Lucrative deal worth up to $6bn could inflame tension with neighbour and rival Pakistan.
Indian firms bid billions for Afghan iron ore mining contract
The move comes despite increasing insecurity and gun battles with Taliban rebels in Kabul.
A consortium led by the state-run Steel Authority of India (SAIL) could invest up to US$6 billion (Dh22bn) in the mine, railroads and a steel plant in a race with China to lock in raw materials for two of the world's fastest-growing economies.
The bid also signals India's intention to remain engaged in Afghanistan after 2014, when US-led forces complete a pullout.
The contract for the Hajigak mines in Bamiyan province is potentially the single biggest foreign investment project in Afghanistan.
But it could be complicated by Pakistan, which fears closer cooperation between its two neighbours.
India is Afghanistan's biggest regional aid donor and sixth largest overall. It has pledged $2bn in projects, from constructing a new parliament building to laying a motorway to Iran.
There are fears an Indian-run mining concession could be a tempting target. But with an economy ravaged by more than 30 years of war, Afghanistan's government is under pressure to ensure projects involving foreign investment flourish.
Jawad Omar, a spokesman in the Afghan mines ministry, said a 7,000-strong mine protection force is being raised to protect mine sites, including Hajigak.
So far, it is mainly Chinese and Indian firms that have shown interest in mining Afghanistan's resources.
China's National Petroleum was last week chosen as a preferred bidder for an oilfield in northern Afghanistan, taking the country a step closer to a second major deal after winning a $4bn copper project in 2007.
Global miners such as Rio Tinto and BHP Billiton have stayed away because of security concerns and high production costs.
New Delhi seems to be banking on security improving.
"A lot can change from now until the time this reaches the production stage, which is years away in this kind of operation," an Indian diplomat said.
Exploration at Hajigak is due to start next year and development will take four to five years.
Building road and rail networks will take several more years.
"You are talking 10 years before commercial production starts," the diplomat said. "It's hard to say what Afghanistan will look like in three years, let alone 10."