In the concluding part of an exclusive interview with rediff.com Pakistan's High Commissioner to India Aziz Ahmed Khan discusses peace initiatives, Most Favoured Nation status for India and the US decision to sell F-16s to Pakistan.

After asserting that Dawood Ibrahim [Images] is not in Pakistan and there are no issues other than Kashmir between the two nations, Khan told told Senior Editor Sheela Bhatt that India's overwhelming superiority in conventional forces was forcing Pakistan to acquire weapons.

Part I: 'There is a trust deficit'

What do you think of the Srinagar-Muzaffarabad bus service?

It a good CBM (confidence building measure). Good for the Kashmiri people. It will be helpful to the divided families and will generate goodwill. It will be helpful towards the solution of the Kashmir problem.

But there are many restrictions. Non-Kashmiris can't travel on the bus.

Only 35 to 40 passengers can be accommodated on one bus. Now if you suddenly ask how and when would one billion people go, I would say be patient. Let the Kashmiris meet each other. People who are living in the immediate vicinity and people who are divided, let them go. This is the CBM for them. You can take a plane and go to Lahore [Images] anytime you want.

There are large number of CBMs which you can initiate. There is no movement on Most Favoured Nation status for India. Why don't you give Dawood Ibrahim back to India?

We have given the suitable answers. We have said we have looked around. He is not there. If you have evidence then provide it to us. We have to look forward. Most important, we have to bridge the trust deficit.

As far as MFN status is concerned, at the technical level meeting our commerce secretary has given India some of our apprehensions. We want a level playing field.

Can India expect MFN status soon?

What you should expect is that from January 1, 2006, SAFTA (South Asia Free Trade Agreement) is coming into force and it is much more than MFN.

What about a transit route to Afghanistan?

Everything will be discussed. Let us keep moving forward.

When your Prime Minister Shaukat Aziz came to India he spoke about the Iran gas pipeline issue at length. It is interesting that Pakistan is taking the pipeline as a stand-alone issue and not linking it with Kashmir.

The pipeline project is not a bilateral project; it is a tri-lateral project. It is not a new project, it has been discussed for years. We have agreed to the transit of the pipeline. It will improve relations. It will create better understanding. On your side it was being linked with MFN and other things. We said please don't link it with other things for which we are already having a dialogue.

Is Pakistan interested because it wants gas and also $600 million in transit fees?

The figure of $600 million is highly exaggerated. First of all, nothing is being signed. The transit fees will be governed by several factors. How much gas do you want? How much will Iran supply?

As far as we are concerned Prime Minister Aziz has said we need gas. If India is interested the economies of scale will work, benefit both countries and create economical linkages.

The US has expressed reservations about investment in Iran.

Let us see how negotiations go. I think things are going well. We are discussing pipelines with Turkmenistan and Afghanistan too. We have invited India. The Asian Development Bank [Get Quote] is also involved. Several meetings have taken place. It will be beneficial for you too. You are most welcome to it.

Everybody is talking about President Musharraf's cricket diplomacy.

He is very found of sports. I remember he turned up for a short while for the Rawalpindi match. He met the Indian players and knew each player's game which showed his level of interest.

Is Kashmir the only issue? What is the second biggest issue between India and Pakistan?

Let me put you a question: Do you think there is any other issue between India and Pakistan?

What about economic relations?

They are moving forward. Many meetings have taken place.

Jihadi terrorism has been growing in Pakistan. America has expressed its concern.

The Pakistani people are an overwhelmingly -- almost to the extent of 100% -- moderate people. They are for enlightened moderation as President Musharraf has outlined. They support it. There is a small fringe, and you know the circumstances that lead to this situation. The government of Pakistan is very categorically saying it will not allow such activities.

What about nuclear proliferation? Your minister Sheikh Rashid has accepted that Pakistani scientists sold nuclear technology to Iran.

It was clarified that was not what he meant. He was misquoted in the press. Leave that subject behind.

Has General Musharraf's seven-point formula for resolving the Kashmir issue been shelved for now?

No, no, no, again you have misunderstood. Please go back and listen to his speech. He was saying this is food for thought. He was talking about intellectuals, opinion makers, analysts and political people. All of them should think about the various options. When you are having discussions people should think aloud. People should come out with what can be different solutions.

It was a food for thought proposal. It was not a proposal, which was presented across the negotiating table. It is for you to discuss this is possible or that is possible. It is just a part of the process.

While proposing solutions for Kashmir, why do Pakistani analysts overlook the unanimously passed resolution by the Indian Parliament led by the Narasimha Rao government, which claims sovereignty not just over Jammu and Kashmir [Images] but also over the part of Kashmir under Pakistan's occupation, even the Northern Areas.

You forget Pakistan cannot also overlook not one but several United Nations resolutions which were agreed to by India and by Pakistan and the entire international community.

Has the peace process led to competition to acquire arms?

We have always said there should not be any arms race. We should discuss mutual, balanced reduction of the armed forces for peace and security. There are two issues discussed at the foreign secretary level. One is Kashmir, the other is peace and security.

Under peace and security we are not only talking about nuclear Confidence Building Measures, we are also talking about conventional CBMs. We are discussing how we should not indulge in the arms race, how we should reduce levels of the armed forces so that those resources could be diverted towards the economic benefits of the poorest sections of both countries.

What is actually happening is that America is about to give you F-16s. It is worrying India.

Well, just compare the force levels of Pakistan and India and see whether it should worry us or worry India.

But compare the populations also.

Not population, it is a question of forces. You have overwhelmingly large forces. And that is worrying us and pushes us to acquire weapons. If you stop doing it, we will stop doing it also.

Photograph: Prakash Singh/AFP/Getty Images

Image: Uday Kuckian