* Passenger car sales down 5.7 pct in August
* Forecast of 10-12 pct growth might need to be revised down
* Growth could recover, touch double-digits by Jan (Adds details, quotes, bylines)
By Anurag Kotoky and Devidutta Tripathy
NEW DELHI, Sept 7 Demand for cars in India is expected to slow more than predicted, an industry body said on Wednesday, as rising interest rates and vehicle costs prompt a pull-back in spending in the world's second-fastest growing auto market after China.
Passenger vehicle sales, which include cars, vans and sport utility vehicles, fell 5.7 percent in August, the second drop in two and a half years, the Society of Indian Automobile Manufacturers said.
Car sales in Asia's third largest economy, which grew at a breakneck 30 percent in the fiscal year that ended in April, are now expected to grow by just 10 to 12 percent this fiscal year, down from an earlier forecast of 16 to 18 percent.
"While we hope that the industry achieves the overall growth forecast...we may have to revise growth projection for passenger vehicles and commercial vehicles further," said Pawan Goenka, president of SIAM.
The Indian auto market, which saw a 15.8-percent decline in July, is driven by a burgeoning and aspirational middle class that relies on bank loans for purchases.
But India's central bank has raised interest rates 11 times since March last year in an effort to battle stubbornly high inflation, a move that has hurt credit-based purchases.
Demand has also been dented by high fuel prices, with many first-time buyers plumbing for motorcycles or scooters.
Car sales in neighboring China, which grew 33 percent last year, are also slowing after the government stripped away most of its incentive policies. Chinese auto sales are forecast to grow at roughly 10 percent annually until 2015.
Still, China sells as many cars in an average month than India sells in a year. Despite comparable populations, China's car sales reached 13.8 million in 2010, while Indian sales totaled 1.9 million in the last fiscal year.
MOST WONDERFUL TIME OF THE YEAR?
Sales in coming months are expected to be buoyed by India's festive season, which starts in early September and peaks in November after the Hindu festival of Diwali, when it is considered auspicious to buy big-ticket items and when most people get their annual bonuses.
Many automakers also offer discounts at this time of year, leading to a pickup in sales, which could return to double-digit growth by January, Goenka said.
"We all hope the festival season will mark a recovery for the passenger car segment," he said.
Car sales in August were dragged lower by Maruti Suzuki , which sells nearly half of all passenger cars in India and saw its sales drop by 19 percent in August, marking its third decline since December 2008.
Output at Maruti, majority-owned by Japan's Suzuki Motor Corp , was also partly hurt by ongoing labor unrest that has now led to a production loss of about 4,000 cars.
Sales at Tata Motors , India's largest maker of trucks and buses and the manufacturer of the Nano, touted as the world's cheapest car, fell 34 percent. Sales of the Nano, which was meant to target families of four on motorcycles, plunged 85 percent from a year earlier.
Foreign automakers, however, continued to post rising sales, driven by exports. Many are also relatively new entrants to India and enjoy lower bases of comparison.
The Indian unit of Toyota Motor Corp posted an 84 percent-rise in August sales, driven mainly by its Innova and Etios models, which accounted for nearly 85 percent of its sales.
Nissan Motor Corp saw sales rise 11 percent from a year earlier.
Several global automakers in India such as Toyota, Ford Motor Co , Volkswagen (VOWG_p.DE), Nissan and General Motors are lining up new models and boosting investment in the country, with a focus on exports. (Additional reporting by Henry Foy in MUMBAI; Editing by Jui Chakravorty)