Tata Motors has signed a deal with French company MDI, run by a former Formula One engineer, and has spent the past 10 years developing the engine.
The MDI Air Car can be powered by an external compressed air pump or by an internal compressor running on petrol.
"MDI has for many years been engaged in developing environment-friendly engines," said MDI chief executive Guy Negre.
"MDI is happy to conclude this agreement with Tata Motors and to work together with this important and experienced industrial group to develop a new and cost-saving technology for various applications for the Indian market that meets with severe regulations for environmental protection.
"We have also developed this new technology for other applications where cost competitiveness combined with respect for environmental questions has our priority."
The final car should cost around £4,000 (A$9.775)and would have a range of around 300km between refuelling. The cost of a refill would be an almost negligible €1.5 (A$3.66).
It would have a top speed of around 60kmh using air alone and 200kmh using an air and fuel combination engine.
The car is made of foam and fibreglass but has survived official crash tests. The 90 cubic metres of compressed air is stored at 300 bars in fibre fuel tanks built by Airbus.
The tanks are crash resistant and vent quickly and safely in the event of a collision.
India to build air-powered car
By Iain Thomson on Mar 21, 2007 12:30PM