Literally, indah itu baik means: that beauty is good.
Itu = kata penunjuk benda (waktu, hal) yang jauh dari pembicara. (Refer to kbbi)
I don't know the English term for "itu", is it called as demonstrative? Strictly, english has two, ie. demonstrative adjective and pronoun. Itu is close to that but wider in its practice.
In short, itu can point to everything from abstract to concrete :)
(From Australia) it sounds like a normal sentence. Maybe its just the way we structure sentences, cause we do slang with that too.