Hi Rajat,
As I understand, may be end result might be common for both of them. But, there is a fair difference the way result is computed. Product Proposal far more dynamic that of Item Proposal. If you look at Product Proposal, the system will automatically propose a list of products for a specific customer during sales document processing. This really entry help and an aid to sales team, b'coz in some industry the ordering pattern don't change for some specific customer. So, this will display/propose list of material as soon as you enter the customer in allowing sales doc type.
Have look on the following link, it might provide little SAP functional insight on both functionality:
If you still have any concerns, do let us know.
Thanks, JP