India's government likes to point to the boom in mobile telephony as a sign of the nation's economic take-off. More than 1.5m mobile phone users sign up each month; there are now around 54m subscribers in India from around 10m just three years ago.

More affordable handsets and some of the world's cheapest call rates have helped propel overall telephone ownership to 100m users this month, making India's phone network the world's fifth-largest.

Mobile operators on Tuesday hailed this “telecom success story” in full-page newspaper advertisements. Dayanidhi Maran, India's telecommunications minister who is praised as a “visionary” in the ads, has aimed at 250m telephone users by 2007.

But even if India crosses that mark, the sheer scale of its 1bn-plus population means there will still be around 750m people without their own phone connection. Mr Maran believes one way forward is to target rural India, where most Indians live.

Cracking India's rural consumer market has become a holy grail for many foreign and local companies. A lesson among those who have had some success is to sell low-cost products and let the volumes take care of profit margins.

The idea has now crept into the mobile phone industry. Yesterday, Mr Maran unveiled an “ultra low-cost” mobile handset priced below $40, half the cost of the cheapest models currently on sale in India.

“The high price of the handset has been the single biggest hurdle for consumer entry into the mobile market,” Sunil Mittal, head of Indian mobile network operator Bharti Televentures, told an industry summit early this year.

The new low-cost phone, sold by Motorola of the US, has standard features including text messaging. Mr Maran said the phone would be “the crucial factor” in reaching the 250m user target. He also urged Motorola to follow the lead of Finland's Nokia which set up its first handset factory in India this month.

Jouni Hartikainen, president and chief executive of Elcoteq, a Finnish handset manufacturer, says India's low-cost labour and software development skills could make the country a base for manufacturing cheaper handsets. Software is the main cost in a new handset.

“To make a low-cost phone you need as few middlemen as possible,” says Mr Hartikainen. “Manufacturers, network operators and end-users need to question the whole value chain.”

Indian mobile network operators are getting used to selling rock-bottom call plans. Average revenues per user have dropped from Rs1,390 a month in 2000 to Rs407 ($9, €7, £5) a month today. Yet Bharti, for instance, already runs a profitable operation despite the bulk of its customers buying pre-paid phone cards that cost around $5.

According to Pankaj Mohindroo, head of the Indian Cellular Association, which represents handset makers, the minimum mobile phone entry cost for the average rural worker is Rs200 excluding handset costs. But Mr Mohindroo remains sceptical about whether a low-cost phone will be the product that cracks the rural Indian market. The main problem, he says, is not affordability but network coverage and the need for more aggressive marketing. In north India, there are about 300m urban dwellers. Mr Mohindroo says out of these, there are 16m mobile phone users concentrated in Delhi and Punjab. “We have a long way to go.”

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