Crowding out


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Crowding out

  1. 1. Crowding Out Roshankumar S
  2. 2. There is a term – CROWDING OUT which is liberally used in the pinkbusiness newspapers that cover the macro-economic issues. So what isCROWDING OUT all about? To understand this, let us consider a storyabout a school where there are several deserving students going abouttheir daily routine. However, there is something very odd going on inthe school. There is one student among them who is exceptionally strong. He tendsto overpower the others most of the time due to his physical strengthand power and they are left defenseless. When he goes to the canteen, heeats much more than he should without considering the needs of hisfriends. The canteen authorities do not object because they know that hecomes from a very influential family, and if they were to deny him extrafood, they would have to bear adverse consequences of doing so. Now because our friend – Mr. Strong and Powerful eats up most of thefood, the prices of the items sold in the school canteen start to soarupwards making it expensive for the other students. The other students though not as strong, are quite brilliant otherwise.But they too need to eat well to be able to perform to their full potential.Because the food becomes expensive, they are forced to compromise andthus results in their eating less. This also hurts their performance. As aresult, because of one student who consumes a larger share of food thanwhat he should, the others get deprived of the nutrition that is needed.Therefore, the other students are unable to exploit their potential to thebest possible extent being deprived of vital nutrients.So in a sense we can say that the larger student has “elbowed out” thephysically weaker classmates on the back of his power and strength andnot because of capability. Now let us consider another story that is being played day in and dayout in our country and which bears a lot of resemblance with the abovestory. In order to get a better understanding of this story we will have tomake some changes (replacements) These are as follows :-1) We need to replace the stronger student by the Government2) We need to replace the other students by private
  3. 3. 3) We need to replace food by capital And lo and behold, the scenario transforms to what is happening to theinvestment climate in our economy. Like Mr. Big and Strong, thegovernment is consuming a larger share of the available capital forinvestments. In a sense the government can do so because it is thegovernment. Because of this, the cost of capital is going up just as thecost of food had gone up for the students.So just as the students felt deprived, the entrepreneurs too are feeling“CROWDED OUT” of the opportunity of making sound investmentdecisions. The higher cost of capital adversely impacts the feasibility of their ideas/ projects and they are unable to contribute fittingly to the growth of