Sanskritization was a deservedly important concept in its time, of great utility in the development of the anthropology of South Asia, which in the era of the village study (e.g. Srinivas, Adrian Mayer, early McKim Marriott) was beginning to connect local ethnography with the civilizational complex encompassing it (unlike the earlier isolated ethnographies of South Asia, such as Rivers on the Todas, Radcliffe-Brown on The Andaman Islanders, and Seligman on The Veddas). Besides the ideas of both sanskritization and westernization, Srinivas refined Redfield's distinction of the Great and Little tradition, proposing local, regional, peninsular, and all-India levels of Hinduism.
You might like to read Srinivas' idea of sanskritization in relation to Fox's essay on varna systems:
Fox, R.G. 1969. Varna Schemes and Ideological Integration in Indian Society. Comparative Studies in Society and History 11, 27-45. (available through JSTOR)
You might also be interested in the application of Sanskritisation to the ethnography of Nepal. See:
Jones, R.L. 1976. Sanskritization in Eastern Nepal. Ethnology 15, 63-75. (available through JSTOR)
Regarding your point about ethnocentrism, well that would certainly relate to Berreman's critique of Dumont's Brahmanocentric approach. See:
Berreman, G. 1971. The Brahamanical View of Caste. Contributions to Indian Sociology (n.s) 5, 16-23.
Even if Sanskritization may seem a little simplistic now, we have to recognise its stimulating role within scholarly discourse.
Perhaps what is of core utility is the idea that a hegemonic cultural system so implicated in a complex, hierarchical, and unequal world of ranked castes, presents opportunities for emulation if one wishes to advance the interests of one's group (i.e in how your group is evaluated by others, especially the dominant ones). It is about the play of social, political and economic power by means of modifying one's ritual and other social practices. And again with regard to Nepal, you might like to read William Fisher's Fluid Boundaries, in which he discusses the changing circumstances and factional disputes among the Thakali concerning their interests in defining themselves as Hindu or as Buddhist - I would suggest that this is not entirely unrelated. One of the most fascinating developments in the anthropology of South Asia has been its historicisation, such that we have discarded ahistoric structure, instead mapping processes of ethnogenesis, and recognising disputed caste statuses and their (admittedly limited) histories of mobility. Sanskritization takes us towards a view of process in society and culture, and that is its value in retrospect.
Just some thoughts...