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Crowding Out Effect

  • Integrity Education, Delhi
  • 30, Jul 2021
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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.