Priced at about US$2,500 (S$3,400), the Nano will cost about half the price of the cheapest car on the market, affordable for many in India - and elsewhere.
But some environmentalists are dreading the prospect of hundreds of thousands of cheap cars hitting congested roads around the world in the next few years.
'In the current policy and regulatory framework, the low-cost cars will be disastrous,' said Ms Anumita Roychowdhury, associate director of the Centre for Science and Environment in New Delhi.
Carmakers, warily eyeing sliding sales in developed markets such as the United States and Europe, disagree.
They argue that small, fuel-efficient vehicles are a greener option than gas-guzzling SUVs and larger cars as the price of oil soars above US$130 a barrel and as more and more consumers in emerging economies such as China, India and Russia get behind the steering wheel.
Tata Motors, which unveiled the snub-nosed Nano in January, says the world's cheapest car meets the strictest environmental criteria, and its lean design delivers high fuel-efficiency of about 20km per litre of petrol.
'The concern is really about the sheer numbers,' said Mr Mohit Arora, managing director for India at JD Power Asia Pacific.
'They may be more fuel-efficient than bigger cars, but they will still emit carbon and NOx (nitrogen oxide)...and that's a valid concern.'
With the explosive growth in demand for cars, carmakers will have to return to the drawing board.
'Over the next five to 10 years, technology, moral pressure, regulatory pressure and high oil prices will push even premium carmakers into making changes to their engines,' said Mr Steve Howard, chief executive of The Climate Group in Britain.
Rival carmakers, including Fiat, General Motors, Ford Motor, Hyundai and Toyota, are all interested in building a small car that is affordable to more middle-class consumers in emerging markets.
'Growth is in the emerging markets, and the bulk of demand there is for small cars because people are much more sensitive to fuel prices,' said Mr Arora.
Still, Mr Howard cautioned against demonising low-cost cars or belittling their importance in emerging economies such as India, despite concerns about their impact.
'It's easy to look at cheap mass-produced cars and say, 'Oh, they're going to cause more pollution'. But it's an elitist view that only a small percentage of the population should own cars.'
