Trade amongst the South Asian countries continues to be low despite tariff reductions under the region’s Free Trade Agreements, primarily due to the high transaction costs of trading. This study examines the case of India and Pakistan’s trade and transport facilitation in the larger context of South Asia. A framework for transaction cost analysis is developed, which quantifies and compares the costs of trade impediments incurred by Indian and Pakistani traders. Apart from analysing the conventional transaction costs identified in the South Asian context, the study also considers transaction costs emanating from the unique trade policy between India and Pakistan as the latter has not offered MFN status to the former. The study suggests policy measures that the two countries can adopt to lower transaction costs. It also suggests trade policy measures that can enhance India-Pakistan trade and trade integration in South Asia. The study, based on primary data gathered through an extensive field survey and secondary data analysis using published and unpublished data, will be of use to academicians, think tanks, policymakers and industry in and outside the South Asian region.