On the Measurement of Capacity Utilization: An Evidence from Indian Chemical Industry

The present study attempts to estimate rate of capacity utilization in Indian Chemical Industry at aggregate level and analyse its trend during a period of 25 years. In this paper, optimal output is defined as the minimum point on the firm’s short-run average total cost curve and the rate of capacity utilization is merely ratio of its actual output to capacity output level. A mode is used to determine the optimal capacity output. We find that economic measure of capacity utilization is always higher than engineering measure and at times greater than unity and varies widely than engineering measure. A declining trend of capacity utilization is noticed after mid 90’s due to slow increase in actual output resulting from stagnated demand and rapid expansion of capacity output as a result of abolition of licensing rule consequent to economic reform.