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Although Indonesia is the world's largest Muslim country (around 85% of its 240 million citizens), Islam has never been declared the national religion. Resistance to establishing a national religion is deeply rooted in Indonesia's political history. In 1945, when drafting the constitution, nationalist leaders overruled any suggestion to prioritize Islam. The founders of the new nation honoured the plurality of faiths and cultures; several Muslim sects as well as Christians and Hindus.

Indonesia's ambiguity as an Islamic state is related to 3 issues:

1. Fear
In 1946, a militant group, called Darul Islam, opposed the new republic and wanted to create a Islamic state. The ensuing fighting between Darul Islam and the government destroyed much of West-Java's rural society. After 20 years of violence, the rebellion was squashed. From the Fifties to the Sixties, a similar conflict took place in Sulawesi.
An idea of an Islamic state provokes fear of instability.

2. Racial identity
Racial categories, introduced in the 19th century by the Dutch, are not aligned with religious groups. An Indonesian "Malay" can be a Christian or a Hindu, while a Indonesian "Chinese"may be a Muslim.
Islam is not a key factor in race-based conflicts in Indonesia.

3. Pluralism
Islam in Indonesia is not as cohesive as in Arab countries. Since its arrival in the 15th century, Islam had to find its way through a plurality of religious interpretations. This plurality resulted in a liberal interpretation of Islam.

Source:
Further East Consult