Why is the villain played by an Indian?

It's typical dumb yank bubblegum brain-dead comedy you're looking for political correctness in the wrong place.

Because Americans are stronger, bigger, louder.

I see your point, I guess though Baywatch isn't a documentary so the powers-that-be can cast whoever they want as villain. At the end of the day Priyanka could have turned down the role. It's possible that when Die Hard (the original one of course) was cast, no German actor was willing to play uber-villain Hans Gruber, probably explaining why a Brit, Alan Rickman was cast (and he was most impressive may I add).

In any event, maybe the producers will think twice about casting an Indian as a villain now that President-elect Trump has announced the appointment of two Indian females to high level posts:

Nimrata "Nikki" Haley(née Randhawa) as UN Ambassador
Seema Verma as Administrator of the Centers for Medicare and Medicaid Services.

Exactly.

And even if her name isn't fake, people aren't stupid. We can see that it's an Indian actress, not one of white European ancestry.

So like you say, it would have been far more progressive if she had been cast as one of the main lifeguards rather than the evil antagonist (I'm guessing she's a corporate environmental threat seeing as she's described as an oil tycoon in the press releases).