For me, as much as the quoted part feels threatening, this is a positive signal of how the Indian government is ready to embrace cryptocurrency. Here i see a sense of government protection instead of government regulation, a protection intended towards the welfare of their people and of course, a protection for their economic sovereignty.
It's over-regulation in my opinion. I have no idea why they would choose to go this far when they can simply regulate how it's used, just like every other country who chose to embrace it. Letting the government arbitrarily decide which coins are legal/illegal is a little overbearing and gives the system more loopholes instead of less. But yeah it's not like it has been decided. I hope they see how crazy it is.