External Affairs Minister Jaswant Singh, in his opening remarks confirmed India's interest in such a free trade treaty, likely to come into effect in phases, saying that its proposed creation would ``prove to be an important milestone in our relations.''

Singh said India was ``convinced that the infrastructure sector and the field of hydrocarbons in particular'' offer immense scope for mutually beneficial cooperation.

Interestingly, Singh was expected to lead the Indian delegation even as deputy chairman of the Planning Commission, pointing to the interest New Delhi is taking in the bilateral relationship.

Sri Lanka's Foreign Minister Lakshman Kadirgamar pulled few punches in his own public statement, pointing out that the huge imbalance in bilateraltrade (about Rs 1,500 crore: Rs 50 crore in India's favour) was becoming a ``cause for concern.'' He said it was imperative that the Indian market gave Sri Lanka ``freer access'' and that ``certain impediments'' like high tariffs and excise duties be removed.

The political leadership in New Delhi seems quite keen on such a bilateral free trade area, since the Government is conscious of the fact that it needs to seen as being generous to its smaller neighbours. Also, India already has relatively free trade with the four least developed countries in South Asia (Maldives, Bhutan, Nepal and Bangladesh), something that is allowed under the WTO.

A bilateral treaty with Sri Lanka would mean that six out of seven countries in South Asia, with the exception of Pakistan, are keen on doing business with each other. ``By linking political problems such as Kashmir with trade & commerce, Islamabad would be seen to be weighing down economic movement in the region,'' the officials said.

Ministry of Commerce officialson the other hand are believed to have certain reservations on how such a free trade area will work in practice. Would Sri Lanka for example be allowed to import bulk tea from India, something Colombo has long been demanding since India is a large consumer of the brew. So far India is only allowed to import packaged tea.

A framework of cooperation in key areas such as tea, livestock development and small industries was also established, besides an increased line of credit under the sub-commission on trade, finance and investment. Talks on civil aviation, which include enhanced seat-sharing, will take place towards the end of February.