The government’s plan to shift energy subsidies from a commodity-based scheme to an individual-based system is considered an appropriate step toward improving subsidy targeting. However, its implementation must be carried out carefully to avoid adverse effects on economically vulnerable groups, particularly the middle class.
Wisnu Setiadi Nugroho, S.E., M.Sc., Ph.D., a lecturer at the Faculty of Economics and Business (FEB) of UGM, said that energy subsidy reform is an important agenda that has long been delayed due to persistent beneficiary mistargeting.
“In principle, this is a very appropriate and crucial step. The issue of mistargeting has been a longstanding problem. However, in the current context, its implementation must be handled with great caution,” he said on Thursday (Jun. 18).
According to Wisnu, the government needs to pay special attention to the middle class, which is currently experiencing increasing economic pressure. This group often does not qualify for social assistance programs, yet lacks sufficient economic resilience to absorb increases in the prices of basic necessities and energy.
“This group exists in a gray area. They are not poor enough to be included in the National Integrated Socioeconomic Data system as recipients of individual-based subsidies, but they are also not wealthy enough to withstand economic shocks caused by rising energy prices. If not anticipated properly, this policy could push the middle class into a new form of poverty,” he explained.
Wisnu believes subsidy reform is becoming increasingly urgent as the government’s fiscal space continues to narrow. Energy subsidy spending, which reaches hundreds of trillions of rupiah annually, limits the state’s ability to finance other development programs.
“The urgency is very high because our fiscal space is becoming more constrained. Reducing energy subsidies is arguably one of the most rational ways to reduce government expenditure,” he said.
Nevertheless, he cautioned that efficiency measures should not focus solely on sectors that directly affect the public. The government also needs to evaluate various new programs that require substantial budgets to ensure fairness in public financial management.
“The government should not impose strict efficiency measures on energy subsidies for the public while remaining lenient toward new programs whose effectiveness and governance have not yet been fully proven in practice,” he emphasized.
According to Wisnu, the success of an individual-based subsidy system depends heavily on the quality of beneficiary data. Therefore, the government needs to develop a more dynamic and integrated data management system. He proposed regular data updates through field surveys, strengthening self-targeting mechanisms, and integrating various government databases.
“Data accuracy is at the heart of successful individual-based subsidies. We can no longer rely solely on a single static data source,” he said.
In addition to utilizing the National Integrated Socioeconomic Data system, the government should conduct cross-validation using tax records, electricity consumption data, and energy consumption behavior data from digital platforms such as MyPertamina and PLN Mobile.
Nugroho explained that, in theory, savings generated from subsidy reform could be redirected to productive sectors such as infrastructure development, support for micro, small, and medium enterprises (MSMEs), and technology investment. However, given the current uncertainty in the global economy, he argued that strengthening social protection should be the immediate priority.
“Budget savings should currently be prioritized to build a stronger social safety net. Maintaining people’s purchasing power and stabilizing domestic consumption are far more urgent in the short term to withstand the impact of the global crisis,” he said.
According to Wisnu, geopolitical tensions, supply chain disruptions, and slowing global economic growth require the government to establish strong social safeguards before reallocating funds to other productive sectors.
He predicts that energy subsidy reform will generate different impacts in the short and long term. In the short term, subsidy reductions could increase inflation due to higher transportation and production costs. This situation may weaken purchasing power and slow economic growth.
“Subsidy reallocation will inevitably create shocks. Inflation will gradually rise due to increasing transportation and production costs. Household purchasing power, particularly among lower- and middle-income groups, will decline,” he explained.
However, in the long term, subsidy reform could create a healthier and more sustainable fiscal structure. In addition to strengthening the state budget’s resilience to external shocks, the policy could also accelerate the transition to cleaner energy sources.
“If the fiscal space created through these savings is allocated appropriately, our state budget will become much healthier and more sustainable. In addition, public awareness of efficient and cleaner energy use will continue to improve,” he said.
Amid uncertainty in global oil prices and ongoing geopolitical conflicts, Nugroho emphasized that Indonesia does need to reduce its dependence on energy subsidies. However, the process must be implemented gradually to avoid social and economic instability.
“We cannot make radical cuts or remove support overnight because the resulting shock could trigger socioeconomic instability,” he said. He cited various international studies showing that gradual subsidy reform produces less severe social impacts than sudden price adjustments.
In addition, the government needs to strengthen public communication to ensure people understand the policy’s objectives.
“Successful fiscal reform requires moral legitimacy. That legitimacy can only be achieved if the government is willing to improve efficiency within its own institutions before limiting the economic capacity of its citizens,” Wisnu concluded.
Through a measured, transparent, and data-driven approach, individual-based energy subsidies are expected to create a system that is fairer, more accurately targeted, and more sustainable without sacrificing groups that remain vulnerable to economic pressures.
Author: Jelita Agustine
Editor: Gusti Grehenson
Post-editor: Zabrina Kumara
Photo: Magnific