Crowding Out Effect

• Integrity Education, Delhi
• 30, Jul 2021

Why in news: High fiscal borrowings won’t crowd out private sector, says Chief Economic Advisor

• The crowding out effect is an economic theory arguing that rising public sector spending drives down or even eliminates private sector spending.
• There are three main reasons for the crowding out effect to take place: economics, social welfare, and infrastructure.
• Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity. This leads to an increase in interest rates.
• Rise in the real interest rate has the effect of absorbing the economy's lending capacity and of discouraging businesses from making capital investments.