On one hand, it is possible to bemoan the things that government does wrong on higher education. But it is perhaps more important to make progress on building good universities - regardless of the constraints. In my opinion, the most important effort at starting a serious university in India is the Indian School of Business. ISB is the first incentive compatible campus on India, where the faculty members get appropriate incentives and resources to perform.
I have heard from some employers that ISB MBAs are superior to IIM MBAs (which is not surprising given their pre-MBA work experience, and the quality of the faculty). The ISB experiment is far from complete. It is only a good MBA program so far. It is not yet clear that it will take root as a genuine research university, going well beyond an MBA to play a role in the intellectual life of the nation. But in a bleak situation with dismal public sector universities, and a State that won't solve long-standing policy mistakes, ISB is the most important experiment in what could happen with universities in India.
In my view, the biggest weakness about ISB is the location. There is no reason for most people to visit Hyderabad :-). In the US, the argument is made that good universities are found in obscure places, so location does not matter that much. But the institutional setting where we are is more like US higher education in 1858 (when MIT was started). At that time, in order to attract the best faculty, the university had to be on the East Coast - that was no time to setup a university in an obscure location like Chicago - the founding date for the University of Chicago was only 1890 or 30 years later.
In similar fashion, I feel that in the India of today, Bombay, Delhi and Bangalore are the natural locations for universities in India, in order to attract the best faculty members and in order to have a meaningful engagement with India.