The Nano, the world's cheapest car, is threatening to be a commercial flop as surging raw material costs scramble its low-cost business model, according to industry insiders.

Analysts and rival manufacturers expect Tata, the conglomerate behind the Nano, to suffer heavy losses on the car as its promise to sell a basic model for only 100,000 rupees (£1,250) - a price calculated to tempt India's middle classes away from their motorcycles - proves unexpectedly costly.

Ratan Tata, the chairman of Tata, has admitted that he faces a dilemma. “If we pass on all costs to the consumer, it will affect demand, and if we don't, it will affect margins,” he told investors recently.

The economics underpinning the Nano, which is due to go on sale this autumn, make it especially vulnerable to commodity market moves. Since Tata began to develop the Nano in 2003, raw material costs have risen from about 13 per cent to about 23 per cent of its price before taxes, according to an estimate by Global Insight, the consultancy. By contrast, the cost of raw materials account for about 7 per cent of the average American car - or about $1,600 (£815), up from about $800 five years ago.

Ian Fletcher, of Global Insight, said: “I can't see the 100,000 rupee price being maintained for more than three months, largely to let Ratan Tata keep his price promise, before the company raises it.”

Potential Indian buyers are also facing interest-rate rises, which have made financing packages dearer, and increases in fuel costs, making motorbike mileage figures more attractive than the Nano's 50 miles per gallon.

Poor Nano sales may force a rethink across the industry. With oil prices at historic highs, carmakers have drawn up plans to follow Tata's lead by targeting developing markets with a new generation of cheap runabouts. Within eight years, 100million households in countries such as India and China will be able to afford cars priced under £3,000, according to Boston Consulting Group.

Whether manufacturers will be able to reap sufficient profits from ultra-cheap cars is in doubt. Hyundai Motor, the South Korean company, said last month that it had scrapped plans for a $5,000 saloon in China because the model would not be profitable. Renault-Nissan said in May that it had joined forces with Bajaj Auto, an Indian motorbike manufacturer, to sell an “ultra-low-cost” car at the Nano's price-point in India. Now, both sides are understood to doubt the project's viability.

To mitigate losses, rivals are suggesting that Tata will limit sales of the basic version of the Nano and seek to make money back by pushing upgraded models. Protests over the ownership of the land on which the Nano factory is being built have also raised doubts over whether the car will be ready on time in the volumes that Tata had planned.

Indian analysts forecast that Tata will need to produce nearly 400,000 Nanos a year to make a profit, above a planned initial capacity of 250,000.

Tata has not commented on the margins that it expects to make on the Nano, saying only that the car will be profitable over the long term.

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