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.
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