Telenor, which has a strong balance sheet, can absorb the $3 billion investment write-off it would face if it quits India due to telecom licensing problems, Trade Minister Trond Giske told reporters in New Delhi.
But Telenor's loss -- which would "probably be the biggest" a Norwegian company has ever lost in a foreign investment -- would make other firms think twice about putting money in India, Giske said.
"It would be fair to say it would influence the view of India as an investment country," said Giske, who was in India to push the government to ensure the survival of Telenor's Indian unit which has 17,000 workers and 40 million clients.
"If a company like Telenor can lose $3 billion in India, it has an effect on other foreign investors. They ask if your (state-controlled) company can lose that money, how will private companies be treated?" he said.
The problems roiling the telecom sector come as India is also under strong investor attack over retroactive legislation that could force British phone giant Vodafone to pay $3.7 billion in back taxes, interest and penalties.
Policy uncertainty has been one of the main criticisms of foreign investors, who have been demanding clear rules for them to keep pouring in billions of dollars in vital investment to spur economic growth.
Telenor was among eight mobile operators whose licences granted in 2008 were cancelled by the Supreme Court in January on grounds the sale was under-priced and corrupt in what has become one of the biggest scandals in India's history.
The court ordered an auction for new licences in which Telenor can take part.
But the telecom regulator has proposed a 10-fold hike in the spectrum auction base price from the 2008 sale and a big reduction in bandwidth up for grabs.
"If these recommendations become policy, Telenor will likely be forced to exit India" because the cost would be too high, Giske said.
The company's departure could also have "political implications," he said, addding that "Telenor is not just any company."
"Some 54 percent of the shares are owned by Norwegian people through the state and thus it has even further political implications that such a company will be harmed," Giske said, without elaborating.
His comments came after Telenor earlier in the week said net quarterly profit plunged to 583 million kroner ($100.5 million) from nearly 2.8 billion kroner a year earlier due to a writedown on its Indian operations.
Other Indian mobile operators also oppose the regulator's proposals.
They say the high auction price would make it unprofitable to make the huge investments needed to roll out mobile networks in poor, remote areas -- seen as key to promoting "inclusive" economic growth -- and also mean sharp tariff hikes.