Long considered the home of call centers and cheap outsourcing, India is entering a new stage of development with home-grown telecom equipment vendors emerging in their own right.

Following the lead of startups like Tejas Networks India Ltd., a Bangalore-based optical equipment vendor set up in 2000, new companies are setting up shop in India not just to save money, but to tap a domestic market bursting with pent-up demand. And they're attracting foreign investment to do it.

In addition to the $800 million it will splash out on its India operations, {dirlink 2|39} (Nasdaq: INTC) said last week it's setting up Intel Capital India Technology, a $250 million venture fund targeting Indian startups. And of the $1 billion {dirlink 2|19} (Nasdaq: CSCO) pledged to spend in India during the next three years, it's set aside $100 million for venture capital. (See Intel Touts $250M and Cisco Pays to Play in India.)

Silicon Valley law firm Wilson Sonsini Goodrich & Rosati, which advises technology startups and has been focused on the Indian market, is seeing a "significant increase" in the number of startups that operate beyond the familiar call-center model. "There are a lot of venture funds that are looking at the telecom side," says Raj Judge, head of the firm's India practice group.

As Gururaj "Desh" Deshpande, chairman of Sycamore Networks Inc. and Tejas, puts it, investment in India has come in "waves." Offshoring was the first wave, followed by Bangalore-based development centers for U.S. startups. Now there's a third wave: telecom startups established directly in India.

For a market that had few homegrown vendors -- a legacy of British colonialism -- a raft of companies is coming into their own, such as Tejas; Ethernet transport and broadband wireless vendor Telsima Corp.; and mobile applications software vendor July Systems Inc.; and older companies established in the 90s like Sasken Communication Technologies Ltd., which develops DSL software and wireless protocol stacks, and Midas Communication Technologies Pvt. Ltd., a wireless local loop and broadband access equipment maker.

Then there's the new breed of startups like Eisodus Networks Pvt. Ltd., which is developing equipment for converged services over Ethernet and has raised $500,000 in first-round funding to take it out of the incubator at Mumbai's Institute of Technology.

This doesn't mean the first two waves are subsiding -- Pune-based outsourcing software provider Persistent Systems Pvt. Ltd. just raised $13.8 million from Norwest Venture Partners -- but Judge notes a shift from what industry execs like to call "cost leveraging," to funding companies that will generate their own business.

It's an outgrowth of the earlier investment waves, says Sanjay Nayak, Tejas's CEO and managing director. "So many large companies were doing outsourcing that a huge talent pool got exposed to their knowledge," he says. "We could literally pinpoint good people with experience."

And with the market growing, many see the need for products tailor-made for India -- a low revenue-per-user, non-English-speaking economy with a huge rural population. Intel's new fund, for instance, aims to help "nurture important technologies and products for local use," an Intel spokesman says.

India's local startups have the benefit of a "greenfield" start, Nayak says, noting that in some cases companies such as Eisodus have been able to "leapfrog" over technologies used in North America and Europe. "That's the sort of environment startups need. You push the technologies and vendors to the max," he says.

According to A.T. Kearney Inc.'s year-end Foreign Direct Investment Confidence Index, India is now second only to China as an attraction for foreign direct investment, having overtaken the United States. India received $5.3 billion last year -- still a long way behind China's whopping $60.6 billion -- and topped the list for investor optimism, with more than 47 percent expressing a positive change in outlook about the country compared to last year.

India's boost stems partly from a government decision to up the country's foreign direct investment limit for the telecom sector. Since the domestic market is too small to keep pace with accelerating demand for telecom services, The Ministry of Communications and IT submitted a proposal, approved last month, to raise the cap on foreign investment to 74 percent from 49 percent.

India hopes the extra money will help build out the country's telecom infrastructure to tackle waiting lists for telephone lines. And that's good news for India's equipment and software vendors. "We get a bigger market volume," says Tejas's Nayak. To encourage the development of those local vendors, the government also wants carriers to use gear that's manufactured in India. (See India Blocks Foreign Telecom Gear.)

The hardware space is a tougher nut to crack than software, but as one of the country's first equipment vendors, Tejas is showing it can be done. It builds Sonet/SDH gear with Ethernet interfaces and has deployed its kit in all of India's major carriers, including Bharat Sanchar Nigam Ltd. (BSNL), Mahanagar Telephone Nigam Ltd. (MTNL), Tata Teleservices Ltd., RailTel, and Videsh Sanchar Nigam Ltd. (VSNL) (NYSE: VSL). Tejas has more than 25 customers in India and abroad, generating 470 million rupees (US$10.1 million) in revenues, a figure it expects to triple in the next year. Its investors include Battery Ventures, Intel, and Sycamore.

"We need a few more success stories in the equipment space" to help the industry blossom, Nayak says. "All the right ingredients are in place."

— Nicole Willing, Reporter, Light Reading