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Can India revive the iron ore market?

As India embarks on an aggressive drive to become a manufacturing powerhouse and revamp its ailing infrastructure, Asia's third-largest economy may emerge as bright spot for iron ore demand.

"India comes up as an alternative buyer. It is a country growing in terms of steel and iron ore demand so that might be an area to keep an eye on," Annalisa Jeffries, associate editorial director for Asia metals at Platts, told CNBC on Friday.

The nation's potential growth could be the long-awaited catalyst to knock beleaguered iron ore prices out of their bear market.

Prices of the commodity, a vital ingredient for steelmaking, tumbled to $43.4 a ton this week, according to the Steel Index—the weakest reading on record. At blame were the usual suspects: excess supply as low-cost miners like BHP Billiton and Vale continue to churn out output and dwindling demand from China, the world's largest iron ore importer.

Even more gloom is looming over the horizon, with Fitch Ratings predicting more than 145 million metric tons of new supply next year, according to a statement on Thursday. Meanwhile, Jeffries warned prices could go below $40 next year based on pessimistic views from steel mills in China and traders.

While the U.K.'s Vedanta Resources is one of the only major foreign miners active in India, Jeffries believes that other heavyweight firms could gradually shift their focus to India.

"It's interesting to see that trend. Going back to 2008-2010, India used to be one of the biggest exporter of iron ore and now the reverse has happened."

Indeed, a 2011 ban on domestic mining in the mineral-rich states of Karnataka, Odisha and Goa led to a severe supply deficit, resulting in a need for foreign ore. Imports are already on the rise, hitting a record of more than 15 million metric tons during the 2014-2015 financial year.

While the ban has since been lifted, output caps have been imposed, which further underpins import growth. In Goa, for instance, iron-ore production can't exceed 20 million tons per year and each miner is allocated a specific amount. The cap is 5.5 million tons for Vedanta, for example.

Prime Minister Modi's decision to triple spending on roads, highways and other public infrastructure projects could boost steel consumption by 7-8 percent in the 2016 calendar year, versus an estimated 4 percent rise this year, Fitch said in a note last week.

An iron ore mine in Goa, India
Abhijit Bhatlekar | Mint | Getty Images
An iron ore mine in Goa, India

"It is feasible to consider India as new catalyst for iron ore demand. India has the potential to follow same growth trajectory we saw in China over the past decade," said David Lennox, resources analyst at Fat Prophets.

However, New Delhi is unlikely to overtake Beijing anytime soon due to a series of protectionist measures aimed at protecting the profitability of Indian steel producers, he warned. It also remains to be seen if the feverish pace witnessed in China over the past two decades can be replicated in India.

In reaction to a flood of steel imports over the past year, New Delhi levied a 20 percent safeguard duty on imports in September after raising custom duties twice this year.

"Like every country going through an economic boom, you want to keep as much of it in the country. I do believe that India will do that as much as possible even if it costs them more instead of importing cheaper resources," Lennox said.

Former Rio Tinto boss Tom Albanese echoed those sentiments, saying India's iron ore industry is likely to be held back by conflicts with farmers and protectionism despite rising demand, The South China Morning Post reported this week.

The industry is "complicated by interaction with communities, existing towns and agriculture, which would more resemble the interaction between coal miners in the Hunter Valley and the farmers, than it would the Pilbara", he said.