Indonesia’s Gasoline Subsidy Cut, Road Availability and Their Impact on Micro and Small Industry Productivity

Gasoline subsidy is part of the energy subsidies program that has contributed a significant fiscal burden on the government of Indonesia. A radical gasoline subsidy reform was initially announced on 31 December 2014 and implemented as of January 2015. The reform was designed to restrict fossil-fuel subsidies becoming a liability in future budgets by entirely removing the subsidy on Premium (RON 88) gasoline. Although energy subsidy is perceived as a form of social assistance, many of Indonesia’s energy subsidies are found benefiting higher income groups excessively, because of a lack of distribution strategy. Up to now, no detailed studies had yet been published about the impact of the June 2013 price reforms for gasoline on micro-small industries. Therefore the likely impact of January 2015 entire subsidy removal on Premium gasoline and followed by infrastructure development remains unknown. In this study, panel data observation was conducted to study combinations of time-series data (2010-2013) and cross-sectional data (23 subsectors industry). Therefore, the research outcomes are expected to give more informative data, more variability, less collinearity among variables, more degrees of freedom and more efficiency. According to observation, 17 out of 23 micro-small industry’s subsectors would still positively grow their production indices during reduction gasoline subsidy and less rapid new road development. There are three recommendations that would like to be proposed to the government based on the outcome of the observation. First, the Indonesian government should reallocate a proportion of the gasoline subsidy funds for the development of infrastructure such as roads especially in rural areas where the majority of micro-small industries are located and marketing their products. Second, the government has to provide technical as well as financial assistance for improving energy efficiency and modernizing production systems. Third, the government must support feasible micro-small industries by increasing accessibility to bank financing. Two recommendations are suggested to micro-small industries players. Firstly, immediate action to minimize impact subsidy removal. Secondly, observe a long term anticipation of higher energy prices by actively consulting to the government related organizations, universities, larger enterprises, and non-governmental organizations. As final points, recommendations to society are buying micro-small industries’ products or services, transferring knowledge of technologies to micro-small industries and conducting researches related to micro-small sectors.