Atlantic Council in its report said India and Pakistan need to shift this trajectory of military spending and turn toward greater confidence building.
They can do this by many means, including: increased people-to-people contacts and thus eliminate old stereotypes that fuel fears of each other; direct communications between their militaries, through exchange visits and more transparency about their military plans and movements.
Open borders for trade and tourism and joint investments in energy, water, and export industries would also help.
"It is clear that increased spending has not brought foolproof security to either country. Indeed, their threats have changed much over the decades. Internal militancy and insurgencies continue to bedevil both states," said the report authored by Shuja Nawaz and Mohan Guruswamy.
"The production of newer missiles, and tactical nuclear weapons adds further volatility and danger to this mix. Unless both sides can begin a dialogue on economic and military relations, they will continue to feed their defence budgets, increasing the opportunity costs of such expenditures."
Writing a forward for the report, "India and Pakistan: The Opportunity Cost of Conflict", former Secretary of State George P Shultz said the cost of the military itself is substantial.
"But the cost of arms and armies is only part of the problem. Here we have two countries full of competent people and many complementary capabilities. In this setting, trade should be booming, much to the benefit of people in both countries. Instead, trade is at a mere trickle," he wrote.
The report argues that bilateral trade between India and Pakistan can easily evolve into a major economic factor, if both countries seriously proceeded with it.
"While India and Pakistan may still be far away from evolving open borders to allow people to move freely, they could have open borders for trade. A big bilateral trade then invests in the peace constituencies in both countries. Business relationships make nations more pragmatic and accommodating," it said.
"India and Pakistan seriously need to invest efforts in expanding trade and investment to the fullest extent possible. An annual bilateral trade between India and Pakistan may result in a GDP trajectory that could be as much as 1.5 per cent more than present," the report said.
"This will represent a fourfold increase in trade and both sides have much to gain in terms of lower prices and timely supplies," said the Atlantic Council.
It added that a more cooperative climate will also enable both countries to jointly develop hydroelectric power in the Indus basin.