This is a specific policy to allow them to enforce their censorship laws in other countries.
It seems like India's stance is: If you want to do business in India, you have to have employees you care about on our soil, so we can be mean to them if you do something we don't like.
Facebook's stance appears to be: We like your money enough that we will comply with this.
I'm just glad I'm not one of those Facebook employees.
Nor a facebook user.
"Either have employees in-country so we can intimidate them so you'll do what we want, or we block your service."
Sounds pretty effective? Sure, some people will get around the blocks, but it'll be a relatively small percentage (especially if the government makes circumventing these blocks illegal, most people won't find it worth any risk to do it anyway), and your service will be effectively destroyed in that country.
Stuff like the drinking age (a state law) doesn't apply, but federal laws do apply, which is why American citizens who go abroad to commit gang-related crimes (and more stupidly, break fishing and hunting restrictions) are still arrested when they return despite the fact that no aspect of the crime touched American soil.
This is completely false. There is no country that is more well versed on imposing their laws on other countries than the USA. This is done via sanctions, limiting access to the international US dollar based financial system, and by holding a dominant position in trade negotiations that often allows the USA to literally dictate the contents of foreign laws.
Sure, the US government pressures other countries though various means to adopt certain legal regimes. But in the absence of that pressure (or the absence of a foreign country caving to that pressure), US law does not apply in that other country (well, except to US citizens traveling there; the US can and will arrest US citizens who break US federal law while abroad, upon their return).
The overarching point is that US-based companies will often apply US law to their operations in other countries, even when they are not obligated to (by any law, US or otherwise). Likely this is for consistency and simplicity reasons: it's easier to have one policy than hundreds.
Of course in this case it's the reverse: India strong-arming Facebook into following India's censorship initiatives. Seems they can do this by requiring Facebook employ people who reside in India, who the Indian government can threaten in order to get Facebook to comply. As lame as I think that is, that's life, and capitalism. Facebook seems plenty happy to accept all the revenue generated by their Indian user base, in exchange for complying with questionable (or worse) local laws.
The US arrests or gets foreign citizens extradited to the US for acts committed in a foreign country on a regular basis. I'm not sure how you're not aware of this since it has happened to several very notable figure such as SBF, Kim Dotcom and Assange.
More words: the Cloud Act was specifically designed to apply globally. As long as a company has some kind of presence in the US, they can compel that company to produce any data stored anywhere on the globe. That definitely makes American law apply in foreign countries outside of treaties.
I think it's really that simple. Facebook can say "we will obey whatever your laws decide" to every country. Or it can say "deal with it. Block us." And I think it already happens that way for many countries.