Firstly, despite its size and diversity Tata appears able to act like a start-up. Its engineers kept the Nano simple, which in turn makes it cheap, light and economical. They binned everything unnecessary, from air conditioning to the second windscreen wiper. They found new ways of doing things, such as making more body parts from plastic, or adapting engine management systems from motorcycles to cut the cost of electronics. And they still made it look like a real car, with four doors, a roof and upholstered seats. The two-cylinder, 624cc engine mounted in the boot makes 33bhp and will take the Nano to 65mph, returning better than 50mpg.

Secondly, behind the hype, the Nano is in fact almost as much a European car as an Indian one. Germany’s Bosch, the world’s largest automotive supplier, has been involved in the project almost from the outset. It estimates that the market for ultra-low cost cars such as the Nano will explode to 10 million units a year in just three years; Bosch parts will feature on most of them. The company anticipates its revenue from low-cost cars will be €1bn a year by 2010, and is investing almost €500m in India alone to get it there.

“Those figures are certainly conceivable,” says leading industry analyst Jay Nagley of Spyder Automotive. “By 2020 we could be looking at a whole new market for cars. Tata might be able to design and build it cheaply, but the big question is whether it’s any good; will it last? Will it meet the needs of the people it’s aimed at?”

Nagley points out that previous low-cost car projects have not got off the ground because they haven’t had the quality. “But Tata is a serious operation, and they might have this cracked. They’ve worked very closely with suppliers like Bosch who have been making components for decades and already had some good ideas on how to make them radically cheaper.”

Another European firm quickly recognised the significance of what Tata was doing. Fiat boss Sergio Marchionne visited the Delhi motor show two years ago to announce a partnership between the two companies. At the time, the agreement seemed to amount to little more than sharing a few dealers in India but Marchionne was after a much bigger prize: an agreement to put the Nano into production in Fiat’s factories worldwide, with China and South America first, and Eastern Europe later. Marchionne has already been lauded for taking Fiat from deep trouble to profit in three years, but this deal has the potential to put even that achievement in the shade. Tata gets instant global scale; Fiat gets into a new market sector with vast potential – first, fast and for free.

But Renault-Nissan isn’t far behind. Bajaj Auto has revealed a concept version of its own ultra-low-cost car, and the two firms are likely to strike a similar deal to Tata and Fiat, with the car likely to be ready in two years. Renault boss Carlos Ghosn is already talking about bringing it to Europe and even the US, priced at around €3,000.

Renault has some relevant experience here. In 2004 it revived Romania’s Dacia brand with a new model. The Logan is a very respectable-looking four-door saloon car, indistinguishable from other basic saloons in every respect – bar the price. In Eastern European markets, where it has sold since launch, you can buy one from around €7,000, undercutting rivals by at least a third. It’s an engineering achievement comparable to the Nano, if not quite on the same scale. Renault’s engineers simply decided to build a proper car for substantially less than anyone else, and their vision was rewarded with a car that will sell a million units a year once production has expanded to China and South America. The Logan accounts for most of Renault’s ambitious growth targets, and its success means it’s likely to hit them.

It has also won positive, if slightly surprised, reviews from the car magazines and it is clearly good enough in both dynamics and build quality to have gone on sale in demanding Western European markets, including Germany. Its higher price means it won’t have the impact most are anticipating for the Nano and its rivals.

New categories of car are emerging; the Logan is low-cost, and anything under €5,000 is ultra-low cost.Volkswagen also has a low-cost car in development, based on the rear-engined, rear-drive Up! concept it unveiled at last year’s Frankfurt motor show. It’s likely to straddle the divide; stripped-down versions for emerging economies could dip below €5,000, with more luxurious, costlier versions for Western markets to compete with city cars such as the Smart.

But Europe’s potentially most exciting contribution to the low-cost car explosion may not be seen until 2010. Gordon Murray, the iconic British-based designer of the McLaren F1 and the McLaren MP4/4, is working on a city car which he claims will be his crowning achievement. Known only as the T25, Murray claims the vehicle will look and work unlike any other car and it will be possible for owners to reconfigure it from, say, a coupe to a pick-up on their driveways. The power source could be anything from diesel to a hydrogen fuel cell. Murray is also designing the factories and even the crates in which the flat-packed cars will be shipped to local assembly plants to minimise their environmental impact.

Murray doesn’t want to build the T25 himself; operating like a technology start-up, he plans to license his intellectual property to others. Major carmakers have already expressed interest, he says, but no deal has been done. “It could be a big manufacturer or it could be someone entirely new, because we will hand-hold them all the way. This could be a Sony car or a Virgin car. It could be anybody. As long as the entity we pass it onto really believes in it, I don’t care.”