Jakarta, IO – There is a single figure often cited to counter concerns about premature deindustrialization—a figure that, at first glance, appeared convincing, at least until the last quarter. Throughout 2025, the manufacturing sector’s contribution to GDP peaked at 19.20 percent in the fourth quarter, with an annual growth rate of 5.40 percent.

This marked the first time in 14 years that manufacturing growth outpaced the national economy as a whole. However, that trend was short-lived; data released by Statistics Indonesia (BPS) on August 5, 2026, showed that manufacturing’s contribution to GDP fell to 18.50 percent in the second quarter of 2026. Growth slowed to 4.52 percent—a decline from the 5.68 percent recorded during the same period the previous year.

While this slowdown was largely driven by a contraction in the oil, gas, and coal sub-sectors—with the non-oil and gas manufacturing industry itself still growing at 5.32 percent, slightly above the national GDP average—the headline figure remains cause for concern. The manufacturing sector, once hailed as an engine of growth, is now losing momentum. This phenomenon presents a critical challenge for policymakers, industry players, practitioners, and economic development analysts alike.

A crucial question that has frequently arisen regarding the phenomenon of premature deindustrialization in Indonesia is not “how much value-added do factories generate?” but rather “how many people can they employ?” And that is where the story changes.

According to the Minister of Industry’s explanation at the House of Representatives meeting on January 26, 2026, the non-oil and gas manufacturing sector employed 20.26 million people—representing 13.83 percent of the national workforce—as of August 2025. This contrasts with data from BPS’s National Labor Force Survey, which reported that the agriculture, forestry, and fisheries sector employed 42.49 million people (28.78 percent of the national workforce) as of February 2026.

The discrepancy—a gap of approximately 19 percent of GDP versus 14 percent of the workforce— represents more than just skewed statistics; it illustrates an imbalance in intensity, where manufacturing contributes a far larger share of value-added output than the share of labor it absorbs. In other words, each additional Rupiah of manufacturing output is now generated using less labor per Rupiah—a pattern known in development literature as “jobless growth.” For a country with a continuously expanding workforce, this pattern implies that the sector which statistically “grew the fastest” is failing to open a pathway for the millions of agricultural workers who ought to be transitioning into it. Cumulative data from January to November 2025 shows the manufacturing industry’s capacity utilization rate at just 61.89 percent. An idle capacity of nearly forty percent hardly paints the picture of a sector starved for labor.

A BPS report in February 2026 provides strong confirmation of this trend. While the number of formal sector workers rose by 736,000 in absolute terms—reaching a total of 59.93 million—their share of the workforce actually shrank by 0.02 percentage points, compared to the previous year. This indicates that while the economy is indeed creating jobs, a greater proportion of them lack formal pay slips. The report also notes that the employment category seeing the largest increase was casual agricultural labor, which rose by 0.14 percentage points.

An Uncomfortable Premise

The logic is simple, and precisely for that reason it is rarely seriously challenged. If the manufacturing sector does not grow fast enough to absorb the labor force being attracted away from agriculture, the remaining avenue for absorption lies in the rural non-farm economy— such humble activity as grocery stalls, repair shops, transport services, milling operations, village construction, tailoring, event catering, mobile phone credit kiosks, market porters, motorcycle taxi drivers, and so on.

The issue is that this economy does not grow in a vacuum; it grows in response to demand. And the primary source of demand for the rural non-farm economy is the income of farming households themselves. This is not merely a matter of intuition. Mellor, in a seminal paper of Agricultural Development and Economic Transformation (2017), systematically explains the mechanisms behind this growth linkage.

Farmers who enjoy good harvests and fair prices will purchase roofing materials, service their motorcycles, pay for their children’s education, build bathrooms and hire landless neighbors for wages. This is the labor absorption mechanism that is actually at work in Indonesia today—not the large-scale, formal industrial zones.

The consequences are significant: if the real income of farming households stagnates, the rural non-farm economy will fail to absorb anyone. It will merely spread the same poverty among more people—manifesting as an increasing number of stalls competing for a dwindling pool of customers. Half a century ago, Geertz coined a term for this pattern in “Agricultural Involution” (1963).

What is the Contribution of the Village Fund?

Founded on Law Number 17 of 2025 concerning the State Budget (APBN) of 2026, the Village Fund allocation has dropped by 14.69 percent to IDR 60.57 trillion, following a decade of increases from IDR 20.77 trillion in 2015 to IDR 71 trillion in 2025. That is not the interesting part, however: what is more to the point is its composition. In a media briefing at the Ministry, Finance Minister Purbaya explained that approximately IDR 40 trillion of the IDR 60.6 trillion ceiling is specifically allocated to pay for the construction of outlets and warehouses for the Koperasi Desa Merah Putih (KDMP). Consequently, the remaining IDR 20.6 trillion—distributed among 75,259 villages— yields an average of only IDR 273.7 million per village. Compare this to the previous scheme, under which villages generally received around IDR 1 billion.

