The Ministry of Industry plans to extend the low-cost green car (LCGC) incentive programme until 2031 to support sales and vehicle ownership.

However, experts have noted that the decision could impede efforts to advance vehicle electrification.

"The LCGC programme has contributed to increased vehicle ownership and supported the national automotive industry. Therefore, we will continue the LCGC incentive through 2031," Industry Minister Agus Gumiwang Kartasasmita stated on 12th July.

The Minister announced the plan the previous day during his visit to Expo 2025 Osaka, where he held meetings with executives from Japanese automotive manufacturers Toyota, Suzuki, and Daihatsu. The Ministry characterised the decision as a measure to maintain vehicle affordability and to accompany the country's shift toward electric vehicles.

However, it did not specify how LCGCs, which run on fossil fuels, align with this transition.

Agus stated that the extension of the incentive is expected to provide policy continuity for industry participants and promote greater domestic production and use of energy-efficient vehicles.

LCGCs are subject to a luxury goods sales tax (PPnBM) of 3%, which is lower than the rate for larger or luxury vehicles, starting at 10% and exceeding 100% based on engine size, emissions, and body type.

The decision to extend the incentive has raised concerns about the government's priorities, especially in relation to its stated aim of electrifying road transport. The government currently provides tax reductions and subsidies for electric and hybrid vehicles.

Experts have argued that the continuation of the LCGC programme could negatively affect other market segments and increase pressure on the automotive sector.

A short-term measure

Indonesia's domestic four-wheeled vehicle market has contracted in recent months.

According to the Association of Indonesian Automotive Manufacturers (Gaikindo), both wholesale deliveries and retail sales of new vehicles have declined compared with the same period last year, with LCGC sales experiencing a sharper drop.

An independent researcher, described the extension of the LCGC incentive as understandable in light of the recent market contraction, but also identified potential long-term risks.

"In the long run, this incentive contradicts the government's vision of achieving energy transition through electric vehicles," he said on 17th July.

Deni suggested that the incentive could be used to facilitate a gradual shift to electrification, including the conversion of LCGCs into hybrid vehicles. An independent automotive industry analyst made a similar observation, noting that the incentive could be used to address current sales challenges, although its impact may be limited to a few automotive brands.

Rather than focusing on specific segments, The analyst further recommended broader support for consumer spending, such as by lowering the value-added tax (VAT) on vehicles, which was raised to 12% at the beginning of the year.

Yannes Martinus Pasaribu, a product design lecturer and automotive industry analyst at the Bandung Institute of Technology (ITB), said the policy reflected the government's response to current market conditions but required a more integrated strategy to ensure future growth.

"The regulation requires ongoing macroeconomic evaluation, consistent monitoring of market conditions, and coordination with incentives for electrified vehicles, especially for cost-sensitive segments like hybrid LCGCs," he stated on 14 July.

The analyst also remarked that the Ministry's approach revealed inconsistencies in policymaking, which could result in market uncertainty and reduced competitiveness for electric and hybrid vehicles.

"Battery electric vehicles and hybrid vehicles should receive more focused support to reduce fuel consumption," he said.

He also questioned the present relevance of low-cost vehicles, citing price increases and decreasing demand. Since their introduction in 2013 with relatively low starting prices, LCGCs have seen substantial price increases. Meanwhile, demand has remained weak, with recent Gaikindo data showing a significant year-on-year decline in sales.

Mohammad Faisal, Executive Director of the Centre of Reform on Economics (CORE) Indonesia, also highlighted the need for consistency and strategic alignment in the government's incentive policy.

"I do not think it is feasible to support both EVs and LCGCs. There must be a clear decision about which segment to prioritise - EVs or LCGCs - because they target the same consumer base," Faisal said on 15 July. He noted that declining disposable income among middle-income consumers could constrain demand and limit the effectiveness of broad-based incentives, while also placing strain on fiscal resources.

"Declining disposable income is causing the middle class to become more selective in purchasing durable goods, including vehicles. This will lead to competition among LCGCs, EVs, and other vehicle types," he added.

An independent researcher similarly stated that the government should avoid issuing short-term incentives without strategic direction, and instead focus on a long-term policy framework.

"The road map must include clear strategies, objectives, and implementation steps to meet policy targets. It should not rely solely on incentives without defined goals," he said.