The Nano has attracted worldwide attention due to its planned price tag of just 100,000 rupees (2,100 dollars).
Gujarat chief minister Narendra Modi, a Hindu nationalist who has promoted his state as an investment destination, wooed the project with an offer of 1,000 acres (440 hectares) of land and a promise of no labour strikes.
"There was curiosity all over India and this is the occasion -- Ratan Tata is with us in Gujarat," Modi told a press conference.
"Tata and Gujarat can make a new chapter together with this partnership, which will give a fresh boost to the state's development.
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With states around India vying to host the plant, Tata chose a site near Ahmedabad, the main city in Gujarat, company officials said.
Ratan Tata welcomed the deal, which he described as "very attra