I live in India and here are my thoughts:

It's not about the price or how cool it is. First things first, it is a nifty achievement that 'can haz' the potential. BUT is cheap hardware really the most important thing here? No. Here is why.

It is not based on any pedagogical concept at all.
Anything targeted at the students in primary schools must be based on some kind of sound pedagogical framework. From software to the user experience.

Slapping a stock Andriod OS on a cheap tablet is not going to solve the problems of the primary school system in India. Prerecorded video lectures can never work for school classrooms where teacher-student interactivity is indispensable.
Let's stop singing praises of our "Great" "Innovation" for a moment and really think about it for a second. Do primary students really want to listen to someone blabbing on for an hour through a video? NO. It does not work like that. If it worked like that, best schools would have replaced their teachers with tubes and boomboxes.

Where is the content delivery infrastructure?
I run a small web application development company in the heart of a capital city of a state and heck, internet connectivity gives us headaches every once in a while. You can imagine the scenario in the remotest parts of the country. And how much does internet cost here - $100 for a 4Mbps connection with 35GB/month data limit and it is the home plan not the commercial plan.
With so much costly connectivity and abysmal infrastructure, how will the content be delivered.

Involved costs are exorbitant.
As others have already pointed out, the costs involved are not a trivial amount. Not only the tablet but the delivery network and other necessary infrastructure. Can the state governments bear the such costs. No.

Technology is nice; Its not the silver bullet.
Let me say this once for all. 99% of Indian school(or college level) teachers are bullshit. They don't know anything about teaching or the subject matter they are "teaching". I did not know this when I went to school. But now I am 28 and I have 9 cousins between the age 7 - 16 in some of the top schools in my city. And what their teachers teach them is bullshit. Example: I found out one of my 5th grade cousin does not know what a number line is. Despite being a part of his maths curriculum, the teacher just skipped over it. So, advice to the government and education departments: FIX THE DAMN SCHOOL FIRST.
Finally look at what Indian teachers are teaching in schools http://www.youtube.com/watch?v=FViBJg6X_24 even if you do not understand Hindi you will still pick a lot of things.

There are bigger problems than "lack of a cheap tablet".
Children are dying because of malnutrition. Farmers are committing suicides. What Indian government does not want anyone to know is that:

- 65 tribal children died of malnutrition in the state of Madhya Pradesh.

- 125 farmers committed suicide because huge debts in Deccan states.

- Indian security forces butchered 110 peaceful protesters in Kashmir.

during the same period when India was busy spending 150 million USD on Commonwealth games.

http://southasia.oneworld.net/todaysheadlines/children-dying...

Finally, in my very very humble and personal opinion, all this tablet is ever going to achieve is become another toy in the closets of children from middle to upper middle class families.

PS: Does anyone recall India's own custom built, secure OS? Anyone?