Chennai: Some Indian garment exporters, already under pressure because of the worldwide economic gloom, are worried they will get squeezed even harder by the European Union’s preferential treatment for Pakistan on account of that country’s devastating floods last summer.

Pakistan is exempted from export duties on 75 items, including textiles, garments, footwear and leather goods for three years starting 2012.

Indian apparel companies’ concerns follow Bangladesh’s planned withdrawal of a trade complaint that had stalled the approval of the long-announced plan for support to Pakistan’s stagnant garment exports during a meeting of trade diplomats in Geneva, Switzerland. India also withdrew its objections in September.

Losing competitiveness: A file photo of worker at a textile factory. Pradeep Gaur/Mint

“We were not very happy about this decision, we had earlier asked for it not to be considered because the floods were a short-term phenomena," said Chandrima Chatterjee, director of the Delhi-based Apparel Export Promotion Council of the textile ministry.

The removal of the European Union’s 9.6% duty, which Indian companies will continue paying, will hurt the Indian garment sector, already reeling from low-priced garment exports from Bangladesh, Chatterjee said.

Bangladeshi apparel makers have duty-free access to 37 countries but also have lower labour and electricity costs. With a 4.5% share in world garment exports, Bangladesh has overtaken India, which has a 3.5% share, according to Crisil research.

The same research shows that in 2010, Bangladesh had a 9.4% share of world exports to the European Union, India had 6.8% and Pakistan 1.6%.

“India had a lot of niche and value-added garments comprising embroidery, special fabrics and specific knits but now both Pakistan and Bangladesh have developed similar capabilities," said Vinod Kumar Saraogi, managing director of Meridien Apparels Ltd, which exports largely women’s and children’s wear out of its factory in the Tamil Nadu’s textile hub, Tirupur.

Meridien’s sales have slipped to Rs125 crore from Rs138 crore two years ago in the aftermath of the 2008 financial crisis. This year, the 22-year-old business, whose buyers include French hypermarket group Carrefour and American clothing chain Forever 21, has been forced to cut prices by at least 10%, amid sluggish demand in the US and Europe. The proposed preferences, which will liberalize 75 tariff lines accounting for 27% of Pakistan’s exports to the EU, is expected to boost exports by €250-350 million, according to the Pakistan Ready Made Garment Manufacturers and Exporters Association. The concessions will take effect in January after clearance from the World Trade Organization.

The move will hurt “Indian competitiveness in the EU market," said Ajay Kumar, an economist with the Confederation of Indian Textile Industry.

In an environment where overseas demand is dimming and local costs—be it labour, energy or borrowing expenses—are rising, members of the export association in Tirupur, also known as dollar city because of its focus on export revenue, are trying to maintain their grip on the Rs6,000 crore of exports to the EU (out of a total Rs11,600 crore).

“We now have one more rival to the already stiff competition Indian companies face from low-cost countries like Bangladesh and Vietnam," said Tanu Sharma of credit research firm Fitch Ratings India.

Some experts said the healthy 11% compounded average growth rate in India’s $36 billion domestic apparel market could close to double in 2015, as per Technopak Advisors’ data, making up for some of the erosion in export markets.

Six months ago, for instance, Tirupur-based Meridien launched its Indian brand to stall a revenue slump from the decline in overseas customers, order sizes and prices.

“We have a bullish domestic market where the opportunity is large," said Amit Gugnani, who focuses on the garment and textile industry at Technopak Advisors. “So I don’t see why Indian manufacturers have to get too worried (about Pakistan’s preferential EU status)."

Amritha Venketakrishnan and Reuters contributed to this story.