The C-295W is being procured to replace the IAF's HS-748s as the lowest rung of the IAF's transport fleet and not to replace the AN-32 for which the IAF is looking for a far more capable airlifter. The main drawbacks of the C-295 vis a vis the MTA are:
1) cabin volume/dimensions:
The C-295 is about on par with the AN-32 but inadequate when compared to the IL-76/MTA or even C-130. The C-27J would have addressed this issue to a degree but it was not selected so this is a moot point.
2)Payload, the C-295 can carry just about half of the payload of the MTA.
The C-130XJ presents to most attractive option for the IAF as an alternative to the MTA. The IAF requires a turboprop in my opinion for this role for their inherent "rough field" capability which is abdudently required for the IAF's tactical transport fleet ( not as much from their strategic air life fleet) especially in the North East. The XJ's cabin is of sufficent size to present the most utility to the IAF and there will be commonaility with exsisting assets in the IAF not to mention the industrial benefits that could come from an XJ purchase- a C-130 production line in India sounds pretty attractive to me.