The use of What as a relative pronoun

I was doing a TOEFL exercise and I stumbled on this particular error-analysis question:

In the Indus Valley, what is now Pakistan and western India, most dwellings had drains for waste disposal.

The use of "what" in that sentence is markedly correct, while "which" incorrect. Why is "what" correct in that use? Why not "which" that serves better as a relative pronoun?

Interesting question.

The use of what as a normal relative pronoun is common in some varieties of English, but non-standard:

? The man what I saw was wearing a hat

But what is normal as a fused relative pronoun, meaning "the one which", or "the thing which", or (more literary) "that which", eg.

I gave him what he wanted.

The example you give is tricky, because it is possible to read it as a normal relative clause qualifying "the Indus valley", and in that construction, what would be non-standard, and which would be normal.

But it is more natural to read it as a free relative clause, paraphrasable as "In the Indus valley, the region which is now Pakistan and Western India". That seems the more natural reading to me, and I'm sure it's what the writers of the test intended.

But I can't work out why I think it is a more natural reading. I think this construction is quite common when talking about historical places, but I haven't found way to verify this.