The inauguration was held at the parliament building in the capital of Jakarta amid heavy security.
"I will comply with the obligation of President of Republic of Indonesia as well and fairly as possible, uphold the state constitution, all laws and regulations, and devote myself to the country," President Widodo said.
Widodo and his running mate Ma'ruf Amin won the April 17 presidential election, beating rival former general Prabowo Subianto and his running mate Sandiaga Uno.
Widodo secured 55.5 percent, or about 85.67 million, of the total votes.
Among the foreign leaders and envoys attending the ceremony are Chinese Vice President Wang Qishan, Australian Prime Minister Scott Morrison, Malaysian Prime Minister Mahathir Mohamad, Singaporean Prime Minister Lee Hsien Loong, Sultan of Brunei Darussalam Hassanal Bolkiah and U.S. Secretary of Transportation Elaine Chao.
In his speech President Widodo, 58, outlined the targets for his second five-year term with the main goal of working towards helping the country exit the middle-income trap in 2045.
"Our dream in 2045 - Indonesia escapes from the group of middle-income countries and turns to be an advanced nation," he said.
The president said by then he expected the country's total volume of gross domestic product to reach 7 trillion U.S. dollars, income per capita of 320 million rupiah (some 22,652 U.S. dollars) per year and nearly zero percent poverty.
For the next five years, Widodo said he has decided to give priorities to huge infrastructure projects, and shift the country's economic reliance to manufacturing or added-value products from natural resources export.
After the inauguration, the president will finalize the lineup of his cabinet ministers.
Indonesia beefed up security in the capital with about 31,000 policemen and soldiers during the inauguration ceremony, after over 40 alleged militants had been nabbed and scores of terrorist plots, including suicide bombings thwarted ahead of the inauguration, according to the police.
Subdued exports, investment and relatively stable consumption amid the country's weakening economic activities as well as the global economic uncertainty, terrorism and insurgency are among the major challenges facing President Widodo in his new term.
Indonesia, Southeast Asia's biggest economy, is likely to miss its 5.3 percent growth target this year, according to the government.