Crowding out occurs when a large entity, like the government, consumes a large share of available resources, like capital, making those resources more expensive for others. This is illustrated through an example of a strong student eating most of the food in the school canteen, driving up food prices and depriving other students of nutrition. Similarly, when the government uses a large portion of available capital for its investments, it drives up the cost of capital for private entrepreneurs, making it difficult for them to access funds and contribute to economic growth, crowding them out of investment opportunities. Crowding out occurs because the large entity can leverage its influence to secure more resources, even if others may need them more, limiting overall productivity and performance

1. Understanding Crowding Out

2. CROWDING OUT is liberally used in the pink
business 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 several
deserving students going about their daily
routine. However, there is something very
odd going on in the school.
There is one student who is exceptionally
strong. He tends to overpower the others
due to his physical strength and power and
the others are left defenseless.

4. When he goes to the canteen, he eats
much more than he should . He eats all of
his friends’ food without considering their
needs. His friend don’t object because they
know he has a big appetite, and he is much
stronger than them.

5. The canteen authorities say nothing
because they know that he comes from a
very influential family, and if they were to
deny him extra food, they would have to
bear adverse consequences of doing so.
Now because our friend – Mr. Strong and
Powerful eats up most of the food, the
prices of the items sold in the school
canteen start to soar upwards making it
expensive for the other students.

6. 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 and thus results
in their eating less.

7. This also hurts their performance. As a
result, because of one student who
consumes a larger share of food than what
he should, the others get deprived of the
nutrition that is needed.
Therefore, the other students are unable to
exploit their potential to the best possible
extent being deprived of vital nutrients.

8. So in a sense we can say that the larger
student has “elbowed out” the physically
weaker classmates on the back of his
power and strength and not
because of capability.
Now let us consider another story that is
being played day in and day out in our
country. In order to get a better
understanding of this story we will have to
make some changes.

9. These are as follows :-
We need to replace the stronger student by
the Government
We need to replace the other students by
private entrepreneurs
We need to replace food by capital

10. The scenario transforms to what is
happening to the investment climate in our
economy.
Like Mr. Big and Strong, the government is
consuming a larger share of the available
capital for investments.

11. In a sense the government can do so
because it is the government. Because of
this, the cost of capital is going up just as
the cost 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
investment decisions.

12. In a sense the government can do so
because it is the government. Because of
this, the cost of capital is going up just as
the cost 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
investment decisions.

13. The higher cost of capital adversely impacts
the feasibility of their ideas / projects and
they are unable to contribute fittingly to
the 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
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