Selling one car with a range of engines and trims is more profitable; coz 90% parts fit every rolling unit and they don't need to run separate assembly lines. Compare this to making two completely different cars with two assembly lines, and making different parts for each car, like Honda does for City/Civic.
Why'd they do that? Why'd they want to fall into trouble of making two cars when one is doing the job perfectly well? It'd cut them Corolla sales and kill their profits.
Let's consider XLi: their favorite son. To an average Corolla fan (cough-paindu-cough) it's a Chitti to'orii Corolla, it is the same as any Corolla, be a Grande or XRS. Taxi drivers buy it coz people love to hire it. Fleet owners buy it coz it's cheaper and simpler. Zamidar sahib buys it coz it's Caroula gaddi. Now imagine dropping it, what'd they all go after then?
It's an iconic car, waddi gaddi that every peasant and their mother knows, adore, and dream about. No one knows what sort of vegetable a Grande' is, or what season does Altis grow. It's the word XLi (or formerly 2D) that turn their heads around.