In the real environment of recent years, where factories have failed to absorb labor as promised, the burden of labor absorption has fallen instead upon the village economy – which thrives only when there is local demand. Key direct drivers of local demand include discretionary village spending and the Village Cash-for-Work (Padat Karya). However, the issue is that the fund allocation has been slashed to less than one-third of the ceiling, with the remainder diverted to cooperative infrastructure projects, where spending decisions are made in Jakarta rather than through village deliberations.

The official argument is that this constitutes an “adjustment” rather than a “cut.” The Finance Minister explained that the total budget for village development—including the funds allocated for KDMP financing—reaches IDR 181.8 trillion, supported by a separate budget of IDR 83 trillion placed in stateowned banks for low-interest loans. It is important to note that this is a loan scheme, not a spending one. Loan funds create obligations, whereas spending funds generate demand.

Both can be useful, yet they are not interchangeable within the aggregate demand balance of a sub-district. Public policy analyst Agus Pambagio views this scheme as a risk to the effectiveness of village development, asserting that cooperatives should ideally be funded by member contributions, rather than relying on state budget grants.

The broader fiscal context offers no relief either; data compiled by the Regional Autonomy Implementation Monitoring Committee indicates that transfers to regions for 2026 are set at Rp693 trillion—a decline of approximately 20 percent, or Rp171 trillion, from the 2025 outlook. The resulting pressure is already being felt on the ground. National media reported that several local governments are beginning to delay salary payments for contract-based government employees (PPPK), sparking protests in various areas.

Explaining the Financial Note and the 2027 Draft State Budget (RAPBN) on August 14, 2026, Minister Purbaya announced that plans were in the works for Transfers to Regions to rise to IDR 735 trillion—a 5.5 percent increase over the 2026 outlook of IDR 696.9 trillion.

The increase for the Village Fund, specifically, was even sharper. Research citing the RAPBN documents notes that the Government proposed IDR 77 trillion for the 2027 Village Fund—up 39.3 percent from the 2026 outlook—marking the highest figure for this line item in Indonesian history. As of early September 2026, this draft budget was still under deliberation by Commission XI of the House of Representatives and had not yet been enacted into law; enactment was targeted for late October 2026.

On the surface, this sounds like a welcome change of course. However, before celebrating, one must consider the reasons behind the increase. The same report explains that the hike is intended to meet maturing obligations related to the accelerated physical construction of outlets, warehouses, and KDMP facilities.

This implies a potential recurrence of the 2026 pattern: a large headline increases where the bulk of funds remains tied to cooperative infrastructure obligations, rather than serving as discretionary funds that villages can immediately deploy to address the needs of their largest demographic—farming households. To illustrate the program scale, by mid-2026, 83,382 KDMP units had been established and institutionally registered across Indonesia—a substantial number, though not necessarily implying that all are fully operational.

This does not mean it is impossible for KDMPs to become a source of legitimate village-level demand. Cooperative outlets and warehouses, if functioning optimally, can absorb construction labor and eventually serve as new economic hubs. Mechanistically, however, this represents a centralized investment item with disbursement schedules tied to construction phases, rather than a flexible expenditure category capable of immediately responding to rural issues—such as when unhusked rice prices plummet or the planting season goes off-schedule. The premise we posited at the outset calls for an injection of funds that can be mobilized quickly and deployed based on local decisions. Funds tied to national infrastructure contracts do not meet this criterion, regardless of how large the figures may appear on paper.

Thus, the question for 2027 is not actually whether the Village Fund will increase; in nominal terms, it clearly will. The real question is whether that increase expands the fiscal flexibility of villages to address the actual needs of farming households, or simply enlarges the share of funds already earmarked for agendas dictated by the central government.

What is actually at stake?

The Village Fund is not an inherently efficient instrument; media reports and studies alike show that while some programs succeed, others result in accountability reports that look tidy on paper but yield no tangible impact on the ground. We are not claiming that village cooperatives are bound to fail. After all, industrialization has already taken fifty years and yet remains incomplete.

Nevertheless, we expect village cooperatives to resolve these issues within a single fiscal year, so that funds in subsequent years can be immediately utilized for programs responsive to the dynamics and needs of rural communities.

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The crucial issue lies in the logic of the sequence. If one believes that the manufacturing sector will absorb the labor force leaving agriculture, then the decision to reduce rural demand stimulus might be debatable. However, the BPS data presented earlier indicates that manufacturing is not absorbing labor at the required pace—and recent trends show that this pace is actually slowing down.

In this context, the rural demand buffer is being cut precisely when it is most needed: at a time when the manufacturing sector is reluctant to absorb labor as expected. The government terms this a “measured policy adjustment”—a seemingly neutral phrase that masks who actually bears the consequences.

There is one point where various schools of thought on agricultural development should converge: farmer welfare is not merely a sectoral matter; indeed, it is a cross-sectoral macroeconomic variable. Farm household income acts as an engine of demand, determining whether the village becomes a place where people work or merely a place where they wait.

We have long been accustomed to treating agriculture as a sector to be left behind, in favor of more modern enterprise. Yet, if that modern path proves unable to absorb the workforce, while rural aid is simultaneously squeezed off, the critical question shifts. It is no longer “When will factories absorb those millions of people?” but rather, “If the village ultimately has to shoulder the burden, with what capital can it possibly do so?”