Renault-Nissan has pledged to unveil what is likely to be the world’s cheapest car in 2012, undercutting the Tata Nano, which is being sold in India for as little as 100,000 rupees (£1,300) plus taxes.

Carlos Ghosn, the chief executive of the French-Japanese partnership, said today that it had signed a deal with Bajaj Auto, an Indian group best known for building motorcycles and three-wheelers.

Under the pact, the two groups will work together to develop an ultra-low cost, ultra-efficient runabout, codenamed the ULC that will initially be sold on the sub-continent and may later be offered elsewhere.

"I can tell you the cost of this car would be lower than any car today made in India," Mr Ghosn said.

As is the case with the Nano, the target market for Renault-Nissan appears to be India’s burgeoning middle class, many of whom are looking to trade up to four-wheel transportation from their current motorbikes.

"Growth [of car sales in India] is going to continue and is going to be very important for the years to come," Mr Ghosn said.

India sold 1.5 million passenger vehicles last year — a figure expected to rise to two million this year, despite the economy cooling after being buffeted by the global credit crisis and a late monsoon.

With car sales stalling in the West, Renault-Nissan had already earmarked South Asia as a key future market and is building a passenger car plant in Chennai, in southern India, with a capacity to make 400,000 units a year.

It is thought that the new joint venture will be 50 per cent owned by Bajaj, with Renault and Nissan, who co-operate under an alliance pact, controlling 25 per cent each.

The new model will initially be made and sold in India with the first cars due in 2012 and a production capacity of 400,000 units a year planned. The joint venture hopes to target other territories later.

The two-stroke, 624cc Nano shook the auto industry to its core when it was unveiled in January 2008 — chiefly because it sported a price tag that would barely cover the cost of a CD player in a Lexus.

With oil prices at that time hovering at record highs, a host of automakers made it known that they were planning to follow suit and target developing countries — and budget-conscious, green-minded consumers in the West — with a new generation of cheap and efficient runabouts.

Since then, oil prices may have dipped, but much of the world has also fallen into recession, reinforcing the logic behind the ultra-low-cost model. General Motors, Hyundai, Toyota, Volkswagen and Ford are among those honing their own small car plans.

Renault-Nissan and Bajaj first announced that they were exploring a partnership to produce a cheap car in 2008 but since then there have been reports of disagreements over the project.

Mr Ghosn said yesterday that those problems had been resolved at a meeting on Monday and "now we are in total agreement".

He declined to specify the car's price, but he said when taking into account the running expenses, the cost of the vehicle would be "amazing".

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