The current report, in the span of two paragraphs, gives two very different reasons for Islamic banking to be attractive to India:
These are two very different areas for any potential Islamic bank to focus on. I think that the latter is a more important reason for India to allow Islamic banking, although the latter is probably a more compelling reason to spur the decision-makers to action.
The problem with the argument that Islamic banking is necessary to attract funds from the Middle East is that there are already flows from the Middle East, including using Islamic finance. For example, (admittedly not the best example given its current financial state) Arcapita set up a joint-venture with CapitaLand, a Singaporean developer to build an office park in Navi Mumbai. The companies' websites say the development is in planning stage, although it is likely at a standstill as Arcapita sits in Chapter 11 Bankruptcy.
Now, allowing Islamic banking in India would likely help along the cross-border flows, but the biggest beneficiary would be (or should be) Indian Muslims who want to use Islamic banks. That does not contradict the idea that Islamic banking is for non-Muslims as well, but the biggest source of early demand would be from Muslims who otherwise would be outside of the financial system to avoid paying or receiving interest.
There is a clear reason for both the benefits from encouraging in-flows of capital from the Middle East and the demand locally to be cited (the former may nudge other financial institutions into playing a supportive, or at least not acting in opposition to the change) but the main reason to open India to Islamic banking should be to increase financial inclusion among the large Muslim minority.