Efforts by longtime nuclear-armed foes Pakistan and India to liberalise their restrictive trade regimes have sent jitters across some Pakistani sectors which feel threatened by free trade with the neighbouring economic powerhouse.

Pakistan's Commerce Ministry is in the process of increasing the number of goods India can export to its neighbour. But some industries like pharmaceuticals feel cheap Indian goods will ravage local producers.

There will be a sudden downfall, said Riaz Hussain, General Secretary of the Pakistan Pharmaceutical Manufacturers' Association. He says the local industry is worth $1.64 billion (1.02 billion pound) and produces 90 percent of the drugs for the domestic market.

They will flood the market ... We feel that all finished products should be on the negative list, he said referring to a list of banned Indian goods.

The textile industry, which accounts for nearly 60 percent of Pakistan's exports, is also worried.

We are particularly concerned about synthetic fibre and synthetic made-ups that should be on the negative list, said Mohsin Aziz, chairman of the All Pakistan Textile Manufacturers' Association.

We are with the government on this but we can't open everything, said Abdul Waheed Khan, Director General of the Karachi-based Pakistan Automotive Manufacturers' Association.

The system should not be put into a sudden shock.

But in addition to some domestic opposition in Pakistan, there are other concerns. While India granted Pakistan Most Favoured Nation status in 1996, Pakistan has yet to reciprocate.

Pakistan Foreign Minister Hina Rabbani Khar said recently a decision had been taken in principle to accord MFN status to India, but officials say that should go hand in hand with New Delhi removing non-trade barriers against Pakistan goods.

Pakistan has long complained that Indian quality standards and customs procedures have hindered the flow of Pakistani goods into India.

Of the $1.4 billion in trade recorded in 2009/10, Indian exports to Pakistan stood at $1.2 billion while Pakistan exports totalled $268 million, according to official data.

And the economic disparity is stark. Pakistan reported 2.4 percent growth in gross domestic product in fiscal year 2010-11 while India reported 8.5 percent growth.

Since the 1960s, when Pakistan was an Asian tiger economy and India a basket case, India's economy has swelled to $1.06 trillion, more than eight times the size of Pakistan's $207 billion.

POLITICAL ISSUES

Trade has long been tied to political issues between the hostile neighbours, which have fought three wars since independence from Britain in 1947, two over Kashmir, the disputed Himalayan region at the heart of the their decades-old enmity.

Trade ties were severed after the second war in 1965 and have yet to recover fully.

But despite the challenges, the two now appear more keen to remove barriers to trade and the two countries' commerce ministries say trade could easily triple in three years.

India last month dropped opposition to EU tariff cuts offered to Pakistan on its textile goods in the wake of 2010's devastating floods, a move hailed by Islamabad as a big confidence-building measure by New Delhi.

Both sides are close on an accord for a more liberal business visa regime following an agreement to boost trade through at the Atari-Wagah border crossing by increasing trading hours and speeding cargo clearance.

Pakistan currently allows only 1,946 items from India, including things like cosmetics and spices.

But most aren't traded directly. Only 109 goods are allowed through Atari-Wagah, while the bulk is channelled via third countries such as Dubai and Singapore, slowing deliveries and increasing costs.

Restrictions and freight cost have encouraged smuggling in items like tyres and machine parts across their border and also through Afghanistan. Analysts estimate the smuggling at up to $2 billion, more than the legal trade.

A new list of items being prepared by the Pakistani Commerce Ministry would replace the current list of tradable items with a much smaller list of banned items. The list is still being negotiated.

FLURRY OF ACTIVITY

All this follows a flurry of trade meetings this year, including the first trip by a Pakistani commerce minister to India in more than three decades. Their commerce sectaries will meet next month, likely in New Delhi, for their second meeting this year.

Hopes are that progress in trade ties would help bolster a fragile peace process, which the two resumed in February. India broke off talks after the November 2008 attack on Mumbai by Pakistan-based militants who killed 166 people.

The United States has also been pushing Pakistan and India to improve relations, including trade ties, which it sees as vital for a stable South Asian region and helping a troubled transition in Afghanistan as foreign troops begin to withdraw.

There is an express wish today to deepen the economic engagement, which will be both rewarding for Pakistan and India, Indian Trade Minister Anand Sharma told Reuters on Tuesday.

Some Pakistani businessman could not agree more.

The poor masses of both the countries will get great benefit from the free trade between India and Pakistan, said S.M. Muneer, the president of the Karachi-based India-Pakistan Chamber of Commerce and Industry.

(Additional reporting Matthias Willaim in New Delhi; Editing by Chris Allbritton)