Nusantara, which is 2,000 kilometres (1,200 miles) from Jakarta, is set to become the new political centre of the world's fourth-largest country.
It is a legacy project of President Joko Widodo but environmentalists have warned it could accelerate the destruction of tropical jungles home to long-nosed monkeys and orangutans.
The government is preparing to ramp up infrastructure projects to open the doors to the city -- which will cover about 56,180 hectares (216 square miles) on Borneo island -- by the time Widodo leaves office in 2024.
"The main point (of the ceremony) is to take the spirit of the 77th Independence Day to strengthen our resolve and spirit to build the new capital," said State Capital Authority head Bambang Susantono, who will govern the new city.
After the national flag was hoisted by officials to mark the occasion, workers at the site cheered in unison that they were "ready to develop Nusantara", which means archipelago in Indonesian.
Jakarta is home to 30 million people in its greater metro area and it has long been plagued by serious infrastructure problems and flooding exacerbated by climate change.
It is sinking as much as 25 centimetres (10 inches) a year in some areas -- double the global average for major coastal cities -- with some experts predicting up to a third of the megalopolis could be underwater by 2050.
Government officials say the new capital will take decades to be fully completed and inhabited by its planned population of two million people and will help spread economic growth to an underdeveloped region.
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