The group has set a target of capturing 5 per cent of the Indian passenger vehicles market by 2025.
"We are now investing up to 1 billion euro by 2020-21. This is the biggest investment which we have done in one single market. This the first and most decisive step," Skoda Auto CEO Bernhard Maier said.
On the R&D centre, he said "It will be ready by the end of the year...we plan to hire 200-250 engineers to develop cars in India."
The group is looking to create up to 5,000 direct and indirect jobs through setting up of the engineering centre and creation of additional capacities in the two plants.
"We want to exploit the maximum of our current capacities in Pune and Aurangabad," he said adding currently the group is working on finalising the details.
Elaborating on the VW group's ambition in India, he said: "Our plan is to have a market share of 5 per cent for VW and Skoda brands together in India by 2025."
The VW group has around 2 per cent market share in PV segment in India, which stood at over 3.2 million units in 2017-18.
In order to achieve its targets, the group which had earlier explored unsuccessfully a partnership with Tata Motors, is looking at launching two models each from Volkswagen and Skoda brands between 2021 and 2025.
Admitting that the group made mistakes in India in the past, Maier said "We decided 1.5 years ago that we want to tackle the Indian market better than we did in the past."
The most important part is that the group decided to split responsibilities and Skoda not only got the responsibility to develop in India but also in Russia, he said.
"In India we are doing it collaboratively...This market is expected to be one of the biggest markets in the world. From 3.2 million units, the market is expected to grow to 5-6 million units by the end of next decade," Maier added.
India is in a transformational phase, things are taking place in the market, he added.
Going forward in India, he said the group's future models will be based on the MQB AO platform which will be highly localised in order to achieve cost competitiveness.
"We are not looking at cheap cars and not are only driven by volumes, we want to be on a sustainable growth path," Maier said, adding vehicles on the new platform would comply with upcoming emission and safety standards in India post 2020.
When asked about the future of VW brand in India, he said "Skoda is taking the lead but there are going to be two brands in the market."
VW cars would continue to be manufactured at the plants, he asserted.
When asked to elaborate on future product plans for India, he said, the group would continue with current portfolio.
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From 2020, he said the model campaign of MQB AO platform will begin with a mid-sized SUV.
"The platform can have many body styles, we do not rule out anything. If market is ready then we can be ready too," Maier said.
When asked about exports, he said the priority will be India but VW is already exporting to various markets, mainly the emerging ones.
"It (exports) could be an opportunity for Skoda as well but the main focus is developing cars in India with Indian suppliers and Indian workers," he said.
As part of the new strategy, he said, Skoda would also expand sales network in tier 2 and tier 3 cities in India.
Since November 2001, Skoda has sold around 2.5 lakh units in India. It sells four models - sedans Superb, Octavia, Rapid, and SUV Kodiaq.