Trade Agreement (PTA) in 2023. PTAs are simpler and less comprehensive than CECAs, focusing on select goods and services. However, no agreement has been finalised yet.

Additionally, Indonesia is keen to attract Indian investments in its new capital, Nusantara, and has called for a Comprehensive Free Trade Agreement (CEPA) to promote trade, investments, and capacity building.

While challenges persist, the India-Indonesia economic relationship remains optimistic. Sectors like energy, infrastructure, IT, and health care offer immense potential for collaboration. To achieve the ambitious $ 50 billion trade target, both nations must address existing hurdles, finalise trade agreements, and diversify economic engagement. Strengthening institutional frameworks and fostering mutual trust will be crucial in unlocking the full potential of this strategic partnership.

This article is authored by Rahul Mishra, associate professor, Centre for Indo-Pacific Studies, School of International Studies, Jawaharlal Nehru University and senior research fellow, German-Southeast Asian Center of Excellence for Public Policy and Good Governance, Thammasat University, Thailand and Prisie L Patnayak, doctoral candidate, Centre for Indo-Pacific Studies, School of International Studies, Jawaharlal Nehru University, New Delhi.