NEW DELHI, July 8: Indian Finance Minister P. Chidambaram on Thursday allocated special funds for the controversial Baglihar hydroelectric dam in occupied Kashmir, but Pakistani officials said they were not opposed to the project, only to its design.

"The government will provide special assistance to the State of Jammu & Kashmir to have a reasonable plan size," Mr Chidambaram said in his budget speech. "It will also provide financial support for the long pending Baglihar project."

India and Pakistan held specially arranged talks between their senior officials to thrash out their dispute over the 450mw-project on the Chenab river. Both sides reported progress in the talks but left the final description to be stated by their respective governments.

"The talks on this issue in New Delhi were generally positive," a Pakistani official told Dawn in response to a query on Mr Chidambaram's reference to the Baglihar project. "Pakistan does not object to the project. But we feel the design could affect the flow of water to our side of the border."

Pakistan had earlier complained that the project was being constructed in violation of the Indus Water Treaty, which gave it exclusive rights to Chenab's waters and claimed that the new gateways would withhold the flow of water to Pakistan.

Mr Chidambaram also announced financial measures to promote industry in Jammu and Kashmir. "New industrial undertakings in Jammu & Kashmir enjoyed 100 per cent tax exemption if they commenced production before March 31, 2004. Pending a detailed examination of the incentives required to promote industrial development in Jammu & Kashmir, I propose to extend the date to March 31, 2005," he said.