Why can't we pay them in Dollar? We can pay them in any currency they want or like, money is digital today and passed not directly but by banks or companies in very different countries. So that is the least of the problems, but such a pipeline will effect a lot of political issues and that needs to be handled and for this the question is not what will India give, but what is Iran ready to do, if we get ready to buy their oil? More controls of their nuclear developments, less involvement in Syria or Libanon?
I do not know why, but since US and EU sanctioned Iran, dollar trade is reduced or stopped:
Last year, India and Iran entered into an agreement in which India would pay for about half of its crude oil imports from the Middle Eastern country in Indian rupees instead of U.S. dollars. The move followed U.S. sanctions that have shut down the global financial system for Iranian crude trade.
India Aims to Widen Basket of Exports to Iran - WSJ.com