Full utilisation of capacity is necessary to achieve higher rate of growth of output, employment, income, investment and to make the best possible use of the scarce capital resources.

Existence of underutilized capacity not only disturbs the input- output ratio but it also adversely affects the supply of goods.

Magnitude of the Problem:

The problem of underutilized capacity has two aspects:

(i) The level of utilisation of capacity in the industrial sector is very low; and


(ii) The level of capacity utilisation in capital utilisation in capital goods industries over the years has fallen, whereas in consumer goods industries, it has increased.

In 1995-96, the capacity utilisation in manufacturing industries was 75.0 per cent suggesting that capacity is underutilised to the extent of minimum 25.0 per cent.

Causes of Underutilisation of Capacity:

Several factors are responsible for the underutilization of capacity, the more important among these are as follows:

(i) Planned Excess Capacity:


While making investment decisions the entrepreneurs take into account not only the existing demand for goods but also the level of demand likely to emerge in the foreseeable future. As a result of planned excess capacity, there is some degree of underutilisation of capacity.

(ii) Technological Indivisibilities:

There are some plants and equipment which can function at a given capacity. In case the plant is used to produce smaller output, some capacity would remain underutilised.

(iii) Shortage of Inputs:


A shortage of inputs like raw materials, power, transport facilities, labour, etc., may cause underutilisation of capacity.

(iv) Shortage of Foreign Exchange:

The shortage of foreign exchange for the import companies, raw materials and spare parts is undoubtedly the most important single factor limiting output in industries.

(v) Breakdowns:

A plant needs periodical repairs and check-ups. Sometimes it may have to be closed down on account of failure and other unforeseen breakdowns.

(vi) Deficiency in Demand:

Demand for industrial goods depends on the purchasing power of community. In India, the rate of growth of income has been very slow due to both lack of adequate expansion on non-agricultural employment as well as poor agricultural performance. The country has not been able to create sufficient demand for domestic products in the foreign markets.

(vii) Government Policy:

Policy changes by the government in respect of industrial licensing, expansion of capacity, imports, project aid, foreign exchange, protection, etc., also leave industrial capacity underutilized.


(viii) Labour Unrest:

Underutilisation of industrial capacity can also be attributed to labour troubles leading to work stoppages. Prolonged strikes and lockouts keep the industries closed for a considerable long period of time, and as a result, some of the industrial capacity remains underutilised.

Remedies for Improving Capacity Utilization:

Underutilization of capacity results from a number of causes; therefore, a number of measures can be adopted to improve the capacity utilisation.

Some of these measures are discussed below:


(i) Financial resources should be made available to an industry taking into consideration its capacity.

(ii) There should be adequate supply of raw materials, power, labour and other inputs to the industries.

(iii) Infrastructural facilities should be provided to avoid bottlenecks in the production process.

(iv) The Government should devise a system of incentives so as to desist the management from keeping idle capacities.


(v) The Government should also penalise companies which make excessive profit by deliberately underutilising their capacities.

(vi) Automatic re-endorsement of licensed capacity at the minimum production achieved by an industrial unit during a particular period of time.

(vii) Broad-banding facility to exporting manufacturing enterprises to adjust their product mix in line with changing market conditions.

(viii) The import policy should be liberalised to enable domestic industry to procure essential raw materials and capital goods.

(ix) Fiscal concessions in the form of higher tax rebate and allowances should be made.

(x) Introduction of minimum economic capacities for a selected group of industries.