Ashling O'Connor in Bombay

Ford is investing $500 million to double its production in India and build a low-cost car to meet the rising demand of the country’s emerging middle classes for cheap hatchbacks.

Capacity at its existing plant near the southern city of Madras will rise to 200,000 cars and 250,000 engines over the next three years to accommodate the small car project, creating 1,500 jobs and bringing Ford’s investment in India to $875 million.

The announcement, made on the eve of the Delhi Auto Expo, comes shortly after Ford named Tata as front-runner to buy its European brands Jaguar and Land Rover, which the US carmaker is selling to counter mounting debt.

The Indian market is worth $34 billion, according to KPMG, but car penetration is just seven per 1,000 people compared to 550 per 1,000 in Germany. Car sales are growing by 20 per cent a year compared with 3 per cent globally.

On Thursday, Tata will unveil the world’s cheapest car, in a bid to dominate the budget end of the market. The cheap family vehicle has been dubbed the “one lakh” car for its sticker price ( one lakh is 100,000 rupees).

At about $2,500, the rear-engine mounted hatchback will be the world’s cheapest car by half. Despite the secrecy until the grand unveiling in Delhi, there have been glimpses into the design of the four-seater that does 59 miles to the gallon, has a top speed of 75 miles an hour and is held together more with strong glue than nuts and bolts.

Tata says the car will conform to European standards but there remains scepticism in the market about its safety and its ability to maintain assembly-line emission outputs after being driven on India’s congested and crumbling roads.An initial production run of 250,000 cars a year, or nearly a quarter of all annual car sales in India, has sent environmentalists into a spin. However, Tata claims it will be one of the greenest cars available and will improve safety on Indian roads by taking drivers off dangerous scooters and putting them in a vehicle with a roof and four doors.

With this in mind, Nissan and Renault are also talking to Bajaj Auto, India's second-biggest motorcycle maker, about making a small car retailing at about $3,000 within the next two to four years.

Today Rajiv Bajaj, managing director of Bajaj, said 250,000 small cars a year would be made at a new plant near the western city of Poona. They could be exported through the Renault and Nissan networks, he added.

Similar ventures are sprouting up across the industry as leading manufacturers try to develop small, fuel-efficient cars within the financial reach of first-time buyers in emerging markets that can also be enhanced for western consumers adverse to hulking gas-guzzlers.

Ford has struggled in India because it focused on sedans rather than hatchbacks, which account for three quarters of all sales in the country. Its sales in India fell slightly last year to about 40,000 units from 42,060 in 2006. Its new small car, which will be low cost but still a step up from the Tata and Bajaj concepts, will sell for between 300,000 rupees and 400,000 rupees.

Half the growth in global automobile sales for the next three years is expected to come from Brazil, Russia, India and China as increasingly affluent consumers graduate from scooters to cheap compact cars, according to PwC.

Meanwhile, Nissan and Renault said today they would pursue plans for a $1bn plant near Madras despite the withdrawal of Mahindra & Mahindra, their Indian partner. The facility, scheduled to begin production this year, will have a capacity for 400,000 cars within seven years. Renault’s joint venture with Mahindra to build the Logan, a no-frills sedan, is unaffected.

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