When Airbus chose the Indian city of Vadodara to assemble military transport aircraft, the loudest reaction came not from Toulouse or New Delhi, but from a state that didn’t get the factory. In Maharashtra, opposition leaders accused their own government of letting the plant and the jobs, and the prestige slip across the border into Gujarat. They claimed the state had offered a rival semiconductor project some ₹10,000 crore more than Gujarat, and still lost.
The episode looked like local politics. It was really a lesson in how India works for the companies that invest there. The most important counterparty a European firm will face is not the government in New Delhi. It is the state and the states compete, hard, for the same euro of investment.
That competition is the opportunity most European boardrooms never see. Accustomed to a single national interlocutor, they negotiate India as if it were one market with one rulebook. It is not. It is a contest between provinces, and the firms that understand the contest extract terms the others never knew were on the table.
The Asterisk
Europe got the border. It did not get the contract.
On 27 January 2026, after nearly two decades of stop-start talks, the European Union and India concluded a comprehensive free trade agreement in New Delhi. The European Commission calls it the largest deal either side has ever signed: a market of two billion people, roughly a quarter of global GDP, with tariffs falling on more than 96 percent of EU goods lines and the prospect of doubling EU goods exports to India by 2032.
That is the headline. The fine print is where strategy lives.
First, the deal is not yet in force. Political conclusion is a milestone, not a legal reality; the text still has to clear the Council, win the consent of the European Parliament, and complete approval in India. A realistic entry into force is 2027–2028, and the investment-protection track was split off and remains unfinished. Until then, trade runs on existing tariffs and the EU’s Carbon Border Adjustment Mechanism, live since January 2026 with no Indian carve-out, applies in full.
Second, and decisively: the agreement did not open India’s public procurement market. Independent analysis of the concluded text notably from the Jacques Delors Institute flags this as the clearest gap in the deal. India’s public procurement is worth roughly US$600 billion a year, and New Delhi has long refused to open central, state and public-sector contracts to foreign suppliers, cracking the door only narrowly for the UAE and the UK. On procurement, European exporters walked away with close to nothing.
Put those two facts together, the consequence is stark. A European company cannot ride the trade deal into an Indian government order. What it can do is invest and the body that decides whether that investment is worth making is, overwhelmingly, the state government. India’s federal structure has quietly made the sub-national incentive system the most valuable, most negotiable, and most overlooked entry route Europe has into the country.
Two Doors
What Delhi rewards, and what the states reward
India runs two parallel incentive systems, and they pay for entirely different things. Learn to tell them apart and the whole map changes.
The central layer rewards performance. Its flagship is the Production Linked Incentive scheme launched in 2020 across fourteen strategic sectors with an outlay near ₹1.97 lakh crore, about US$23 billion. PLI deliberately pays on incremental sales, not on bricks: typically four to six percent on output above a base year in electronics. By March 2025 it had drawn realised investment of roughly ₹1.76 lakh crore across 806 approved applications. A foreign company cannot claim it directly; it participates through an Indian subsidiary or joint venture which is exactly how the likes of Samsung and Foxconn hold their approvals.
The state layer rewards location. Where Delhi rewards what you sell, the states reward what you build and where you build it. The instruments are different in kind: capital subsidies, reimbursement of state GST, stamp-duty and registration waivers, cheaper power and water, interest subsidies, concessional land, and employment-linked bonuses. Crucially, much of this stacks on top of central PLI and several states let you take a top-up on your PLI award instead of a capital subsidy.
This is the layer European firms most consistently under-negotiate, because it has no European equivalent and is invisible from outside the country. The FTA changes the arithmetic at the border; the central schemes shape the economics of a sector; but the state package decides whether a specific plant in a specific district actually pays. And it is the layer with the most room to bargain.
The Comparison
Same blueprint, very different price
Nationally, the front door is Invest India, the country’s official promotion agency. But Invest India facilitates; it does not set the fiscal terms. Each major state runs its own body and its own policy Invest UP, Andhra Pradesh’s Single Desk, Invest Karnataka, and their counterparts in Gujarat, Maharashtra and Tamil Nadu. The architecture rhymes from state to state. The generosity does not. Three features recur in the strongest policies, and a European entrant should read every state policy hunting for them.
Choose your instrument. The best policies let you pick the single most valuable lever rather than handing you a fixed bundle. Uttar Pradesh’s 2022 policy offers a one-time choice between three mutually exclusive options a capital subsidy of up to 25 percent of eligible investment, a net SGST reimbursement, or a top-up on your PLI award. Karnataka’s 2025–30 policy runs the same logic: up to 25 percent on capital expenditure, or up to 2.5 percent of turnover for seven years. Choose wrong and you leave money on the table for the life of the plant.
Region-weighted generosity. States steer capital toward their poorer districts by tiering the offer. Karnataka sorts its taluks into three zones backward Zone 1 districts can attract MSME subsidies of 30–35 percent while Bengaluru gets little or nothing. Uttar Pradesh front-loads Bundelkhand and Poorvanchal over its developed west. The “best” site is rarely the obvious metro; the incentive delta between a Tier-1 city and a backward district can decide a project’s viability.
