Mumbai: India and Pakistan are all set to take their bilateral trade relationship to the next level by setting a clear cut timeline for signing a preferential trade agreement at the earliest, after Pakistan promised to grant most favoured nation status (MFN), Indian commerce secretary Rahul Khullar said.

A paramilitary soldier stands guard as a truck crosses into Pakistan from India, at the Wagah border (Reuters)

“We are open to preparing a road map with Pakistan for preferential trading arrangements under the Safta (South Asian Free Trade Agreement) process. I hope that through our discussions starting today, we shall achieve a greater clarity on such preferential trading arrangements," Khullar said in his opening statement.

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Unlike a free-trade agreement, a preferential trade agreement (PTA) is a pact between countries where they agree to reduce tariffs only for certain traded products. Khullar added that the goal should be to reach peak tariff levels of “no more than 5%" for all major traded and tradable commodities. “We hope to positively engage and jointly work to put such preferential trade arrangements in place at the very earliest," he said.

The offer to upgrade trade ties to a PTA was made when Indian Prime Minister Manmohan Singh met his Pakistani counterpart Yousuf Raza Gilani on the sidelines of a South Asian regional summit in the Maldives last week where both sides had declared their intention to open a “new chapter"at future talks between the rival nations. It followed Pakistan moving to grant India MFN status.

Khullar welcomed the decision by the Pakistan government “to accord MFN status to India and to the mandate given for full normalization of bilateral trade relations as also meeting of all legal obligations." Though there was confusion with contradictory statements coming from Pakistan on whether it has decided to accord MFN status to India, later Pakistan officials clarified that this was the case.

While India granted equal treatment to Pakistan when it comes to trade in 1996 as any other country, as per World Trade Organisation requirements, Pakistan restricts trade with India by allowing import of just 1,900 items.

Improving trade ties, hostage in the past to disputes between the neighbours, will be “a significant confidence-building measure between the two countries," said Biswajit Dhar, director general of the Research and Information Systems for Developing Countries think-tank.

Both sides have been trying to narrow their mutual trust deficit, the result of the November 2008 Mumbai attack in which 166 people were killed when Pakistan-based gunmen targeted multiple locations in India’s financial capital.

“Improved trade means improved economy and that means more jobs and less unemployed young people getting involved in terrorism," Dhar said. “This is how we need to sell this to Pakistan. India being the biggest economy in the region, India has to do most of the running in this case."

Moving to normalize trade ties with India was “a tactical move than a radical change of heart," said Lalit Mansingh, former foreign secretary.

“They are under pressure from the Americans," Mansingh said, referring to the US wanting the country to cut links with terrorist groups cultivated by some sections of the Pakistani establishment for leverage against Afghanistan and India.

PTI contributed to this story.