Reduction of Excess Capacity with Response of Capital Intensity

Purpose: The objective of this research was to show the response of the potential reduction of excess capacity in terms of capital intensity to the growth rate of labor productivity in the manufacturing industrial sector. Design/Methodology/Approach: The research was carried out in 2019 in 55 groups of Indian manufacturing industry within six major Indian industrial states. Mainly, the research used the modified VES (Variable Elasticity Substitution) estimation model. The research focused on the value of the additional substitution parameter of capital intensity (mu > 0). Findings: Almost all selected industry groups with in six states need capital-intensive production. The results found additional parameter of capital intensity (mu) is greater than zero for all industry groups. It means that a higher product per man can be obtained by increasing the capital per worker. Practical Implications: Research shows that an increasingly need for capital investment in need for higher labor productivity is likely to induce the manufacturing unit to use more capacity in existence. It reveals that investors in these selected six states can increase their capital investment. Originality/Value: The analysis of the result allowed to determine the fact that capital intensity is an essential variable for reduction of excess capacity which cannot be ignored in explaining productivity.