This is an interesting question because there are a lot of dimensions to answering it.
First of all when we look at the overall graduate education system in our country, there are many areas we can be extremely proud of like the National Education Policy framework and many areas to improve. In the late 90s at the start of the IT revolution in India, an emphasis was made to equip our aspiring students in professional colleges with career and job oriented skills . This was re-emphasized with every passing year, leading up to this decade with both government and industry joining hands with universities and colleges to give our education system that needed edge. Of late with the emergence of the direct to consumer approach in India, tech companies are bypassing erstwhile training practices, and directly interfacing with students so that they can hone their technical skills and enter the industry.
Despite both these above mentioned initiatives, it is merely a drop of water in the ocean, as when you take engineering as an example ,India churns out close to 1,50,000 engineers every year of which a very high percentage of them are unemployable. This trend is not a passing phase , and hence there is something in our educational system especially at the undergraduate and graduate level that needs to be addressed in order to improve the overall system.
I hope the above paragraph sheds some light on why people consider graduates as raw material when in an ideal situation they are supposed to be raring to go material, capable of taking on the latest technological challenges in a bid to usher the nation into the next phase of economic growth.
From the point of view of a small self-funded startup whose business model is still in a beta stage, hiring an intern is definitely a good strategy upfront , but experience has taught me that there are only two real qualities one should expect from an engineering intern and that is a certain degree of trustworthiness and commitment to a given task.
There are various hiring models like (paid, unpaid, expenses covered , revenue sharing model) which make the task of hiring easier. I generally prefer sites like Lets Intern which let me shortlist candidates for a particular job opening and co-ordinate with them online first before giving an offer.
For a VC funded startup, i can only surmise that one has to first hone the business model / product until it is out of beta, and then the task of refining , re-inventing the model/ product can be laid on the shoulders of interns. The bottomline is if as an indian startup you want to build the next big thing in the industry, please dont look to interns, and hire the best you can find on naukri / monster. However if there are certain tasks / activities in your firm are more of an analytical nature, and are relatively simple technical tasks, which can take a considerable amount of time (eg- at my startup I am currently working on the High level design document for a web based product, and now i either need someone to help with the low level design or directly interpret the design and implement the code) you should go ahead and hire an intern.
From the industry employment numbers point of view, it is a given that an intern is not considered as a long term option and it is unlikely that an intern would stay with the company / startup for a longer period than three months (six months max) and so again the candidate has to enter the job market and look for a permanent opening elsewhere.