"The cabinet has cleared the proposal to hike foreign direct investment (FDI) in the telecom sector to 74 percent to meet the funding needs of the growing industry," Finance Minister Palaniappan Chidambaram told reporters after a cabinet meeting.

India has emerged as the second-fastest growing mobile phone market after China and it has an ambitious target of adding some 200-250 million by 2007, compared with about 95 million now.

This breakneck expansion would require investments of nearly 1.5 trillion rupees (34 billion dollars), according to the telecommunication ministry.

According to US-based investment bank Morgan Stanley, India's mobile market is expected to grow at 40 percent a year until 2007.

"The FDI relaxation coupled with rapid local market growth could really ignite interest in the Indian telecommunication industrys," said Sanjay Mehta, a partner with Ernst and Young India consultancy.

"It sends out a very positive signal to foreign investors," he added.

India had 14 private phone companies when it opened up its cellular services in the mid-1990s. Since then, four have become dominant players -- Bharti Televentures which has a tie-up with Singapore Telecom; Essar, which has a deal with Hong Kong-based Hutchison Whampoa, alongside the Sterling and Tata groups.

With the proliferation of mobile phones, the telephone penetration rate in India has shot up to eight percent from less than three percent five years ago but that is still well below the global average of around 15 percent.