According to preliminary data, the value of India's merchandise exports rose by 26.8% year on year to US$18.9bn in November, while imports expanded by 11.2% to US$27.8bn. The trade deficit in November stood at US$8.9bn, compared with US$9.7bn in October; the trade deficit had reached its widest point for 23 months, at US$13.1bn, in August. The government has said that the shortfall on trade could reach US$135bn in 2010/11-an increase on the previous forecast of US$120bn.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission (the government's main economic policymaking body), has said that the economy can cope with a current-account deficit equivalent to 3-3.5% of GDP. There is a risk, however, that the deficit could widen significantly, as domestic demand strengthens and external demand remains vulnerable to a possible economic slowdown in the US and the EU. The problem is that at present nearly 80% of the current-account deficit is being funded by short-term capital inflows rather than more durable foreign direct investment. The major risk in this regard is therefore a reversal of capital flows. For example, a renewed global economic recession or a further deepening of the sovereign debt crisis in the euro zone might trigger an extended period of elevated risk aversion on the part of international investors that could lead to a sell-off of the rupee and of local bonds and equities, causing a liquidity crunch. This in turn would result in a sharp decline in output, similar to that which occurred in the wake of the 2008-09 global financial crisis and economic recession.