The German company, which is jostling to overtake world leader Toyota, rolled out Volkswagen's first locally manufactured Polo from its plant in Pune in western India, giving it a niche in the country's crucial small car segment.
Volkswagen Group said it hopes to capture up to a tenth of the Indian car market in the next four to six years as part of a strategy to boost sales in emerging countries to counter anaemic growth in saturated Western markets.
The company, which entered India in 2001, now holds 1.5 percent of the Indian market, company spokesman Kurt Rippholz told news agency AFP.
The start of Polo's production in India "marks a milestone in our journey together into a successful future for the Volkswagen Group in India", Jochem Heizmann, a member of the company's management board, said in a statement.
India, where new car sales soared 61 percent year-on-year in November, holds "enormous potential" for Volkswagen, he added.
The Pune plant, which has the capacity to produce 110,000 cars annually, is a key plank in Volkswagen's India strategy. The firm has invested 850 million dollars in the plant, its biggest investment so far in India.
The Indian price for the Polo has not yet been announced, but it is seen as a vital model for Volkswagen to penetrate the market in India where small cars make up 80 percent of annual car sales.
"Volkswagen will be present in the mass market segment and therefore this is an important step," company spokesman Rippholz said. In Europe, the Polo has won more than 130,000 orders since the new model was launched in May.
Analysts say India holds huge promise for automakers as the country of nearly 1.2 billion people has one of the world's least penetrated car markets.
Nearly all big global carmakers such as General Motors, Ford and Renault are present in India where annual car sales are forecast to triple to six million in the next decade, according to industry estimates.
The Polo rollout came days after Volkswagen bought a one-fifth stake in Suzuki Motor for 2.5 billion dollars, seeking to tap the Japanese firm's small car prowess and dominant Indian market share.
The purchase gives Volkswagen an additional footprint in India as Suzuki holds a majority share in Maruti Suzuki, India's largest carmaker with 50 percent of the market.
The spokesman said he could not comment on media reports that Volkswagen and Suzuki plan to develop a new small car for the Indian market.
Volkswagen already sells its Passat and Jetta sedans in India as well as its premium Phaeton and Touareg SUV. The company also recently began selling in India its new Beetle, the remake of the iconic "bug".
The company aims to boost its market share with the Volkswagen Group brands - Volkswagen, Audi and Skoda. It began producing its Skoda Fabia in 2009 at the Pune plant and plans to launch a saloon car in the second half of 2010.
"These products - in particular our Polo - will help us to increase our share of this growing market significantly," Heizmann said.