just add the line
LOCAL_EXPORT_C_INCLUDES := pathto/folder (where my file resides)
above the
include $(PREBUILT_STATIC_LIBRARY)
and my final .mk file became like this:
LOCAL_PATH := $(call my-dir)
include $(CLEAR_VARS)
LOCAL_MODULE := libtest
LOCAL_SRC_FILES := libtest.a
LOCAL_EXPORT_C_INCLUDES := $(LOCAL_PATH)/../../libtest/jni/include
include $(PREBUILT_STATIC_LIBRARY)
include $(CLEAR_VARS)
LOCAL_MODULE := socket
LOCAL_SRC_FILES := source/interface.c source/file.c
LOCAL_STATIC_LIBRARIES += libtest
include $(BUILD_SHARED_LIBRARY)