The study estimates the rate of capacity utilization for the Indian paper industry for the
period 1973-74 to 1997-98 on the basis of the theoretical framework of variable cost function. It is
based on the basic premise that deviation from full utilization of capacity takes place as the levels of
certain inputs, particularly capital, are fixed in the short-run and thus can be changed only in the longrun.
In order to meet the increase (decrease) in demand, the industry puts the existing capital to more
(less) intensive use. The study undertakes empirical estimation of a translog variable cost function by
considering three variable inputs, viz., labour, energy and raw material and one quasi-fixed input,
capital, on the basis of aggregate industry level data taken from annual survey of industries. It is found
that under-utilization of capacity prevails in the Indian paper industry and there has been a decline in
the rate of capacity utilization over time.