The contraction of private investment spending due to deficit spending by the Government is called

The contraction of private investment spending due to government deficit spending is known as 'crowding out'. When the government borrows excessively to finance its fiscal deficit, it increases the demand for loanable funds, which exerts upward pressure on interest rates [4]. Higher interest rates make borrowing more expensive for the private sector, thereby discouraging investment in capital and equipment [2]. Additionally, because government bonds are considered risk-free, they compete with corporate instruments for the available supply of savings [2]. If the supply of savings is relatively fixed, the government's increased share 'displaces' or 'crowds out' private borrowers from the financial markets [5]. This phenomenon is particularly noted when government spending is directed toward revenue expenditure rather than productive infrastructure [1]. Conversely, 'crowding in' occurs when public spending stimulates private activity, and 'pump priming' refers to initial government investment to spark broader economic recovery [3].

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Crowding Out > p. 117
2. [4] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 159
3. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.8 Perspectives on Deficit and Debt > p. 158
4. [5] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Debt > p. 79
5. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 160