As per Reserve Bank of India (RBI), capacity utilisation declined to 68.9 per cent in April-September quarter of current fiscal from 73.6 per cent in the previous quarter.
The estimate is based on RBI's order books, inventories and capacity utilisation survey (OBICUS).
The lower capacity utilisation means factories firing less and fewer job opportunities.
"Who would want to make fresh investments if present capacity is not utilised? So, it will further reduce fresh investment and correspondingly employment growth would also be affected," said R. Nagraj, professor of economics at Indira Gandhi Institute of Development Research.
In its monetary policy statement, the RBI said that gross value added (GVA) growth decelerated to 4.3 per cent in the second quarter of FY20 as it was pulled down by a contraction in manufacturing.
"The slowdown in manufacturing activity was also reflected in a decline in capacity utilisation (CU) to 68.9 per cent in Q2:2019-20 from 73.6 per cent in Q1 in the early results of the Reserve Bank's order books, inventories and capacity utilisation survey (OBICUS)," it said.
The central bank further said that seasonally adjusted capacity utilisation also fell to 69.8 per cent from 74.6 per cent during the same period.
Growth in the services sector moderated, weighed down mainly by trade, hotels, transport, communication, broadcasting services and construction activity. However, growth in public administration, defence and other services accelerated in line with the surge in government final consumption expenditure.
"Agricultural GVA growth increased marginally, despite contraction in kharif foodgrains production in the first advance estimates," the RBI said.
With the second quarter GDP slipping to six-year low of 4.5 per cent and expected to remain muted, the RBI on Thursday cut GDP growth forecast for the current fiscal to 5 per cent.
In its October monetary policy, the RBI had estimated the GDP to grow at 6.1 per cent in financial year 2019-20.
In its sixth monetary policy in 2019, the RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.15 per cent. Consequently, the reverse repo rate under the LAF remains unchanged at 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 5.40 per cent.
( With inputs from IANS )