Deputy Prime Minister Lal Krishna Advani will lead the government side while a five-member delegation of the region's main separatist alliance, the All Parties Hurriyat Conference, will represent the Kashmiris.
Local media reported on Thursday New Delhi was likely to agree to some key demands of the separatists so that they were not to be seen returning from the talks empty-handed.
The five members of the Kashmiri delegation represent the moderate face of the Hurriyat and have been warned by hardliners and rebels that they will come to a "bad end" if they "bend to New Delhi".
The concessions could include a unilateral ceasefire against rebels, who have since 1989 been waging an armed rebellion against Indian rule in Kashmir at a cost of at least 40,000 lives; the release of political prisoners and the granting of permission for Hurriyat leaders to visit Pakistan.
Faruq has said that a ceasefire
will top the talks agenda
One of the Kashmiri leaders attending the first-ever high-level talks, Umar Faruq, said earlier this week a ceasefire would top the agenda of talks.
"(A ceasefire) is definitely on our agenda," said Faruq. "We want an end to violence as it will help push forward the peace process."
The separatists are led by cleric and senior separatist Maulana Abbas Ansari, who was elected as Hurriyat chief in July.
Besides Faruq, others in the team are former Hurriyat chief Abd al-Gani Bhat, low-profile leader Fazal Haque Qureshi, who is respected by separatists and rebels for his integrity, and Bilal Lone, the elder son of assassinated moderate separatist leader Abd al-Gani Lone.
Their involvement in talks comes at a time of damaging division between hardline and moderate separatists.
Sayyid Gilani (2nd L) has come out
against the two-way dialogue
In September, the hardliners expressed no confidence in Ansari and declared the staunchly pro-Pakistan Sayyid Ali Gilani as their head.
Gilani's faction say they are the real Hurriyat and oppose two-way talks between the government and Kashmiris, saying Pakistan needs to be included in the process.
While the Ansari-led faction does not enjoy the support of all the separatists opposed to Indian-rule in Kashmir, many Kashmiris who want to see an end to violence have welcomed the talks, saying the two sides have for the first time in 15 years broken the ice and moved forward.
The five cannot claim to represent the entire Kashmiri community, but do reflect the views of a significant number of the separatists opposed to Indian-rule in the region.
They represent four of the seven powerful parties forming the decision-making executive council of Hurriyat. Three other parties have neither opposed nor supported them.
Analysts have expressed doubt over the success of the talks because of the deep rift.
"In the absence of hardliners... moderates can't win peace for the region," warned analyst Showket Ahmed.
Thursday's talks follow a surprising turnaround by the Indian authorities in October, to allow Advani to hold formal talks with Hurriyat.
A soldier and a rebel were killed as fresh violence erupted in Indian Kashmir on Thursday.
The clash occurred in Paner village, near Bandipora town, 60km north of Srinagar, the summer capital of Jammu and Kashmir, police said.
"The fighting broke out when troops raided a militant hideout on a tip-off," a police spokesman said.
Exchange of fire lasted for two hours, he added.