The document discusses the concept of "crowding out" using an analogy of a school. One strong student eats a large share of the canteen food, driving up prices and leaving less for other students. This deprives the other students, who are brilliant but cannot perform to their potential without proper nutrition. Similarly, when the government consumes a large share of available capital for investments, it drives up capital costs and "crowds out" private entrepreneurs, depriving the economy of their investment and contributions to growth. Crowding out occurs when one party, through their power or influence, elbows others out of opportunities without regard for their needs or capabilities.

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Understanding Crowding Out
PSS Series
There is a term – CROWDING OUT which is liberally used in the pink business newspapers that cover the macro-economic issues. So what is
CROWDING OUT all about? To understand this let us consider a story about a school where there several deserving students going about their daily
routine. However, there is something very odd going on in the school.
There is one student among them who is exceptionally strong. He tends to overpower the others most of the time due to his physical strength and
power and they are left defenseless. When he goes to the canteen, he eats much more than he should without considering the needs of his friends.
The canteen authorities do not object 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.
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. 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.
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 and which bears a lot of resemblance with the above story. In
order to get a better understanding of this story we will have to make some changes (replacements) These are as follows :-
1) We need to replace the stronger student by the Government
2) We need to replace the other students by private entrepreneurs
3) We need to replace food by capital
And lo and behold, 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. 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.
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.
Hope this lesson has helped you in understanding the term Crowding Out.
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Disclaimer: The views expressed in this lesson are for information purposes only and do not construe to be any investment, legal or taxation advice.
The contents are topical in nature and held true at the time of creation of the lesson. This is 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. Tata Asset Management Ltd. will not
be liable for the consequences of such action.
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