NEW DELHI—Chinese smartphone seller Xiaomi Corp. said Monday its handsets are now being assembled in India, as global electronics manufacturers look to ramp up production in the increasingly important and fast-growing market for their wares.

Xiaomi's phones will be put together in a plant run by Taiwanese contract manufacturer Foxconn, which over the weekend signed an agreement to spend $5 billion on factories and research and development in the western Indian state of Maharashtra.

The pair of developments delivered a boost to Indian Prime Minister Narendra's Modi's efforts to expand manufacturing, create jobs and drive economic growth in India, which has long lagged behind its East Asian neighbors in terms of industrial development.

As demand for electronics, especially smartphones, has accelerated in the world's second-most-populous nation in recent years, more companies have said they are looking to shift production here. But hurdles, such as poor transportation infrastructure and a lack of local components suppliers, remain.

Chinese phone makers Huawei Technologies Co. and Oppo Mobile Telecommunications Corp. have said they want produce in India. Samsung Electronics Co. recently said it invested around $80 million in an existing plant and is looking to open another, which would be its third in India.

India's Micromax Informatics Ltd., which has the biggest share of the cellphone market in terms of phones sold and now makes most of its handsets in China, has also said it wants to manufacture more phones locally.

For now, Xiaomi, said, it is importing all the parts for the low-cost model being made here.

"Right now we are assembling phones in India," said Xiaomi's India head, Manu Kumar Jain. "To manufacture the phone in India, the whole ecosystem would have to exist here. We're hopeful that this will eventually happen."

India's government says it is working to cut red tape, improve infrastructure and make the country a more attractive place for companies to invest.

Manufacturing now contributes 18% of economic output in India. Mr. Modi hopes to raise that to 25% by 2022. By comparison, 31% of China's gross domestic product comes from manufacturing. The proportion is 33% in Thailand and 22% in Indonesia.

India represents an important new battleground for global smartphone makers, as China's market has become increasingly saturated and competitive.

As prices have fallen, the number of smartphones sold in India has doubled in the past two years to 150 million. The market is projected to grow at around 40% a year for the next five years, according to research firm International Data Corp.

Xiaomi has been selling phones in India for about a year, in which time the country has become its second-biggest market outside China. The company has sold 3 million smartphones and tablets since it entered the market.

In a sign of its India focus, the company chose New Delhi for its first new- phone launch outside China. In April, it unveiled the $200 Mi 4i in the Indian capital.

For Xiaomi, "the benefits are clear" for making in India, Hugo Barra, the company's vice president in charge of global operations, said. Mr. Barra said the company would benefit from tax breaks and be able to deliver phones more quickly, allowing it to save on inventory costs.

Xiaomi, which sells smartphones similar to those made by Apple and high-end models from Samsung at a fraction of the cost, has risen over five years to become the world's third-largest seller of the devices, thanks almost entirely to sales in China.

Now it wants to take on its rivals by expanding manufacturing and sales outside its home country. Xiaomi recently started making phones in Brazil, another large developing country.

In India, Xiaomi's Redmi 2 Prime model, which sells for about $100, is being assembled by a Foxconn plant in the central state of Andhra Pradesh. Foxconn, known officially as Hon Hai Precision Industry Co. also assembles Apple Inc. iPhones and Sony Corp. PlayStation game consoles. It also makes Xiaomi phones in China.

If Foxconn follows through on its $5 billion investment plan, more of its clients may have their phones produced in India.

Xiaomi's Mr. Barra says that his company's presence in the country should help encourage others to set up shop. "The fact that we're here, and now manufacturing, allows that ecosystem to evolve faster."

Write to Sean McLain at sean.mclain@wsj.com

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