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It was an attention-grabbing headline: "Get Oxford degree in Pune". The University of Oxford was poised to set up an offshore campus - in India.

"India has become increasingly important for Oxford and the world at large. The university is committed to expanding its collaboration with India," John Hood, Oxford's vice-chancellor, was reported to have said, according to The Times of India.

But the reality is not quite as sensational as the January news report suggested. "Oxford will not be setting up a campus in India," a spokesman for the university tells Times Higher Education. Its Said Business School will "merely be using facilities in Pune, India, to deliver an executive education programme" that is set to start in 2010.

For more than a decade, India has been welcoming an increasing number of foreign universities. Its economy has been booming, but the number of people with higher education has not. Employers fear that the annual growth rate of 9 per cent will stall unless the supply of educated people expands.

To address that need, the Indian Government has a five-year plan that involves building 50 more universities and hundreds of colleges. But the higher education participation rate is predicted to rise from 10 per cent to 15 per cent by 2012, which translates into an extra 6 million to 7 million students. Even if the plan succeeds, there will still be too few university places.

A number of countries are offering to step in to meet the demand, including Syria, New Zealand, Australia, the US and the UK. The US has been particularly successful: it hosts 80,000 Indian students, compared with just 29,000 studying in Britain, according to Tim Gore, director of education at the British Council in India. There is even talk of the Georgia Institute of Technology establishing a fully recognised campus in India.

To bolster the profile of UK universities in India, the British Government has set aside £12 million. Much of the money - channelled through the UK-India Education and Research Initiative - will be used to set up 50 new collaborative research projects by 2011, along with 40 new UK award programmes for 2,000 students in India, to be delivered jointly. The rest of the money will be used to promote exchange programmes.

For academics trying to promote such student exchanges, the collaborations are exciting. But for vice-chancellors, the interest in India is mostly money-led. Indian students represent 10 per cent of the foreign student market, second only to the Chinese. With each foreign student bringing in an average of £9,000 in fees a year, Britain's overseas Indian student market is worth £261 million annually.

"The number of Indian students coming to Britain is rising by 12 per cent a year," Gore says. With India's economy flourishing - and with a middle class that is only too willing to see British degrees as a passport to success - the growth potential for British universities is enormous.

The University of Greenwich has had the most success in recruiting Indians to Britain. Between 2006 and 2007, it admitted 875 Indians, earning £7.8 million in the process.

"Very few of our British students are interested in student exchanges with India," says Tessa Blackstone, Greenwich's vice-chancellor. "India hasn't got itself established as having a large number of strong higher education institutions, and the facilities wouldn't match what our students would find in the UK. There is also the language problem."

Instead, the university focuses on selling itself abroad. "We are very successful at recruiting Indian students for three reasons," Blackstone says. "We got into recruitment from India before other universities; we have a strong recruitment team that goes out to India on a regular basis, and we teach in areas that are of interest to students wishing to get education outside India - business, engineering, computing, architecture and construction."

Napier University recruited 530 Indian students in 2006-07 and is eighth in the Higher Education Statistics Agency's league table of the most successful recruiters of students from the country. "We try to give a very positive impression of our university and of Scotland. Indian students are attracted to our degree courses," says Jack Worden, dean of Napier's International College.

"We tell prospective students that our students are rated number one in graduation employability by The Sunday Times, that we have a high proportion of international students - one third are non-UK - and that Edinburgh is an attractive and safe location in which to study and work. We disabuse them of the notion that it's cold up here; temperatures are not that different from London. And we are renaming ourselves Edinburgh Napier University so that they know where we are."

Napier also goes to great lengths to appear collaborative, Worden says. "We try to avoid the cash-cow image by doing student exchanges and inviting Indian professors to Edinburgh as a way of showing ourselves to be above just purely financial arrangements."

But like most new universities with a talent for recruiting Indian students, Napier is businesslike in its sales tactics. "We have recruitment drives where we take our academics out to India, and we make offers to potential students on the spot," Worden notes.

Universities vary in their willingness to play the diplomatic game. "We don't have research collaborations with India," says Terry Butland, deputy vice-chancellor of Middlesex University, which is third in the Hesa table.

"We just concentrate on bringing Indian students to the UK. That's our priority. We want to be number one in recruiting Indians to the UK, and we wish to be number one for teaching students in India because it's a growing world economy and a good place to be," Butland says.

Between 2006 and 2007, Middlesex drew 660 Indian students to its campus on the outskirts of London, and it recruited 120 more in January, Butland says. Each student pays £9,500 tuition costs plus living expenses over a three-year period.

"Our mission as a university is to widen participation and deliver education to people who wouldn't otherwise achieve it," he says. "We just happen to be doing that in India."

Andy Nicol, director of the international office at Coventry University, says that although the cash-cows issue is a sensitive one, the Indian Government is as keen as its British counterpart to encourage Indian students to come to Britain. "They offer students loans with low interest rates to come to the UK and study. The hope is that foreign-educated students will have a long-term benefit for India in the future," Nicol says.

The only problem is that the attitude of the Indian Government to foreigners investing in the country's universities can be unpredictable.

"Some British campuses have expressed an interest in setting up a campus in India," Nicol says. "They want to follow the Americans, who have set up local delivery services. But the Indian Government's regulatory framework is reluctant to encourage that kind of activity."

At present, a higher education Bill is moving through the Indian parliament. If it becomes law, any foreign university wishing to open a campus will have to "offer up a million quid to the Government just to operate in India", says Napier's Jack Worden. "Then there is the issue of minimum and maximum fees that the Government is threatening to fix. This is a worry: there is no point in setting up in India if you can't charge the fee level needed to make it economically viable."

Recruitment could also be a problem, Worden adds. "The Government wants to reserve university places for people from different castes. While the logic is understandable, the practicalities could be difficult to implement," he says.

Even setting up joint degree programmes can be complicated. The Indian Government insists that any foreign university running programmes in collaboration with an Indian university must be accredited by the All India Council for Technical Education. This is a considerable undertaking, in which only two UK universities have succeeded: Staffordshire and Huddersfield. The rest operate without accreditation, which means that the Indian Government does not recognise their degrees.

Hamish Main, director of South Asia Partnerships at Staffordshire University, says that the system is an historical hangover. "It's bad for students if they want their qualification recognised by the Government, but most students go on to private-sector jobs."

As a consequence of this, most British universities are reluctant to even think about investing in bricks and mortar.

"Maybe we will set up a campus in India in the future," says Blackstone. "But we wouldn't do it without an Indian partner. And I wouldn't put up money for the capital development. We don't have the money, and I wouldn't take the risk. It would have to be provided by somebody in India."

Until then, many British universities are concentrating their efforts on recruiting Indian students to Britain or, better still, on building partnerships where the first two years of an undergraduate degree are taught in India and the third year is spent in Britain.

"You get more money if you lock students into doing their third year here in Britain," says Middlesex's Terry Butland. "A lot more students could afford one year out of three here. So you build up the numbers that way ... We wouldn't be the only ones to benefit: living expenses for the students would be far less because they'd spend their first two years in India. And we would probably offer a slightly smaller tuition fee."

The British Council's Tim Gore is optimistic that Britain's interest in India will broaden. "Perceptions are out of date as to what India can offer. Business and computer engineering are domains where it would be of particular benefit to UK students to have exposure.

"We do have British students going out to India, but the numbers are very low. We want to increase them. Next year we are launching a summer camp so that they can come out to India for academic and cultural exposure."