It seems like India's stance is: If you want to do business in India, you have to have employees you care about on our soil, so we can be mean to them if you do something we don't like.
Facebook's stance appears to be: We like your money enough that we will comply with this.
I'm just glad I'm not one of those Facebook employees.
Nor a facebook user.
"Either have employees in-country so we can intimidate them so you'll do what we want, or we block your service."
Sounds pretty effective? Sure, some people will get around the blocks, but it'll be a relatively small percentage (especially if the government makes circumventing these blocks illegal, most people won't find it worth any risk to do it anyway), and your service will be effectively destroyed in that country.
This is a specific policy to allow them to enforce their censorship laws in other countries.