Mitsubishi Motor’s plan to produce a volume-generating compact car in India – following the likes of Suzuki and Hyundai – has been deferred indefinitely for lack of funds and sliding demand.

The company planned to launch the premium compact car through its technical tie-up with local Mitsubishi assembler and distributor Hindustan Motors in 2011-2012, local paper Business Standard reported.

The original plan involved either re-engineering a compact car from Mitsubishi’s global range for the Indian market [eg the Colt] or building a new car from scratch, possibly for export later.

Scarcity of financing from Japan has forced both companies to cut capital expenditure for the current year and rein in investment plans for next year, which included expansion of the Chennai facility.

To accommodate the new compact car and some other models, Hindustan Motors had planned to increase annual production at Chennai from 12,000 to 100,000 units, the paper said.

Hindustan managing director Ravi Santhanam said: “The market has become very volatile, so it’s hard to make a prediction even two months down the line. In view of this we have decided to revise our capital expenditure for 2009-10.” He declined to discuss details.

Mitsubishi’s premium compact car would have had to battle Hyundai’s i20, Skoda’s Fabia, and yet-to-be launched models like the Fiat Grande Punto, Honda Jazz and offerings from Toyota and Ford in India.

Mitsubishi currently sells three sports utility vehicles (Outlander, Montero and Pajero) and two sedans (Lancer and Lancer Cedia) in India but none has picked up appreciable market share.

Meanwhile, Hindustan Motors is reducing its dependence on the automotive sector by investing in units for forgings, casting and spare parts, mostly for power equipment and rail manufacturers.

The company is also building an integrated township on 314 acres of land in West Bengal, Business Standard noted.