Mumbai: Tata Motors Ltd’s newly launched compact—Tiago—could set off a price war in the small car market, with the company keeping the price tag way below the competition.

With prices starting at 3.20 lakh for the petrol version and 3.94 lakh for the diesel variant (ex-showroom, Delhi), the latest offering from Tata Motors is set to replace the two-decade-old Indica and is pitted against top-selling models such as Maruti Suzuki Celerio and Wagon R and Hyundai Grand i10.

The base model of the Tiago is about 80,000 cheaper than the Celerio LXi, 90,000 less than the Wagon R LXi and 1.68 lakh less than Grand i10 Era in Delhi.

The disruptive pricing, said analysts, is expected to shake up the small-car market, which has so far been the stronghold of Maruti Suzuki India Ltd and Hyundai Motor India Ltd.

“It may prompt companies to come out with so-called special edition models, offer attractive schemes and discounts and cut prices," said Mahantesh Sabarad, deputy vice-president (research-equities) at SBICAP Securities.

“Good reason for Maruti to worry as aggressively priced Tiago and Renault Kwid directly targets the entry hatch segment which contributes ~40% of Maruti’s volumes," Nitesh Sharma, analyst at PhillipCapital (India) Pvt. Ltd in a note after the Tiago’s launch.

Powered by a 1.2-litre Revotron petrol engine and a one-litre turbocharged Revotorq diesel motor, Tata Motors is producing the Tiago at its Sanand factory in Gujarat. It has set an initial target of 5,000 units a month. The factory, set up to manufacture Nano, has an installed capacity to make 250,000 cars per annum.

Being the first model to be developed from the ground up by Tata Motors since the launch of the Nano in 2008, the Tiago has a lot riding on it.

“It is a lot more than a mere product launch for the company," said Guenter Butschek, the new managing director and chief executive of Tata Motors, on the sidelines of the launch.

“It’s the first step into the future of the company’s passenger cars and a new brand ambassador for the company," he said.

Tata Motors aims to move up on the priority list of individual buyers in the segment which accounts for a lion’s share in the overall market, said Butshchek.

One in every two cars sold in India is a small car.

Tata Motors’ attempts to make a dent in the competitive car market have so far met with a tepid response. Even the recent Zest sedan and Bolt hatchback (launched in August 2014 and January 2015, respectively) have done little to help reclaim the ground the company has ceded to rivals over the years.

The Tiago “is the beginning of the transformation at Tata Motors", said Girish Wagh, senior vice-president-programme planning and project management, at Tata Motors. The transformation, he added, will be brought about through disruptive pricing, lower cost of ownership and better design.

Having learnt its lessons from previous launches such as the Nano GenX and Zest, when the company was not able to capitalize upon the initial euphoria of the launch owing to unavailability of the models, Tata Motors will be selling the Tiago through 596 outlets and 1,000 dealerships.

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