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The Economist's Free Exchange discusses the Nano:

The economist in me is puzzled: can you claim to have made a one-lakh car ... if you are selling it at a loss? After all, if Tata Motors was prepared to make a loss to realise its dream of a one-lakh car, it could simply have repriced the Tata Indica, its existing small car, at 100,000 rupees and avoided all the fuss of a fresh design and a new plant.

It seems to me that until the one-lakh car breaks even, it does not exist in an economic sense. But by the time the profitable “long run” arrives, I am not convinced that the Nano will still be 100,000 rupees.

From here, and in part II it goes on to discuss the economics of demand outstripping supply, deposits that would remain with the company:

Suppose the initial allotment of cars is subscribed twice over: Tata Motors will get an immediate cash infusion of more than 20 billion rupees. If it can sustain the hype and expectation, it won’t have to return this booking money to the surplus customers. It will, in effect, have secured for itself a cheapish source of deposits, redeemable for a car, as production allows. The cash will come in handy—in June, Tata Motors has to repay about 100 billion rupees ($2 billion) to the lenders who financed its acquisition of Jaguar Land Rover last year.

There is a peculiar circularity to all this. By declaring an impossible price tag, the company has generated enough lucrative hype to make the cheapest car viable after all.

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