Capacity utilization is a crucial factor that not only affects growth but also indicates the levels of resource utilization in an economy. In most of the underdeveloped countries and developing countries, utilization of resources is very low. Higher the unutilized capacity, slower are the growth rates. Hence, capacity utilization is an important indicator, which should be taken care of for a sustained economic growth. In India, there is continuous underutilization of capacity in most of the industries.
The reasons could be different for this underutilization and differ industry-wise. Some are supply factors and some are demand factors. However, the result of three equations simultaneous system shows that factors like growth of sales, advertisement and competitive structure are important determinants of capacity in India. The study suggests that investment alone to create additional capacity wouldn't help in realizing higher growth rate in India. The concept of capacity utilization is frequently used in assessing both micro and macro level
performances. The excess capacity in the industry is often related to the presence of
monopolistic elements in the industry. It is also used as an indicator of underutilization of
resources.
Hence Policy planners always take capacity utilization as an important indicator
in planning process. In India the idea of licensing was to allocate resources efficiently and
to control the flows of goods and services according to the planning. However, the outcome
of restricted policy failed to achieve its objectives (Bagwati et. al 1970). Absence of market
forces was cited as the main reason for inefficiency and underutilization of capacity. During
mid-eighties market forces were allowed in some industries by introducing policy relaxation
like Re-endorsement of capacity to enhance the levels of capacity utilization1. Later in
nineties a more extensive policy known as liberalization policy with the idea of market
mechanism was introduced in India.
The liberalization is based on the twin principle of
optimum allocation of resources and efficiency through market mechanism.
It has been observed that in India there is continuous underutilization of capacity despite
various attempts made by government to improve capacity utilization. This is a serious
concern for any economy. This paper exclusively deals with the causes of underutilization
of capacity in India for a period of 17 years i.e., 1981 to 1998. |
