Indonesia, the world’s fourth most populous nation, has experienced solid growth despite the global downturn. Its economy is expected to expand over 6 percent this year, up from 4.5 percent in 2009 and 6 percent in 2008.

“The government wants to see the economy grow by as much as 7 to 7.7 percent by 2014. With a good planning and implementation, we are optimistic the target can be achieved,” Yudhoyono said.

Indonesia will spend more on infrastructure, raise tax revenues and cut subsidies next year, the president said, moves that would improve prospects for an investment grade credit rating.

He forecast GDP growth for Southeast Asia’s biggest economy on a steadily rising trajectory of 6.3 percent in 2011, up from 6 percent this year, and reaching as much as 7.7 percent by 2014 — levels which still put it behind China and India.

“The time has come for us to no longer be a caged tiger but a nation that is competitive on the international stage,” Yudhoyono said in an annual state of the nation speech to Parliament.

Indonesia’s resilience in the face of a global financial crisis combined with increased political stability has attracted strong foreign capital inflows to its bonds and stock market.

Yudhoyono was re-elected in 2009 to a second five-year term on promises to boost economic growth by tackling graft, reform of the civil service, and infrastructure, but many Indonesians are disappointed with his slow progress.

Yudhoyono said he would increase infrastructure spending by 28 percent next year to 121.7 trillion rupiah ($13.57 billion), seek to lift woefully low tax revenues by 13 percent and cut politically sensitive subsidies by 8 percent.

This will leave the budget deficit next year at 1.7 percent of GDP, down from an initial forecast of 2.1 percent for 2010.   Improved government revenues led the country to recently cut its remaining 2010 bond issuance plans by 26 percent, giving a further boost to bond prices, but it said on Monday it would increase 2011 gross debt issuance by 29 percent.

The funds will be used to build bridges, underpasses, roads and 14 new airports, but only 85 km of double-track railway, barely enough to get out of the capital for the weekend. Poor infrastructure, unpredictable capital inflows, and profligate spending on energy and other subsidies are among factors that hold back the economy from even stronger growth and stand in the way of a much-coveted investment grade rating.

“Indonesia remains on track with its intentions of further structural reforms. However implementation, particularly in the areas of infrastructure and improving its investment climate and export competitiveness, are key rating drivers for the sovereign to further improve its credit profile,” said Ai Ling Ngiam, sovereign analyst at Fitch Ratings, which has Indonesia at BB+, one notch below investment grade.

Investors hope further reforms will earn Indonesia an investment grade credit rating within two or three years, a status that would lead to a windfall for bondholders and put the country on a par with BRIC nations such as Brazil.

Yudhoyono said in the speech he will amend laws to improve infrastructure development such as on land use, though gave no timeframe, and reiterated he was committed to tackling graft, bureaucratic reform and good governance.

Anton Gunawan, economist at Bank Danamon in Jakarta, said progress had been slow, with a poor working relationship between central and regional governments and disruption from a Parliament full of vested interests. Other analysts agreed.   “What people are looking for is the action, not the words. That’s where we haven’t seen much being delivered,” said David Kiu, a political risk analyst at Eurasia Group.

Investors for years shunned the country in favor of China, India and Vietnam, citing red tape, graft and bad infrastructure, but its stock market hit a record last month and 10-year bond yields fell to a record low this month.

Foreign direct investment is expected to pick up this year, with steel giant ArcelorMittal and sovereign fund China Investment Corp eyeing investments.

“We must push bureaucratic reform, until all our state employees become agents of change and create good governance,” Yudhoyono said. “A change in mindset is truly needed, if we are to overcome the enormous challenges that we face.”

Yudhoyono stressed the need for religious tolerance amid growing calls for him to act against radicals.

In his speech to parliament on the eve of the country’s independence day, Yudhoyono called on Indonesians to exercise the “true philosophy of harmonious living in a pluralistic society”.

“To build a democratic and fair life, I want to underline the importance of maintaining and strengthening our brotherhood, harmony and tolerance as a nation,” he said.

“In everyday life, we still find cases that don’t reflect the harmony, tolerance and mutual respect... related to religion, ethnicity, tribe and regions. We must not ignore such a situation,” he added.

“We want every citizen to live their lives in a serene and peaceful manner and accordance with his rights.”

Indonesia’s constitution explicitly guarantees freedom of religion and the country of some 240 million people, 80 percent of whom are Muslim, has ratified the International Covenant on Civil and Political Rights.