Low velocity of cash circulation in large States hints at sluggish economy: report

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  1. According to State Bank of India report,India’s present currency circulation is at Rs 20.4 lakh crore,which is at least Rs 1.5 lakh crore lower than what it would have reached if there had been no demonetisation.Thus, any argument of cash coming back aggressively into the system and financing informal activities is not entirely correct.
  2. The report adds that there is a paradox in the economy as the currency in circulation has expanded but the velocity of money has shown a sharp plunge.
  3. Velocity of money means the average number of times money passes from one hand to another, during given time period.For example,when you buy a book worth Rs.10 from shopkeeper, he uses same 10 rupee note to buy food then same currency note performed function of twenty Rupees. This is called “Velocity of money”A declining velocity suggests that money is not getting adequately circulated in the economy.
  4. The report also suggests that in more advanced and larger States the income velocity is far less than the national average while in smaller states the velocity is much higher than the national average which indicates economic activity is indeed slowing down.
  5. Demonetisation is a radical monetary step in which a currency unit is declared as an invalid legal tender.Government of India in 2016 has announced Demonetization of higher denomination notes to unearth black-money.