I participated in a discussion on the same topic at Orkut's 'Indian theatre' community. The concern is also valid to a certain degree to countries other than india who does have interest in theatre.
The discussion brings up some good points which I would like to mention here, in addition to my own thoughts.
In general, I think, everyone would agree that many people dont watch theatre. The obvious main reason is lack of awareness. There is a tiny set of people in this country who has developed an interest in theatre, the rest just dont know about it.
Like films, Everybody and anybody would not go for theatre; only the people who are directly or indirectly connected to this form would go. That is because they appreciate it. They appreciate the thought behind a certain play, they understand the efforts behind it, they also understand the challenge to keep every mind in the audience engaged. Thats why I feel there is a need to connect everyone to theatre. I myself got interested by watching people around me doing it, thats the natural way of learning and am sure many theatre enthusiasts share the same story.
This connection to theatre is a key to improving awareness and it can be most effective if it is targeted at school/college students. Creating such awareness at this age can be effective because it will invoke thinking at an early age and also it will be easier for students to work together within the school/college community model. A friend of mine is doing a great job of running a Performing Arts Institute for children between age group of 8 to 14 years. This group, Chaitanya, is now active for past 3 years.
Another factor behind lack of theatre awareness is the prejudice of traditional performing arts on previous generations. Working with a local dance or theatre group was never considered a gracious way of living, in the past. Today, the urban parts of india has definitely overcome this; in fact theatre people today are considered to be very much sophisticated, but the bias is strong enough in rural parts to kill small groups.
Also, The entertainment business does not consider theatre as high as films or television. This is good in a way because this has saved theatre from being commercialized, but in return every production has faced financial challenges due to this lack of (or limited) financial support. Making money has never been the primary focus on the contrarian minds behind such activities, which is indirectly affecting penetration of this art in the society.
I was visiting Norway last November and got introdued to work of a great playwright, Henrik Ibsen. From whatever little I studied him, theatre even in his times or now is facing the same concern, I feel. Same story in the US.
With the discussion, I also realized that there are plenty of groups that are doing some great work but are not connected to each other. e.g. Pune has a great culture of marathi plays, but has limited exposure to other families like bengali/hindi plays. It is very important that such groups come together and work closely on connecting people to theatre.
This will not only increase theatre awareness but will also empower the minds to create a better place for living!!