Syllabus: GS2/Governance; GS3/Economy
Context
- The Supreme Court’s recent approach to the meaning of ‘industry’ has narrowed the scope of institutional activities covered by industrial relations law, raising concerns over worker protection, wage growth and India’s manufacturing ambitions.
About the Definition of ‘Industry’ in India
- The definition of ‘industry’ determines which establishments and workers fall within the framework of collective bargaining, dispute resolution, protection against dismissal and other labour rights.
- It has therefore been central to the evolution of India’s labour jurisprudence.
Past to Present
- Industrial Disputes Act, 1947: The earlier statutory framework contained a broad definition of ‘industry’.
- Its interpretation was substantially expanded by the Supreme Court in the landmark Bangalore Water Supply and Sewerage Board v. A. Rajappa (1978) judgment.
- The Court adopted the ‘triple test’, broadly bringing activities involving systematic employer-employee cooperation for production or distribution of goods and services within the concept of industry, subject to specified exclusions.
- Recent Judicial Approach: The Supreme Court’s subsequent consideration of the issue, including the UP State Warehousing Corporation/Jai Bir Singh-related litigation, has revisited the breadth of the earlier interpretation.
- The significance of the present approach is that sovereign, charitable, social and philanthropic activities are not brought within the official conception of industry in the same expansive manner.
- It potentially reduces the institutional spaces in which workers can collectively negotiate wages and employment conditions.
- Industrial Relations Code, 2020: It consolidates three major labour laws i.e. the Industrial Disputes Act, 1947, the Trade Unions Act, 1926 and the Industrial Employment (Standing Orders) Act, 1946.
- Its definition of ‘industry’ seeks to provide a common statutory framework for industrial relations.
What are the Issues and Concerns?
- Risk of greater labour informality: Only about 23.6% of workers are regular salaried employees, while merely 11% have salaried status along with a written contract and social security.
- A narrower industrial classification could encourage employers to reorganise activities through legal forms falling outside industrial regulation.
- It may widen the divide between formal and informal employment, weakening collective bargaining and employment security.
- Falling wages and labour share: Average monthly earnings in rural areas declined from around ₹9,107 in 2017-18 to ₹8,842 in 2023-24.
- Real wages for both rural men and women were also lower in 2023-24 than six years earlier.
- A declining labour share can transfer income from labour to capital.
- Since workers generally have a higher propensity to consume, weaker wages can reduce aggregate demand that can further lead to low capacity utilisation and investment, creating a negative economic cycle.
- ‘Labour Arbitrage’ Myth: Relaxing labour protection is often justified on the grounds that cheaper labour will attract global production networks.
- However, manufacturing competitiveness depends on more than wages.
- India’s manufacturing-to-GDP ratio has remained around 16–17%, compared with about 25% in Vietnam and 28% in China.
- East and South-East Asian production hubs benefit from economies of scale and scope, including established supplier networks, testing, logistics, engineering, packaging and trade-finance capabilities.
- Infrastructure & Productivity Constraints: India faces relatively high logistics costs ranging from 7.8–8.9% of GDP to 7.97%, while some industry assessments place them at 13–14%, compared with an international average near 8%.
- India’s logistics costs are estimated to be 4–5 percentage points higher than Vietnam’s. It can outweigh apparent wage-cost advantages.
- Weak Incentives Mechanism & Low Wages: Weak incentives for long-term employment may discourage firms from investing in on-the-job training, task-specific knowledge and organisational capabilities.
- Low wages without higher productivity can be counterproductive.
- India’s share of global exports of apparel, leather, textiles and footwear rose from 0.9% in 2002 to 4.5% in 2013, but subsequently declined, while Vietnam and Bangladesh crossed 5%.
- It indicates that wage suppression alone cannot substitute for productivity growth and industrial ecosystems.
Way Forward: Combining Worker Protection with Productivity & Formalisation
- India needs a balanced labour policy rather than a race to the bottom on wages.
- Strengthen collective bargaining and social security while simplifying compliance.
- Incentivise firms to provide on-the-job training and skill development.
- Promote formalisation through written contracts, portable social security and transparent employment records.
- Reduce logistics costs through better ports, roads, railways, electricity and digital customs.
- Build domestic supplier ecosystems and encourage economies of scale and scope.
- Ensure labour reforms support productivity-linked wage growth, rather than wage suppression.
Conclusion
- India’s manufacturing challenge is fundamentally one of productivity, infrastructure, skills, industrial ecosystems and aggregate demand, not merely labour costs.
- Labour-law reform must therefore reconcile worker dignity with enterprise competitiveness.
- A sustainable industrialisation strategy should expand formal employment and productivity together, ensuring that the gains from growth translate into stronger wages, consumption and investment.
| Daily Mains Practice Question [Q] The changing judicial interpretation of the definition of ‘industry’ has significant implications for labour protection, formalisation and India’s industrialisation strategy. Critically examine. |
