The production cost probably won't come down if they're put in more cars. They're already mandatory in the US, Europe, and a few other places, so adding India to the list won't really do anything to improve economies of scale. Actually, it might cause a temporary price increase, as manufacturers would have to increase airbag production capacity to meet the new demand.
That said, the cost to consumers may come down if they're mandated. Currently they're an option, and car makers like to make profits on options. If they were mandated, car makers would look at airbags as just being part of the cost of building a car.
The biggest problem with mandating safety features for all cars in India is that these features cost money. There are a lot of people in India who can't afford a car, and many more who would be denied the opportunity if cars in India had to meet, say, US specifications. I recently read an article that indicated that a version of the Tata Nano that would meet US regulations would cost about $8,000, or somewhere around 3.7 lakh. That's a lot more than a Nano costs in India. (if you can get one, but that will change when the new factory opens) Of course that Nano would have a bigger engine, 6+ airbags (mandatory as of 2010), etc. Still, an Indian spec Nano is a lot safer than a 2-wheeler or an autorickshaw if you meet with accident, so why should people be forced into a less safe vehicle just because they can't afford airbags?
I think the optimal solution for now is a set of safety regulations based on the price of the vehicle, perhaps modified for seating capacity and vehicle type.
For expensive cars, I don't see any need for India to develop its own set of regulations right now. That would just raise prices and annoy carmakers. The government should just pick a set of regulations that it deems acceptable, and allow any car that meets one of them. For example, maybe a car that meets EU, US, or Japanese safety regulations should be acceptable except for regulations on right/left hand drive, the language used for markings, and metric gauges. As India grows richer of course this may change. Optimally India, the US, the EU, China, Japan, etc. would join together and develop a common set of requirements to spare manufacturers the cost of meeting a different set of regulations (which of couse would be passed on to car buyers) in each major market.
For less expensive cars, I think a sliding scale based on price would be good. That way if all someone can afford is a basic car, they can get one, but one who can afford a nicer car gets airbags, etc. along with their alloy wheels, 8 speaker CD/MP3 ICE, and leather seats. All cars should be required to undergo crash testing unless it's a specialty model made only in small numbers. Cars over a certain price without airbags, etc. should be required to offer them as an option. Maybe 2-3 lakh or something like that, so a 1.3 lakh Nano model wouldn't have to offer an airbag version, but all versions of Wagon-R would have to have an airbag option or simply include them. Thus Maruti could offer a Wagon R LX without airbags, but would have to offer a with airbags version as well. Then for a bit more expensive cars, maybe 4-6 lakh, front airbags would be mandatory. After that, a full set of side and head airbags would be required at a yet higher price point.