First-mover and bespoke escalation. Andhra Pradesh’s 2024–29 policy wrote in an “Early Bird” clause the first 200 projects to secure a Consent for Operation within 18 months get a 30 percent subsidy, and PLI-aligned value-added projects up to 40. And above a threshold — Karnataka draws the line at ₹1,000 crore — the published policy simply stops, and a customised package is negotiated case by case.
The Bargain
How the deal really gets done
For a routine project, you apply through the state’s single-window portal and receive the published, formula-driven incentives. The interesting territory begins above the mega-project threshold, where the printed policy is merely the floor.
There, the decision climbs to the top of the state. In Maharashtra, a cabinet sub-committee chaired by the Chief Minister can sanction bespoke packages for marquee projects on a case-by-case basis. Karnataka’s high-level clearance committee, also chaired by the Chief Minister, has cleared individual projects and pledged all regulatory approvals within 90 days of signing. The Memorandum of Understanding signed at a Global Investors’ Meet is the characteristic instrument Tamil Nadu’s most recent meet generated MoUs worth ₹6.64 lakh crore, and the state promptly set up a committee to turn pledges into plants.
This is “competitive federalism,” and it is the single dynamic a European negotiator must internalise: states bid against each other for the same factory. That rivalry is the investor’s leverage. It also plays out in public the recriminations over Airbus and over the Vedanta–Foxconn semiconductor project were front-page news precisely because everyone understood what the loser had lost.
The Case
Why the biggest cheque lost
The clearest recent illustration is Airbus, which through its partnership with Tata is building two aircraft final-assembly lines in India.
For the H125 civil-helicopter line, Karnataka beat off Andhra Pradesh, Uttar Pradesh and Gujarat. Its aerospace and defence policy delivered a recognisable state-layer package: subsidies on land acquisition, capital-investment support, lower stamp duties, electricity concessions, and a production-linked incentive of one percent of turnover for five years. Yet the reporting is explicit that Karnataka won less on the size of the cheque than on its established aerospace ecosystem, its supplier base, and Tata’s own operational hub nearby the things that cut execution risk.
That distinction - incentive versus ecosystem is the heart of it. As Maharashtra’s leadership has argued in defending its own record, investors weigh not just the offer but the government’s proven ability to honour it; the state stresses that it has never defaulted and clears commitments on schedule. In a system where disbursement can lag the promise by years, the credibility of the payer is itself part of the package.
The Playbook
How a European company should actually move
Pull the threads together and a disciplined India strategy looks less like tariff arbitrage and more like a structured, multi-state negotiation.
Treat the FTA as context, not catalyst. It improves the long-run climate and signals political alignment, but it won’t be in force for some time, it doesn’t open procurement, and CBAM still bites on exports. Build the case on today’s rules and let any treaty upside be a bonus.
Decide location and instrument together. Because incentives are region-weighted and “choose-one,” the optimal site, the optimal lever, and the project’s own economics are a single simultaneous equation. A capital-heavy plant with a slow ramp usually favours a capital subsidy in a backward zone; a fast-scaling exporter may extract more from an SGST reimbursement or a PLI top-up.
Engineer the competition. Run a genuine process: invite Invest UP, the Andhra Single Desk, Invest Karnataka, Gujarat and Maharashtra to compete for the same defined project, and make the comparison explicit. Above the mega threshold, this is the only route to the customised, CM-level package rather than the published floor.
Diligence the payer as hard as the offer. Ask each state for its disbursement track record, the typical lag between commercial production and payment, and the legal form of the commitment, a binding government order, or an MoU “intent.” Maharashtra’s pitch on its own reliability is a tell that this varies a great deal.
Build the Indian vehicle early. Central PLI and most state incentives flow to an Indian-registered entity, not the foreign parent. The subsidiary or joint venture should be in place before the incentive negotiation, and designed with the eventual EU–India Investment Protection Agreement in mind once that track closes.
The Fine Print
What can still go wrong
None of this is risk-free, and an honest advisory view names the downsides. There is the subsidy race itself states over-committing to win a trophy, then straining their finances, with the investor caught in the crossfire if a siting becomes partisan. There is disbursement risk: incentives are conditional on milestones, capacity utilisation and jobs, and payment can lag by months or may be years. The procurement gap means even a well-incentivised European manufacturer inside India still meets domestic-preference rules when it bids for a government contract. And the macro frame is shifting under everyone’s feet CBAM, the Corporate Sustainability Due Diligence Directive and deforestation rules are non-tariff realities that a low Indian tariff cannot offset.
The opportunity, read correctly, is not that India is cheap. It is that India’s federal scramble for capital is structurally generous to investors who run the process well and that European firms, trained on a single national interlocutor, leave that value unclaimed. The advantage goes to those who treat the state as the real counterparty, set the states against one another, and weigh the credibility of a promise as carefully as its size.