Toyota has confirmed it will join what is quickly shaping up to be one of the toughest automotive segments to compete in, the ultra-low cost vehicle sector established with the unveiling of the Tata Nano in January. This is set to one of the fastest growing segments in the world with potentially millions of sales in just the Indian market alone so it’s not surprising the likes of Ford, GM and Renault-Nissan have announced plans to develop and market their own budget cars.

Toyota will build its new budget car in India within the next two years with sales planned for India as well as China and Russia, Reuters reports. Toyota appears to have the lead on many of its rivals. The carmaker has already budgeted the construction of a new $343 million plant outside of Bangalore, India, which will be opened in 2010 and already we’ve seen a new minicar concept in the form of the iQ.

Unlike the Nano, which costs just $2,500, analysts predict the Toyota budget car will have a price tag of around $6,900-$7,850, however Toyota may launch an even cheaper model with the help of its Daihatsu subsidiary.

"That will not immediately compete with Tata Motor's $2,500 People's cars, though in the future Toyota may jump into the lower-priced car market using Daihatsu's know-how," said Okasan Securities analyst Yasuaki Iwamoto.

Toyota's closest competitor has to be GM, which is tipped to be developing its own Nano-rival with its Chinese partner Wuling Automobile. Honda, meanwhile, one of the most established foreign carmakers in India, has ruled out entering the budget segment and will instead focus on promoting safer and greener vehicles.