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Understanding Crowding Out
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Understanding Crowding Out

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  • 1. Understanding Crowding Out
  • 2. CROWDING OUT is liberally used in the pinkbusiness newspapers that cover the macro-economic issues.So what is CROWDING OUT all about?Let us look at an example.
  • 3. There is a school where there are severaldeserving students going about their dailyroutine. However, there is something veryodd going on in the school.There is one student who is exceptionallystrong. He tends to overpower the othersdue to his physical strength and power andthe others are left defenseless.
  • 4. When he goes to the canteen, he eatsmuch more than he should . He eats all ofhis friends’ food without considering theirneeds. His friend don’t object because theyknow he has a big appetite, and he is muchstronger than them.
  • 5. The canteen authorities say nothingbecause they know that he comes from avery influential family, and if they were todeny him extra food, they would have tobear adverse consequences of doing so.Now because our friend – Mr. Strong andPowerful eats up most of the food, theprices of the items sold in the schoolcanteen start to soar upwards making itexpensive for the other students.
  • 6. The other students though not asstrong, are quite brilliant otherwise. Butthey too need to eat well to be able toperform to their full potential.Because the food becomes expensive, theyare forced to compromise and thus resultsin their eating less.
  • 7. This also hurts their performance. As aresult, because of one student whoconsumes a larger share of food than whathe should, the others get deprived of thenutrition that is needed.Therefore, the other students are unable toexploit their potential to the best possibleextent being deprived of vital nutrients.
  • 8. So in a sense we can say that the largerstudent has “elbowed out” the physicallyweaker classmates on the back of hispower and strength and notbecause of capability.Now let us consider another story that isbeing played day in and day out in ourcountry. In order to get a betterunderstanding of this story we will have tomake some changes.
  • 9. These are as follows :-We need to replace the stronger student bythe GovernmentWe need to replace the other students byprivate entrepreneursWe need to replace food by capital
  • 10. The scenario transforms to what ishappening to the investment climate in oureconomy.Like Mr. Big and Strong, the government isconsuming a larger share of the availablecapital for investments.
  • 11. In a sense the government can do sobecause it is the government. Because ofthis, the cost of capital is going up just asthe cost of food had gone up for thestudents.So just as the students felt deprived, theentrepreneurs too are feeling “CROWDEDOUT” of the opportunity of making soundinvestment decisions.
  • 12. In a sense the government can do sobecause it is the government. Because ofthis, the cost of capital is going up just asthe cost of food had gone up for thestudents.So just as the students felt deprived, theentrepreneurs too are feeling “CROWDEDOUT” of the opportunity of making soundinvestment decisions.
  • 13. The higher cost of capital adversely impactsthe feasibility of their ideas / projects andthey are unable to contribute fittingly tothe growth of the economy.
  • 14. Hope this lesson has helped you in understanding the term Crowding Out Please give us your feedback at professor@tataamc.com
  • 15. Disclaimer The views expressed in these lessons are for information purposes only and do not construe to be of any investment, legal or taxation advice. They are not indicative of future market trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this presentation will be at your own risk and Tata Asset Management Ltd. will not be liable for the consequences of any such action.Mutual Fund investments are subject to market risks, read all schemerelated documents carefully.

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