By Chang-Ran Kim and Janaki Krishnan

NEW DELHI (Reuters) - Toyota Motor Co <7203.T> and Honda Motor Co <7267.T> launched new compact cars to tap the fast-growing and price-sensitive India market as they and other automakers seek to put a dire 2009 behind them.

Toyota, the world's largest automaker is a laggard in India, Asia's third biggest economy, and is facing increasing competition from rivals targeting one of the few bright spots in an industry ravaged by the global financial crisis.

At the Delhi Auto Expo on Tuesday, Honda also unveiled a new compact car, a five-seater model being developed especially for India and the other emerging markets that are quickly replacing major Western markets as a key battleground for auto firms.

"India will play a pivotal role in Toyota's global expansion plans and the time has come for us to strategically accelerate our growth here," Toyota Vice-Chairman Kazuo Okamoto told a media conference to mark the launch of its new compact car, Etios.

Volkswagen <VOWG.DE>, Europe's largest car maker, said it too aimed to be a significant player in India.

"If you want to be a major player in India in the mass market, small cars are the way to go," said Jochem Heizmann, a member of Volkswagen Group's management board.

Volkswagen last month agreed to buy 20 percent of Suzuki Motor Corp <7269.T> to access its small car expertise and Indian exposure through market leader Maruti Suzuki <MRTI.BO>.

Driven by the world's second-largest population, government incentives and a relatively strong domestic economy, Indian auto sales are set to grow about 16 percent this year to 1.4 million vehicles, after posting double-digit growth through most of 2009.

By comparison, U.S. auto sales due later on Tuesday are expected to show the market there slumping to its worst year since 1982, or possibly 1970.

China is now set to surpass the United States as the world's largest auto market with about 13 million vehicles sold there this year, data this week should show.

Toyota, which has forecast an operating loss of 350 billion yen ($3.8 billion) in the year to March 2010 after the slump in the U.S. market, said more than 2,000 engineers in India and Japan worked for four years on the Etios.

Toyota said the car will go on sale later this year with an annual sales target of 70,000 units. Analysts expect a price tag of less than 500,000 rupees ($10,823).

"With the introduction of Etios, we hope to attain a sizeable market share in India in the shortest possible time," said Sandeep Singh, deputy managing director of marketing at Toyota's local unit, Toyota Kirloskar Motor.

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