Market borrowings of the government do not always squeeze credit for the private sector in India. In the context of crowding out effect, analyse. (200 Words)
Enrich the answer from other sources, if the question demands.
Tapasvi 5 years
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IAS Parliament 5 years
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HB 5 years
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MURALIDHARAN 5 years
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IAS Parliament 5 years
Good attempt. Keep Writing.
IAS Parliament 5 years
KEY POINTS
· The so-called “crowding out" effect refers to how increased government spending, for which it must borrow more money, tends to reduce private spending.
· The government funds its fiscal deficit by borrowing from the domestic bond market. Its expenditure is also local in nature. The Reserve Bank of India (RBI) is the official banker to the government, which spends money by first taking an overdraft from the central bank.
· This overdraft gets repaid through bond market borrowings. The understanding is that any such government spending should ideally not affect the availability of funds to other borrowers in the market.
· However, excessive government borrowing from the bond market, many caution, could lead to a rise in interest rates for the government itself and consequently for everyone else in the economy.
· We find that we have a unique money market, different from the rest of the world, since we have investors who are explicitly required to invest in government debt.
· Banks, non-banking financial companies, insurers, provident funds, and pension funds are all forced to invest in government debt as a condition for their licence to operate in India.
· This has worked for us very effectively all these years. We also find that RBI works towards aiding the government borrowing programme rather effectively, ensuring that interest rates do not change too adversely.
Shantanu tiwari 5 years
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IAS Parliament 5 years
Good attempt. Try to stick to word limit. Keep Writing.
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