The auction of 3G spectrum will propel India firmly into the Internet era where rolling out landline broadband networks has been costly and will heat up the battle for customers in the world’s fastest-growing mobile market.

Leading Indian operators

Bharti Airtel, Reliance and foreign-backed Vodafone Essar and Tata DoCoMo are among the companies bidding in the 3G auction, the largest such sale globally in

recent years, “The auction has started and it is going smoothly,” a telecom ministry official, who declined to be identified, said.

The government has budgeted

to bring in at least INR 350 billion

or eight billion dollars from the sell-off of 3G airwaves and a follow-on auction of broadband wireless

access spectrum that could take days or even weeks.

“The major operators will bid aggressively. It will be very important for them to win 3G slots to retain their high-end subscribers,” Kunal Bajaj, analyst at consultancy BDA Connect, said.

The reserve price has been set at INR 35 billion or $789 million for each of the three pan-India 3G licences across 22 zones while the floor price for broadband spectrum that will begin two days after the 3G auction ends is INR 17.5 billion. Only two broadband slots will be up for sale.

There are a total of nine operators bidding for 3G spectrum in the country of 1.2 billion people. But analysts expect the bidding to go much higher because of the severe crunch for spectrum — the airwaves that carry mobile traffic — in the congested mobile market which has over a dozen players.

“The bids should be double (the base price),” forecast Romal Shetty, executive director for telecommunications at KPMG’s Indian unit.

3G allows mobile phone users to surf the Internet, video conference and download music, video and other content at a much faster pace than the current second-generation or 2G service.

The auction is being carried out using Internet-based bidding with each contender having a password to obtain access to the sale process.

One government official told India’s Economic Times newspaper the 3G auction could last 15 to 20 days while the subsequent broadband sale could prolong the process to 45 days.

In 2000, Britain’s 3G auction lasted a marathon seven weeks and involved 50 bidding rounds.

Under the auction rules, bidders cannot name a price — they can only accept or reject the price posted in each round. “It will be the auctioneer who will drive the prices,” a government official said.

The addition of 3G is seen as giving a major boost to a mobile market already growing by up to 20 million subscribers a month. Mobile subscribers totalled 563.73 million at the last count. But the auction could strain balance sheets of mobile companies that have already been undermined by fierce tariff battles which have reduced calling costs to less than a cent a minute, analysts say.

India is the biggest major

economy not to have widespread 3G services. Fellow emerging

market giant China started offering 3G services last year.

The winners will be awarded spectrum in September, which means rollout of 3G services will be possible only by the end of 2010 or early 2011.

For at least the first year, the main focus is expected to be on improving call quality.

3G uptake in India is expected to be slow in the initial stages as 3G handsets are costlier than second-generation handsets.