The 'Crowding Out Effect' occurs when increased government borrowing raises interest rates, making it more expensive for private entities to borrow. This results in reduced private investment as businesses may find it less viable to finance their expansion or operations due to higher costs of capital. In the context of fiscal policy, this phenomenon highlights the potential trade-offs between government spending aimed at stimulating the economy and the unintended consequence of discouraging private sector growth, a concept often discussed in economic and public policy frameworks reviewed in UPSC preparation materials.