News that Wal-Mart Stores Inc., the world’s largest retailer, recently signed a joint-venture pact to sell goods in one of the world’s most populated countries comes as no surprise to the global auto industry, which is witnessing firsthand the passage to India becoming more crowded by the day.

Despite its relatively primitive stage of development, India sold 1.4 million passenger cars last year, up from 675,116 in 2002, the Society of Indian Automobile Manufacturers says. Although passenger-car exports quadrupled in the period, they represent only a scant portion of overall sales.

Yet the market is far from saturated. A mere 0.7% of Indians own vehicles, a recent study by Maritz Research GmbH shows. This is less than in China, with 1.2 vehicles per 100 inhabitants, and in Germany, Japan and the U.S., where at least one in two people own cars. Thus, India’s market potential is huge.

Global Insight Inc., an automotive research firm, predicts India will be among the global auto industry’s top-six countries – along with the U.S., Germany, China, Japan and Korea – that will account for 60% of worldwide production in 2012.

But as India’s market accelerates, so do international concerns over vehicle emissions and demands to fight global warming. The country is among the world’s heaviest greenhouse-gas emitters, pushing its auto industry to put greater focus on fuel efficiency and small cars.

While India is placing its domestic powertrain emphasis on biodiesel and compressed natural gas, it also is growing more cognizant of the global industry’s tightening fuel economy and emissions laws as it cultivates its reputation as small-car export-production hub.

However, the quest to build inexpensive cars and mini trucks currently driving economic expansion has more to do with Tata Motors Ltd.’s decision to produce its so-called “one-lakh” minicar, expected to retail for about Rs100,000 ($2,500), than it does with fighting climate change.

Tata is being challenged by the Renault Nissan Alliance, which says it plans to manufacture a competing minicar in India that will be priced about $3,000. Renault SA already has seen considerable success in the country with its Logan small car that is built throughout the world and sells for $6,000-$7,000.

Such developments in India have inspired auto makers worldwide to focus on entry-level models. Fiat Automobiles SpA, for example, recently launched its 500 model in Europe; Mitsubishi Motors Corp. is expanding sales of its popular “i” car to India; and China’s Chery Automobile Co. Ltd. is making a worldwide push with its tiny QQ model, as well as its tie-up with Chrysler LLC to build small cars for export to the U.S.

Chrysler’s new head of Asia operations, Phil Murtaugh, recently was quoted saying, “India is our second highest priority after China. “General Motors Corp., which sued Chery for copying its Chevy Spark, has seen much success with its minicar in India this year.

Auto makers insist these new small cars are not glorified motorbikes or stripped-down cars, noting prices will be kept affordable by sourcing components from local low-cost suppliers and not by sacrificing features or performance.

The movement down market is expected to make automobiles affordable for a whole new class of buyer, analysts say. All eyes are on the “BRIC” countries: Brazil, Russia, India and China, where buyers of motorbikes will be able to afford entry-level 4-wheel vehicles.

However, building large numbers of cheap cars is only one step among many India must take to fulfill its ambition to be among the world’s top-10 vehicle producing countries by 2015, beginning with a stronger partnership between industry and government, a recent study by IBM and the University of Michigan’s Transportation Research Institute finds.

While developing inexpensive cars is a key growth strategy, other auto makers already are leveraging the same economies of scale, the study says, adding that India must overcome challenges in infrastructure, product quality, labor costs and tax regulations to meet the demands of the global automotive industry.

The 30 high-level executive and automotive experts in India interviewed for the study expect total vehicle sales to double to 2.8 million by 2010 and triple to 4.2 million by 2015.

– with Sudhakar Shah in Mumbai