Indonesia's $30 Billion Free Lunch Plan Hinges On Big Tax Revamp

(MENAFN- Live Mint) (Bloomberg) -- In northern Jakarta Bay, a region with the highest prevalence of growth stunting and malnutrition in Indonesia's capital, about 160 first graders excitedly grab their free school lunches on a hot September day.

As they recited prayers, some peep into the colorful boxes while others hurriedly open them to reveal rice, omelet, beef teriyaki, stir-fried chickpeas and carrots and melon. Watching on, 45-year-old Yani says she hopes the improved nutrition will help her seven-year-old daughter's grades and attendance.

The meals are part of a government-run pilot program after President-elect Prabowo Subianto, who takes office Oct. 20, promised free school lunches as part of his successful campaign. The goal: cut stunting rates, boost educational outcomes in a nation where almost a quarter of the population is under the age of 15 and power up economic growth to 8% a year.

The focus on soft infrastructure is a contrast with predecessor Joko Widodo, who prioritized roads, rail and bridges and the mineral export industry, with GDP growth averaging 4.2% in his 10-year term. While economists and investors applaud the ambition, it's the price tag and risks in delivering the program without waste and corruption that has them concerned.

Finance Minister
Sri Mulyani Indrawati
set aside
71 trillion rupiah ($4.6 billion) for the lunch program in the 2025 budget, with costs set to climb after that as the rollout broadens.
The eventual
$30 billion-a-year outlay
is equivalent to 14% of Indonesia's entire 2024 budget and about 2.5 times more than its yearly health expenditure.

Prabowo's plan will cost five times the amount that India, which runs the world's largest midday meal scheme, spent in 2023. That program is rife with corruption scandals and allegations of poor hygiene - challenges that Indonesian authorities will need to avoid.

A recent extension of the program to include pregnant mothers suggests
spending could climb even further in future years,“which could put upwards pressure on the fiscal deficit in the absence of reprioritization of spending programs,” said Martin Petch, who's role as vice president and senior credit officer at Moody's Ratings makes him the lead analyst for Indonesia's sovereign rating.

Prabowo has sought to allay fiscal fears with funding for the program within the government's deficit cap of 3% of GDP in the 2025 budget as the government seeks to cut down on waste and other non-essential spending. Details on funding plans after that have yet to be announced.

Kim Eng Tan, a S&P Global Ratings analyst in Singapore, says“continued commitment to fiscal prudence will be important” as the program expands.

Former general Prabowo says his free meal program is about keeping the nation's children healthy and competitive amid rapid technological advances and competition with other countries' workforces.“This is not a matter of being liked, of gaining popularity. This is a matter of strategy,” he said recently in a forum.

Nearly one in three children under the age of five in the vast archipelago of 275 million people is considered too small for their age. Poor nutrition and school attendance means Indonesian students score lower
in mathematics, reading, and science than peers, and their performance is deteriorating.

Improving educational outcomes will be key to helping Indonesia - which currently boasts economic output of roughly $4,800 per person making it an“upper middle income” country according to the World Bank - emulate neighbors and climb up the development ladder.

Economies that have“escaped the middle-income trap such as Singapore, Korea, and Taiwan all have pretty good soft infrastructure,” said Rob Subbaraman, head of global macro research at Nomura Holdings.“So, it's a good move by Indonesia, but they shouldn't suddenly forget about the physical infrastructure.”

Prabowo has also promised to renovate schools across the country, provide free medical check-ups, and expand various other social aid programs. To pay for it all, he's aiming to double the country's tax revenue ratio - from around 10% currently - by reforming the tax system and boosting non-tax revenue. Investors and economists are awaiting more details on those plans once Prabowo is in office and settles on his cabinet line up.

Thomas Rookmaaker, head of Asia-Pacific sovereigns at Fitch Ratings, says reaching developed nation status by 2045 - another of Prabowo's targets -“seems challenging without major productivity-enhancing reforms or significantly higher government spending and a build-up of government debt.”

Of all Prabowo's campaign pledges,
it's the lunch program that
gained the most attention given its vast scale. And not everyone is sold on the idea.

Muhammad Rafi Bakri,
an analyst
at the Audit Board of Indonesia, wrote in a report in April that
the lunch plans
“may not be a silver bullet” for Indonesia's stunting problem
and raised concerns over the sustainability of funding the program.
India's free lunch program, Bakri pointed out, is also supported by non-profit organizations -
something that's unlikely to happen in Indonesia's case.

For other
analysts,
the potential boost to both the near and long-term outlooks outweighs such concerns.

“In the short term, this initiative could stimulate economic activity and create growth opportunities for companies in the consumer staples sector,” said Mohit Mirpuri, a fund manager at Singapore-based SGMC Capital Pte., who is“bullish” on the nation.“A healthier, more educated workforce is the bedrock of productivity and innovation, making Indonesia an attractive market for long-term investors.”

Back in Jakarta Bay, Dahlia, 40, reckons the daily meal program will help her fussy seven-year-old daughter eat a more balanced diet, though she's worried about the quality and hygiene of the food.

“We won't be able to see directly how the kitchen works,” she said.“I really hope that the government and the school will make sure that everything is clean. That's my biggest concern.”

--With assistance from Yuki Tanaka and Andy Lin (News).

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