It is election year for Asia’s two most populous democracies. Almost a billion (968 million) eligible voters will head to the polls in India between April 19 and June 1; incumbent prime minister Narendra Modi is widely expected to clinch a third mandate. In Indonesia, 154 million people have already cast their ballots, granting a solid win to incumbent defence minister and former special forces commander Prabowo Subianto. 

Both countries have walked a tightrope between protectionism and investment openness in recent years. They strategically liberalised and streamlined foreign direct investment (FDI) in strategic activities like manufacturing, while at the same time propping up local conglomerates, retaining old and new trade barriers, and overhauling the governance of FDI enshrined in bilateral investment treaties. 

This delicate balancing act is expected to continue in both countries beyond the elections.

“India and Indonesia are strikingly similar when it comes to FDI,” says Michael Kugelman, director of the Wilson Center’s South Asia Institute. “There is an inherent political risk of standing on the campaign trail and openly embracing FDI because of the traditional emphasis on not being too reliant on external players.

“So it’s ironic that both countries have enjoyed significant levels of economic growth in recent years, fueled in part by robust levels of FDI.”

Mr Modi’s campaign promises have been centred around maintaining the rapid economic growth India has experienced under his administration. In the final quarter of 2023, India’s economy grew 8.4%, according to government figures. 

Similarly, official figures show that Indonesia’s gross domestic product (GDP) grew 5% last year, shored up by $47.34bn of foreign direct investment, up 13.7% on an annual basis. Mr Prabowo is largely expected to continue former President Joko Widodo’s popular economic policies.

“In both cases, political leaders support investments and talk about it in their public messaging, but just not as much on the campaign trail,” says Mr Kugelman. “Where the differences start to appear is that Mr Modi is trying to leverage trade deals as a political asset.”

Modi’s Make in India

Mr Modi launched the Make in India initiative as soon as he was first elected in 2014, with the idea of luring foreign producers into the country to ultimately strengthen its industrial capacity. 

“After the government comes back, I expect there to be a strong focus on getting investments, especially in manufacturing, electric vehicles (EVs) and renewables,” says Bidisha Ganguly, chief economist at the Confederation of Indian Industry. 

“A lot of ventures are taking shape or waiting to take shape,” she adds.

In February 2024, Tata Electronics announced a joint venture with Taiwan’s Powerchip Semiconductor Manufacturing Corporation to build an $11bn semiconductor fabrication plant (fab) in Gujarat. Despite struggling to clear permitting, another Indian-Taiwanese joint venture featuring Vedanta and Foxconn is also trying to build a fab in Gujarat. 

However, Mr Modi has been careful to not be seen as too dependent on external players.

“You have an increasing number of sectors where foreign companies need to localise if they want to win deals, like power equipment,” says Rick Rossow, chair of the US India Policy Studies at the Center for Strategic and International Studies. “So there is protectionism but it’s way more focused on trade and imports than it is on foreign investment.

“India has a massive trade deficit in the kinds of products that Make in India seeks to localise. Overall, job creation is critical as more people will want to leave agriculture, move to cities, and find formal employment.”

Building up India’s manufacturing sector will also continue to be a priority for Mr Modi’s government and trade deals have been seen as a way to leverage this goal.

“Modi is now projecting new trade deals as a way to promote upliftment and create jobs,” says Mr Kugelman. “These are priorities that play well politically, especially with unemployment an enduring challenge in the Modi era despite so much macroeconomic growth.”

One area Mr Modi is focused on for job creation is the country’s manufacturing sector, which has remained relatively small over the past decade. 

According to McKinsey, in 2020, manufacturing generated 17.4% of India’s GDP, little more than the 15.3% it had contributed in 2000. In comparison, Vietnam’s manufacturing sector more than doubled its share of GDP during the same time period.

Mr Modi is trying to tout FDI into the country as evidence that the manufacturing which used to go to China is now coming to India, argues Milan Vaishnav, director of the South Asia Program at the Carnegie Endowment for International Peace.

On March 15 the Indian government approved a new policy on EV manufacturing. Less than a week before that, India signed a trade and economic partnership agreement with the member states of the European Free Trade Association: Iceland, Liechtenstein, Norway and Switzerland.

“The government is now looking at FTAs favourably,” says Ms Ganguly. “There’s been a realisation that FTAs can only add value to the economy, whereas earlier they were much more protectionist and tried to keep the tariffs high.”

Prabowo picks up

Similar to India, Indonesia’s new leader is expected to leverage trade deals to propel economic growth while balancing the idea of self-sufficiency.

“The new government is pro-business, but it’s also putting up conditions for investment in certain industries,” says Laura Schwartz, senior analyst, south-east Asia at Verisk Maplecroft. “There is a push and pull here: you have pro-business policies but you also have efforts to keep value in Indonesia.”

A recent example was a policy change in 2023 in which Mr Widodo’s administration removed tax holidays for investment in lower-valued nickel products to further encourage investment in higher-value-added products. By removing the tax holidays from investment in lower-value materials such as nickel or pig iron which is used in stainless steel, the government hopes to divert investment to the processing for higher-value materials such as those that go into EV batteries.

“As under the Jokowi administration, the Prabowo administration will likely make use of these types of strategies to ensure that policies are aligned with overarching economic goals,” adds Ms Schwartz.

Under Joko Widodo, Indonesia ratified the Omnibus law in March 2023, the largest reform package the country has seen in decades. When fully implemented, the Omnibus law is expected to improve investment conditions by lowering corporate taxes, reforming labour laws and reducing bureaucratic and regulatory barriers.

Too big to resist

Indonesia and India remain among Asia’s fastest-growing economies. While the new governments will continue to mix pro-business and trade protectionist investment strategies, their markets remain too enticing for investors to ignore.

“Indonesia investment attractiveness, particularly around a big issue like critical minerals, will likely keep the investor interest high despite its challenges,” says Ms Schwartz.

Similarly, India’s growth story remains tantalising for investors. As Mr Rossow says: “India is on the verge of something bigger right now, as companies look to diversify away from China.”

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This article first appeared in the April/May 2024 print edition of fDi Intelligence.