The government is likely to increase the foreign direct investment cap in the telecom sector to 74 per cent from 49 per cent in its annual Budget on Friday, industry officials said.

They said Finance Minister Jaswant Singh could announce a cut in customs duties on telecoms equipment and mobile handsets in the 2003/04 (April-March) Budget.

"We're expecting the FDI cap will be increased to 74 per cent as that will help attract more investment in the sector," Akhil Gupta, joint managing director at Bharti Tele-Ventures Ltd, India's largest cellular firm, told Reuters.

New Delhi-based Bharti is 16 per cent owned by Singapore Telecommunications Ltd.

The nascent industry, billed as one of the fastest growing telecoms markets globally, has attracted many global players because of its growth prospects and a low tele-density of 4.5 per cent compared with a global average of 15 per cent.

"You need that relaxation in the FDI limit to attract more investments in the sector, especially when secondary markets are lacklustre and their appetite for telecom issues is also low," said Ramchandra Hegde, telecoms analyst at Enam Securities.

Telecom firms have urged the government to remove customs duties on telecom equipment such as base stations and switches from five per cent to help reduce infrastructure costs.

"We're expecting the basic import duty to be brought down to zero so that equipment becomes cheaper," said SC Khanna, secretary general at the Association of Basic Telecom Operators.

"This will help reduce the cost of services and boost tele-density."

In addition to the five per cent customs duty, phone companies also shell out a countervailing duty of 16 per cent on equipment.

The association for handset sellers, which is fighting to shake off the smuggled market's grip on new buyers, is hoping the basic import duty on mobiles will be reduced to between zero and five per cent from 10 per cent.

"This will spur the legal market and the entry barrier for the industry will go down," said Pankaj Mohindroo, president for the Indian Cellular Association.