By Matthias Williams
NEW DELHI (Reuters) - The trade ministers of India and Pakistan meet in New Delhi on Wednesday to discuss measures to overhaul ragged commercial ties which should help bolster a fragile peace process between the nuclear armed neighbours.
Wednesday's meeting is part of this year's resumption of formal peace talks, known locally as the "composite dialogue," which were broken off after the Mumbai militant attacks in 2008 that killed 166 people and for which India partly blamed Pakistani spies.
Lasting peace between the two countries is seen as key to stability in the South Asian region and help a troubled transition in Afghanistan as NATO-led forces plan their military withdrawal.
For Pakistan, the talks between Makhdoom Amin Fahim and India's Anand Sharma may be a welcome distraction from a diplomatic crisis with its biggest ally and benefactor, the United States.
For India, the talks are a small step further to achieving what Prime Minister Manmohan Singh sees as his most important goal of permanent peace, although major issues such as the fate of the divided Kashmir region remain unresolved.
"There is no direct linkage between a successful trade meeting and success on the political front, or the Kashmir front, but eventually these things will feed into that wider process," said Siddharth Varadarajan, editor of the Hindu newspaper and a well-known foreign policy expert.
"I think both sides, for better or worse, have decided to press ahead with the low-hanging fruit and hope that this improves the atmospherics, hope that it improves the overall picture in South Asia," he said.
India and Pakistan may be home to some 1.4 billion people but bilateral trade flows are paltry -- a legacy of mistrust between the South Asian neighbours who have gone to war three times since their independence from Britain in 1947.
The achievements are likely to be modest -- from opening trading posts to stamping more business visas -- but even small moves can improve frayed ties.
Irritants abound. Trade across what is one of the world's most heavily militarized borders is severely restricted both in the number of items that are permitted to be bought and sold, and the hours during which the customs are open for business.
Exporters are forced to route the bulk of trade via a third party such as Dubai, raising business costs, slowing deliveries and inflating prices. Business leaders on both sides bemoan the untapped potential of hundreds of millions of new customers.
Islamabad wants India to lower what it says are unfair barriers to trade, such as cumbersome approval procedures for exporters selling anything from cement to fruit and vegetables.
Another sore point is India's continued opposition to a scheme proposed by the European Union to boost textile exports from areas of Pakistan ravaged by floods with duty waivers.
Europe's top trade official on Tuesday boosted expectations that India is ready to approve the scheme.
"We have also information ... whereby India would now be prepared to lift its veto," EU Trade Commissioner Karel De Gucht told EU lawmakers at the European Parliament, which must also approve the duty breaks.
Formal approval by India could follow at the World Trade Organization in early November and subsequently by the European Parliament, opening the way for European duties to be lifted on a list of Pakistani textiles and other products including ethanol as early as next January.
(Added reporting by Juliane von Reppert-Bismarck in Brussels; Editing by Alistair Scrutton and Jonathan Thatcher)