India and Japan, two of Asia's largest economies, signed a landmark free trade agreement (FTA) on Wednesday, paving way for the elimination of tariffs on more than 90 percent of goods traded between the two countries over the next decade.

The agreement was signed in Tokyo by India’s Commerce Minister Anand Sharma and Japanese Foreign Minister Seiji Maehara. The pact will come into force after the Japanese parliament approves it.

New Delhi and Tokyo have been locked in talks over the Comprehensive Economic Partnership Agreement (CEPA) negotiations to liberalize mutual trade since 2007.

The pact opens a huge window of opportunity for India, which accounts for just one percent of Japan's trade with the rest of the world. Meanwhile, for Japan, liberalization of trade with India, the burgeoning consumer giant with a billion-plus population, comes at an opportune time. Japan this week officially lost its position as the second largest economy after the U.S. to China as Tokyo said GDP growth rate fell 1.1 percent in the fourth quarter of 2010.

The newly minted trade pact envisions the scrapping of tariffs in sectors like auto parts and machinery as well as farm and fisheries products, which will be mutually beneficial to both economies.

Japanese auto industry will cheer the planned scrapping of the 10 percent tariff levied by India on Japanese exports of lithium ion batteries, DVD players and tractors over the next decade. Likewise Japan will scrap tariffs it imposes on Indian tea and other farm products.

We have noted in our mind that this will usher in a new era of economic engagement, which will bring development, innovation and also prosperity in both of our societies, Sharma said.

He said the pact paves the way for broader cooperation in bilateral trade and investment. The two sides said issues such as allowing Indian nationals to work in Japan’s health industry will be discussed. India also agreed to dilute its restrictions on Japanese firms investing in Indian retail and telecommunication sectors. In return Japan will expedite processes for approving the sale of Indian-made generic drugs.

Bilateral trade between the two countries, which was worth $10.3 billion in 2009-10, will get a major shot in the arm with the conclusion of the deal. As many as 9,000 products ranging from steel and apparel to drugs and machinery could be traded either without duty or at substantially reduced tariffs. Japanese exports to India mainly comprise vehicles and electronic goods while Indian exports to Japan include oil, steel and jewelry.