Prime Minister Atal Behari Vajpayee first made the treaty offer in Colombo in July, while President Kumaratunga today told mediapersons that Sri Lanka had ``no reservations'' about such a pact.

At the end of their meeting in the afternoon, both leaders issued ``appropriate instructions'' to their officials to get the treaty back on track.

Describing the agreement as ``path-breaking'', External Affairs Minister Jaswant Singh admitted the pact would not have been possible but for the vision and understanding shown by the two leaders. ``It is a step towards economic progress through economic integration,'' he said.

His colleague, Commerce Minister Ramakrishna Hegde, whose bureaucrats resisted concessions to Colombo until the last minute, acceptedthat the agreement was a ``model for SAARC countries for developing greater interaction.''

Sri Lankan Foreign Minister Lakshman Kadirgamar, who has been disturbed by the highly unequal import-export ratio between the two countries ($560 million : $47 million), said the pact had opened a new chapter in bilateral relations.

But until the meeting between Vajpayee and Kumaratunga, the free trade pact was effectively off, held up by differences on the period for phasing out tariffs and on the issue of value-addition to third-country goods, particularly on textiles.

The end result is a compromise formula that takes into account the concerns of both sides. India stuck to its guns by not allowing the inclusion of the garments sector in the ``negative list'' of imports, and also kept the overall textile industry mostly out of the treaty's ambit.

The value-addition norm for third-country goods that can enter India via Sri Lanka was fixed at 35 per cent, a compromise between the Indian demand for 50 per cent andthe Sri Lankan demand for 25 per cent.

Both sides also agreed that the treaty would come into force within three years in India and eight years in Sri Lanka.

The last-minute order by Vajpayee and Kumaratunga came as a surprise to most people, even to President K R Narayanan, whose prepared speech at the banquet for the Sri Lankan president originally included the line, ``Of fundamental importance among these (strategies and initiatives) is the proposal for a bilateral free trade area which is now being actively pursued...''

It was suitably amended later to suit the developments of the day.

But President Narayanan also went on to add: ``This is an imaginative concept with great promise for growth and diversification of trade, investment and other economic exchanges. India is committed to the realisation of this proposal, which we believe, could initiate a pattern for the South Asian region.''

The idea of India spurring momentum for economic growth in the region, not only by easing trade restrictionswith its neighbours, but also providing an incentive to foreign investors and entrepreneurs to do business here, is believed to have captured the imagination of the prime minister.

In the wake of the nuclear tests and the negative impact they generated, sources said the top leadership had realised that India had to be seen to be generous, and therefore non-threatening, especially to its neighbours. Freer trade could be the instrument to create a win-win situation for all sides.

Further, the sources added, if New Delhi could add substance to its ties with the smaller countries in South Asia, Pakistan's reluctance to follow suit and its persistence in linking trade with political issues like Kashmir would be exposed.

Vajpayee's offer at Colombo in July -- his first trip abroad as prime minister -- to put together a bilateral free trade treaty with Sri Lanka should be seen in this context.

Sri Lanka was the perfect first example to develop on this ``brotherhood of SAARC'' concept because it is not aleast developing nation (like Nepal, Bhutan, Maldives and Bangladesh), and therefore, New Delhi could not be accused of making concessions to countries that are already granted them under the WTO.

Nevertheless, bureaucrats in New Delhi nearly sabotaged political will by refusing to budge on the trade concessions to Colombo. In the end, the Sri Lankan side accepted New Delhi's bottomline, thereby enabling Kumaratunga to return home with a landmark treaty in her pocket.