That was poorly articulated on my part. It was a minor issue in terms of India-US relations, as she is one individual, serving in one city. It was not a minor issue in terms of the crime she allegedly committed.
I think this basically comes down to better cultural awareness. If US diplomats were taking actions that conflicted with India's sensitivities over the caste system, Indian outrage would be absolutely justified. Diplomats should be aware of local customs and laws and act accordingly. So too, when an Indian diplomat engages in a form of pseudo-slavery in a country with an ugly history of slavery, with political implications that last until today, it's not unreasonable for Americans to be outraged. Americans were confused over India's outrage, so to speak. I would hardly call that "spouting homilies"--if India wants to engage in what Americans consider slavery, that's its right, but it's unreasonable to expect Americans to look upon it favorably, given our values. We are consistent in this, just look at our revulsion of the pseudo-slavery system in the UAE.
I agree that the US should have handled it quietly--arresting Khobragrade as she was dropping her children off to school was a terrible idea, probably ordered by some politically ambitious bureaucrat (there is something in the US called a "perp walk," which is essentially a photo opportunity for law enforcement to show the media that justice is being executed; this custom probably played a part).
Anyway, I don't want to stir this pot again. India can risk a diplomatic breach with the US, but I don't think such a move is to its own benefit. I agree with you that Modi's magnanimity in overlooking past slights probably results in a win for all sides.
No country that has economic ambitions will shun a market as large as the US. China's a good economy to have trade relations with, but why not also have trade relations with the US? India's involvement with the Non-Aligned Movement is one of the reasons why economic growth was so poor over its first several decades. Business is business, and trade should be pursued with as many markets as possible.