In a study released as South Asian leaders meet in Pakistan, the Confederation of Indian Industry said the seven nations had the potential to double intra-regional trade every five years from the current annual level of six billion dollars.
The report said that despite abundant natural and human resources, South Asia remained one of the least industrialised parts of the world mainly because there was no free trade or sense of economic interdependence.
The per capita income of the region's 1.4 billion people - more than a fifth of the total world population - was just 460 dollars against the world average of 7,000 dollars, the study said.
It said much of the responsibility for pulling South Asia out of poverty lay with India, Pakistan and Sri Lanka, which together account for 89 percent of the region's Gross Domestic Product.
South Asian leaders meeting in Islamabad were set to approve an agreement to start breaking down trade frontiers from 2006. The other countries in the bloc are Bangladesh, Bhutan, Maldives and Sri Lanka.
But Pakistan has blocked an Indian attempt to discuss a common currency, considering the idea premature.
The study said that India could take the initiative by permitting duty-free imports from other South Asian nations as the country was the biggest in the region and its trade balance would not get hit.
"Increased trade can help to achieve better trade relations or better balances with the rest of the world, because intra-regional trade can help in generating exporting surplus," the study said.
It said that a common fund should be set up to help South Asian nations carry out fiscal stabilisation programmes as all the economies were battling huge fiscal deficits and relatively low domestic savings.
The study also recommended that potential investors from South Asia be allowed to invest in Indian stock exchanges to boost the development of their capital markets and generate cash for industrial development.
In the farm sector, the study called for wholesale-trading and distribution centres for agricultural products from across the region and joint research.
"We also recommend an intra-regional treaty on investment promotion with a thrust on protection of investment. This will go a long-way in building confidence which is needed for promotion of intra-regional investment," the study said.
"This may also make South Asia an attractive place for global foreign direct investments," it said.
The study urged all the nations to move towards economic liberalisation, noting that free-market reforms in recent years by India and Bangladesh had boosted the two countries' industrial development, employment and exports.
Economic relations between Pakistan and India have been virtually frozen because of their bitter political rivalry, with a dispute over Kashmir remaining a sticking point since their independence from British rule in 1947.
But relations have been improving since April, and on the sidelines of the Islamabad summit the two countries held their first bilateral meetings since nearly coming to war in 2002 over Kashmir.
The regionwide free trade pact is likely to be especially beneficial for India and Pakistan, as illegal bilateral trade is estimated to be seven times higher than the official paltry 204 million dollars a year.