In terms of absolute numbers, luxury cars don’t sell too much in India. But in recent years, their rate of growth has been much higher than mid-market or budget vehicles. What’s more, they are now penetrating into the heartland; marketing efforts are moving to small-town India.

It’s not a smooth ride though. In March this year, Pranab Mukherjee, who was finance minister then, increased import duties on fully-built cars costing above US$40,000 to 75% from an already high 60%. (The cheapest car in India — the Nano — was launched with a price tag of US$2,000.) That increase, coupled with high petrol prices and a declining rupee, threatened to dampen the spirits of the sellers of pricey wheels.

Ironically, also in March this year, luxury carmaker Audi registered its highest sales ever of 1002 cars, a growth of 47% over the same period last year, beating Mercedes Benz’s sales for the month. In June, Audi overtook BMW’s sales for the first time to reach pole position in the Indian luxury car market, dominated by the German trio — BMW, Audi and Mercedes, in that order. In August, Audi sold 726 cars, compared with 510 in August 2011 and 250 in August 2010. While August sales for BMW and Mercedes Benz are yet to be disclosed, Audi is making no bones about its ambitions. According to Audi India head Michael Perschke, “If everything goes according to our plan and strategy, we will become the market leader by 2014.” The company is aiming to sell 8,000 units by the end of 2012 and 16,000 to 20,000 by 2015.

While the economic slowdown has impacted automobile sales, the luxury car segment has managed to retain its momentum, growing at a compound annual growth rate (CAGR) of 30%-40%. Total sales stood at 23,000 units in 2011, and is expected to reach 30,000-31,000 units by the end of 2012, according to The Economic Times. The figures may not be large compared to developed markets, but the growth is impressive considering that until 1994, when Mercedes Benz came to India, there were no foreign luxury cars available for sale in the country. In 2006, the Indian luxury car market had total sales of only 3,050 cars. Audi and BMW came in 2006. The market has since grown almost seven times in as many years. Newer entrants like the U.K.’s Jaguar Land Rover (acquired by Tata Motors) are also registering healthy sales. The ultra-premium segment — Aston Martin, Porsche, Ferrari, Maserati, Bentley and Rolls Royce — has also opened shop in India. Their sales are low, but Aston Martin recently launched its Rs. 3.85 crore (US$770,000) Vanquish model — a testament to its faith in India as a future growth center.

Several factors have contributed to this growth. First, people have greater disposable incomes. According to the annual World Wealth Report (2011) by Merrill Lynch and Capgemini, India has the world’s 12th largest High Net Worth population, growing at the fastest rate of 20.8%. After a posh new home, a swanky car is often next on the list of aspirational purchases.

What has been unexpected is the market; new purchases are coming from smaller cities and towns. Audi has dealerships in Nagpur, Ludhiana and Surat with Lucknow and Coimbatore in the pipeline. BMW was the first to open a dealership in Raipur four years ago; it sold 30 cars the first year and manages to sell about a 100 cars a year today. It has also set up mobile showrooms to visit even smaller towns such as Agra and Nashik.

Mercedes Benz recently launched its dealerships in Karnal and Lucknow. At the launch of the Lucknow dealership, Mercedes Benz India director (sales and marketing) Debashis Mitra said: “Two to three years ago, Delhi and Mumbai accounted for nearly 70% of our sales. Today, this percentage has declined to 50%; the rest is accounted for by Tier-II towns. We are confident that Tier-II and Tier-III towns will account for future growth.”

Mitra added that the domestic car market was estimated to expand from 2.4 million units to 6.8 million units by 2020, and the luxury car segment would account for 4% of that, as compared to the current 1%. Pointing out that only 25,000 of India’s 150,000 dollar millionaires own luxury cars, Mitra said:  “The key is how to reach the prospective customers.”

A successful initiative has been the introduction of lower-priced models, starting at US$44,000. BMW’s X1 SUV and the Audi Q3 have been big hits. Mercedes Benz also plans on launching its own entry-level cars. According to the company, the below US$50,000 segment has become big and there is a huge opportunity.

Several other marketing strategies — sponsored golf tournaments, Bollywood film placements, celebrity endorsements, Formula 1 races and co-branded interactive contests — have also been used. Among the most effective has been the Personal Lease, uncommon in the luxury car segment. Introduced by Mercedes Benz’s in-house financial services arm, Daimler Financial Services, Personal Lease allows a customer to lease a car for a fixed period by paying a lump-sum amount upfront inclusive of the principal, service charges, insurance and warranty. For the rest of the period, the customer only has to pay the lease rent. He doesn’t have to worry about his company being taxed; he can claim everything as operating expenses as opposed to depreciation if he were to buy the car.