India and China have pledged to double trade to $40bn (£21bn) a year by 2010 during talks between Indian PM Manmohan Singh and Chinese President Hu Jintao.
Mr Hu also said the two sides would continue efforts to solve their long-running border disputes.
He was speaking in the capital Delhi during the first visit to India by a Chinese head of state for 10 years.
China and India have overcome many hurdles in recent years but differences remain, correspondents say.
The BBC's Steve Schifferes says the two sides have different objectives in the trade deal.
China wants to boost its exports of manufactured goods to developing countries, while Indian firms, which have a comparative advantage in outsourcing of business and IT services, want more investment in China.
'Peace and tranquillity'
Mr Singh said there was enough space for the two countries to develop together in a "mutually supportive manner" after talks with President Hu.
"We will endeavour to raise the volume of bilateral trade to $40bn by 2010 and encourage two-way investment flows," the Indian prime minister told a joint news conference in Delhi.
That objective was reinforced by Mr Hu, who said the two sides would "sign an agreement on investment, promotion and protection between the two countries".
During their talks, the two leaders had decided "to speed up the joint feasibility study on a regional trade arrangement", Mr Hu said.
Last year, China formally recognised the border state of Sikkim as part of India. The two sides also agreed to continue to work together to resolve other border issues.
A Tibetan activist is detained outside the talks venue in Delhi
Mr Hu said that that work would continue. "Pending an eventual solution to the boundary question, the two sides need to continue their efforts to work together to maintain peace and tranquillity in the border areas," he said.
Meanwhile, more than 40 Tibetans have been arrested in various parts of Delhi for protesting against President Hu's visit to India and alleged Chinese atrocities in Tibet.
Police in Delhi told the BBC that a group of 10 Tibetan protesters were arrested when they were trying to approach Hyderabad House, the venue of talks between Prime Minister Singh and President Hu.
Members of other Tibetan groups were held when they tried to approach the hotel in which the president was staying.
India now recognises Tibet as part of China, but still hosts more than 100,000 Tibetans, including the Tibetan government-in-exile led by the Dalai Lama.
Mr Hu arrived in Delhi on Monday evening. His four-day trip also includes a visit to the financial capital, Mumbai (Bombay).
Ties have been strained despite growing trade
Rising trade between two of the world's fastest growing economies is encouraging vastly improved ties, the BBC's Sanjoy Majumder in Delhi says.
Annual bilateral trade which was worth only about $250m as recently as the 1990s has mushroomed in recent years.
But our correspondent says that mutual economic interests are often undermined by politics, given that the two countries have ambitions of being the unrivalled regional superpower.
The Asian giants fought a brief border war in 1962, which ended with a decisive victory for the Chinese, an event which many Indians still view as traumatic.
India's border state of Arunachal Pradesh is still claimed by China, while India lays claim to the Aksai Chin region in the north of Kashmir, which is administered by China.
Delhi is also suspicious of China's relationship with its long-time rival Pakistan - which Mr Hu is due to visit after his trip to India.
China, meanwhile, is concerned about Delhi's growing ties with Washington, especially a landmark nuclear agreement which allows India access to civilian nuclear technology.
Both India and China have produced staggering economic growth in recent years, but India continues to lag behind on many fronts, correspondents say.
China has a literacy rate of 95%, compared with India's 68%. Indian exports of manufactured goods in the financial year ending last March were valued at $71bn, compared with $713bn for China.