Supreme Court Narrows Definition of 'Industry' Under Industrial Relations Code 2020

The Supreme Court has narrowed the meaning of “industry” under Section 2(p) of the Industrial Relations Code 2020. This decision moves away from the broader definition previously established by the Bangalore Water Supply and Sewerage Board case.

By omitting sovereign, charitable, social, and philanthropic activities from the official definition of industry, the ruling reduces the number of institutional arrangements where workers can engage in collective bargaining, resist dismissals, or claim higher wages aligned with labor productivity increases.

Data from the Periodic Labour Force Survey indicate that only 23.6 percent of workers in India are regular salaried employees, and just 11 percent possess both salaried status alongside a written contract and social security. The remainder are either self-employed with low incomes or work on a casual daily-wage basis. Analysts suggest that employers may reorganize activities into legal forms excluded from industrial classification, potentially widening the gap between formal and informal employment.

The legal shift coincides with broader trends in labor income. According to Periodic Labour Force Survey data, average monthly earnings in rural areas declined from approximately ₹9,107 in 2017-18 to about ₹8,842 in 2023-24, with real wages for rural workers lower in 2023-24 than six years prior. While urban wages saw slight increases, inflation largely offset those gains.

Economists point out that lower overall wage spending can reduce domestic consumption, impacting demand, business capacity utilization, and investment. Furthermore, while worker spending typically focuses on locally made goods, business and investor spending often leans toward imported goods, potentially increasing import dependence as the profit share of national income grows.

Discussions around labor arbitrage often look at the potential for shifting global production networks to India. However, industry comparisons highlight structural challenges. India's manufacturing-to-GDP ratio has remained between 16 and 17 percent for over a decade, compared to higher ratios in countries like Vietnam and China, which benefit from established economies of scale and scope alongside integrated supply chains, testing laboratories, and engineering consultancies.

Additionally, logistics costs remain a significant factor for manufacturing competitiveness. Government surveys and studies by organizations like NCAER-DPIIT estimate India's logistics costs between 7.97 and nearly 9 percent of GDP—with some industry analyses placing it higher at 13 to 14 percent—compared to an international average near 8 percent and lower figures in competing regional manufacturing hubs.

World Bank trade data reflects these dynamics, showing India's share of global exports in sectors such as apparel, leather, textiles, and footwear rose to 4.5 percent in 2013 before declining. Observers note that wage suppression alone may not offset structural disadvantages in infrastructure and productivity unless supported by long-term investments in worker training and operational efficiencies.

"The recent legal redefinition of 'industry' under the Industrial Relations Code 2020 introduces significant structural considerations for businesses and workforce management in India. While regulatory clarity is crucial for enterprise operations, sustainable industrial growth ultimately relies on balancing labor productivity, robust infrastructure, and strong domestic demand. Founders and business leaders must focus on long-term capability building, training, and operational efficiency rather than relying solely on wage arbitrage to navigate macroeconomic shifts." — Dr. Shishir Gupta, Founder & CEO, StartupLanes