I think for all the talk of "soft state" and the like, the Indian govt is caught between the devil and the deep blue sea. It takes action against Dawood and even if the mission is a success and doesn't end in a humiliating failure, then what? Tensions increase again, anyone in Pakistan who might be willing to talk with India peacefully will change their tune and the ISI/PA may feel emboldened enough to launch new proxy attacks into India. Then what? The peace talks grind to a halt, the Pakistani populace hardens against India, trade reduces to naught etc. Back to square one or rather one step forward, 4 steps back.
The fact is India cannot be comparing itself to the US and the OBL raid- the US has the luxury of thousands of miles of ocean between it and Pakistan and it doesn't "need" peace with Pakistan in the same way India very well does.
And one has to say such an operation to get Dawood is going to deliver very little wrt to its impact on India's threat matrix. Just how relevant is this a-hole today? For every Dawood there are dozens of mid-level men who are just as critical to take out. The US could do so with drone strikes and joint missions with the ISI (up to a point)- India has NO such chance of working WITH the Pakistani establishment to target these people.
One has to conduct a cost benefit analysis in getting Dawood and I just don't see the benefits outweighing the costs in this case.
For now the ONLY way this can go is diplomatically IMHO. Get trade going, get peace talks underway, get people-people contact increased and hope the Pakistani establishment abandons their twisted policy of harboring terrorists against India. I'm not naive enough to think this is going to happen overnight- it may not even happen in my lifetime as this would be a HUGE change in Pakistan's foreign policy and Raison d'être. The PA is going to be a significant stumbling block here though,
At the very least India should compel the Pakistani establishment to allow for "hot pursuit" in Pakistani territory.