Indonesian Middle Class Declines, Minister Airlangga: 'It's a Scarring Effect'

TEMPO.CO, Jakarta - Coordinating Minister for Economic Affairs Airlangga Hartarto, held a meeting at his office on Tuesday, August 27, 2024, to discuss the potential of the Indonesian middle class.

Five former Coordinating Ministers for Economic Affairs attended the meeting, including Dorodjatun Kuntjoro-Jakti, who served in the 2001-2004 period; Aburizal Bakrie in the 2004-2005 period; Sri Mulyani, who served as Acting Coordinating Minister in May-August 2008; Chairul Tanjung in May-October 2014; and Darmin Nasution in the 2014-2019 period. The Acting Head of Statistics Indonesia (BPS), Amalia Adininggar Widyasanti, and the General Chairperson of Apindo, Shinta Kamdani, also attended.

Airlangga emphasized that the middle class is a critical driver of the economy, despite the decline in number since the COVID-19 pandemic.

"As stated by the Minister of Finance, this is a scarring effect, which is expected to be improved in the future," said Airlangga after the Tuesday meeting.

Efforts to maintain the middle class

According to Airlangga, the government has made various efforts to maintain the middle class. These efforts include social protection, tax incentives, Pre-Employment, and People's Business Credit (KUR). Regarding tax incentives, Airlangga explained that the government will increase the housing Government-borne Value Added Tax (PPN DTP) incentive to 100 percent from the previous 50 percent until December 2024. 

Airlangga said President Joko Widodo, or Jokowi approved the decision and the Minister of Finance is preparing the ministerial regulation for the program. 

In addition, the government is also encouraging an increase in the Housing Financing Liquidity Facility support for low-income communities. These two policies are expected to boost middle-class ability and the consumption sector.

Middle class’ purchasing power declines

Indonesia has experienced deflation for three consecutive months. At a glance, this seems beneficial for consumers, but prolonged deflation could be a sign of economic decline. One risk that arises is the spiral effect, where falling prices cause falling demand, which in turn reduces purchasing power and causes further price declines.

Didik J. Rachbini, a senior economist at the Institute for Development of Economics and Finance (Indef), warned that deflation reflects a weakening of people's purchasing power. It shows that many consumers are delaying purchases or are unable to consume normally.

On the other hand, the purchasing power of the middle class has also declined. Rangga Cipta, Chief Economist at Mandiri Sekuritas, explained that after the COVID-19 pandemic, the Indonesian economy began to recover and return to normal. “After reopening the middle class actually slows down, and in the manufacturing sector, there’s an issue of global slowdown,” said Rangga on Wednesday, August 7, 2024.

Rangga said these combinations prompted the middle class to slow down and stagnate. The lower class, despite the stagnation, still received social assistance from the government. The decline in middle-class purchasing power was already visible during the Eid al-Adha celebration in June 2024.

Defining the middle class

The middle class can be defined using several different approaches. The first approach is relative, where the middle class is measured based on occupancy, both in terms of income and consumption, with an income range between 75 and 125 percent of the median per capita income of the community.

The second approach is absolute, which defines the middle class based on income or consumption expenditure. According to Indian economist Surjit Bhalla, the middle class is those with an annual income of over Rp62 million in purchasing power parity. The third approach is hybrid, which distinguishes the middle class in developing countries from those in developed countries.

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