New Delhi, Dec. 29: The cabinet has approved the introduction of a pact with India’s neighbours from January 1 to promote free trade and economic ties in South Asia, home to nearly one-fifth of the world's population.

Commerce minister Kamal Nath said India would initially cut customs duties by 5 per cent on goods imported from Pakistan, Sri Lanka, Bangladesh, Maldives and Nepal after the launch of the South Asia Free Trade agreement (Safta).

Although some member-countries are yet to ratify the pact, officials said India would go ahead with its implementation from January 1. It hopes the neighbours will follow suit.

“India being a relatively developed economy, it will provide concessions to the least developed of the Saarc countries,” finance minister P. Chidambaram told reporters after the cabinet meeting that cleared the pact.

He said the agreement includes a mechanism for compensation of revenue losses arising from duty cuts and also for technical assistance.

However, the agreement maps out a negative list of sensitive goods on which tariffs will not be reduced to protect the interests of domestic producers. These items include agricultural products and goods manufactured by small-scale and medium enterprises.

“This is a first step towards a free-trade agreement with the neighbours,” Nath said.

The pact was first mooted in 1995 by the seven-nation South Asian Association for Regional Cooperation (Saarc), an economic grouping formed to reduce poverty, promote trade and fight terrorism. in the region.

Under the pact, Saarc’s developing nations ? Pakistan, India and Sri Lanka ? will cut tariffs to between zero and 5 per cent in the first seven years.

The least developed countries ? Bangladesh, Bhutan, Nepal and the Maldives ? have 10 years to complete the process. All members can have a list of sensitive items on which tariffs will not be reduced.

“To protect the interests of its domestic stakeholders, India has finalised two separate lists ? a longer list for non-LDCs like Pakistan and Sri Lanka. This has 884 items. A shorter one, for Bangladesh, Bhutan, Maldives and Nepal, has 763 items,” he said.