"Indian films have this obsession with hygienic clean spaces, even though the country's not so clean," says Anurag Kashyap. "They're either shot in the studios or shot in London, in America, in Switzerland – clean places. Everywhere except India." By contrast, Kashyap's latest movie, Gangs Of Wasseypur, seems determined to show the India you don't see in the movies. Wasseypur is a nondescript industrial town in Bihar, India's poorest region. And rather than drugs or casinos, these gangs are fighting for control of coal mines and scrap metal. It was filmed on bustling streets and industrial wastelands, even – since one of the movie's central clans are butchers by trade – an abattoir. "That was difficult," Kashyap recalls. "The smell was so bad. While we were shooting, 60 buffaloes and a camel got slaughtered before our eyes. I don't think any of us could eat meat for a month."

In this context, describing Gangs Of Wasseypur as a breath of fresh air seems inappropriate, but for Indian cinema, it feels like a significant moment. The crossover between western and Indian film-making is like nuclear fusion or a long-unsolved maths problem: a conundrum that could unlock untold riches if anyone cracked it, which no-one ever does. Every few years, a contender arises – wasn't it Slumdog Millionaire last time? – but these two tectonic plates of cinema never seem to shift any closer.

Kashyap is in a better position than most, though. Talented, prolific and provocative to his core, the 40-year-old director is leading India's rising indie movement – nurturing whatever alternative directors he can find and turning out movies of his own that play equally well in Ahmedabad or Acton.

Gangs Of Wasseypur is a gangster epic in the grand tradition: a family feud that takes three generations, seven decades, scores of memorable characters, a great many gruesome deaths and a whopping five hours to resolve.

There are no song-and-dance numbers, no muscular heroes, no leering bad guys or compliant females, and no luxury brands. If the average Bollywood product is a shiny yellow Lamborghini, Gangs is a filthy, great freight train, carried along by relentless narrative momentum, fluid camerawork and a throbbing soundtrack. It's an exhilarating ride. "All those pseudo-Hollywood movies set nowhere, with everybody good looking and having great physique – that's not working any more," he says.

Since Cannes last year, Gangs has drawn comparisons with the work of Martin Scorsese, Quentin Tarantino, Sergio Leone and especially The Godfather – with its multi-generational scope and the fact that one of the key characters undergoes a Michael Corleone-like conversion to become head of the family.

Kashyap is weary of the comparisons. "I'm a huge Coppola fan," he says. "But more of Apocalypse Now and The Conversation. The Godfather for me is, like, number three or four on the list." Scorsese's Goodfellas was an influence, he admits. But Gangs is based on fact. "Everything you see in the film is true," he says, "though it did not happen necessarily in the same order to the same people."

Kashyap didn't believe the stories when they were first put to him by writer Zeishan Quadri, who also stars in the film. "I found it funny initially. How can these guys be fighting over nothing for so many years? Then Zeishan started telling me all these stories and the history behind it. I just wanted to shoot the entire thing, and explore the political, socio-economic changes of the region over the years, which is a parallel to what India went through."

Despite its anti-Bollywood stance, movies are a constant presence. Tunes from classic films crop up as mobile ringtones, characters go to the cinema and talk about famous actors. Most provocatively, the chief bad guy, a mine owner-turned-corrupt politician, puts his survival down to the fact that he doesn't watch movies. "Every fucker is trying to become the hero of his own imaginary film," he says. "I swear as long as there are fucking movies in this country, people will continue to be fooled." The opiate offered by Bollywood fantasy, Kashyap brazenly suggests, is part of India's inability to deal with its reality.

"In India, the burden of making people happy is on the movies," he says. "People always accuse me of making these dark, depressing movies. 'Why do you have to pick up on real issues? People are so exhausted and miserable.' So there's this constant pressure to dumb down. India is not a self-service country, we expect servants to do everything for us, and that's how our movies are. People stand back and they want the movie to explain itself to them. Everything is so spoon-fed. And that's the big battle I've been fighting for a very long time."

Kashyap entered industry as a complete outsider: a zoology graduate from Varanasi (only a few hours from Wasseypur) with no connections to the clans that control much of the Indian film industry. He established himself first as a writer, making a breakthrough in 1998 with Satya, a thriller set in Mumbai's underworld. It was directed by Ram Gopal Varma, the edgiest film-maker of the time, who was also once tipped to take Indian cinema to a global audience. That didn't happen, but Kashyap worked with Varma for two more movies, which was "like going to film school," he says. "Varma corrupted me for life. I could not fit in with the rest of them, but he [Varma] changed, so I could not fit in with him either."

His directing debut, Paanch, made in 1999 when he was 26, is still banned in India due to its "sex, drugs and rock and roll" as he puts it. His follow up, Black Friday, fared little better. A hard-hitting account of the 1993 Mumbai terrorist bombings, it named names and stuck close to reality, for which it was suppressed by India's supreme court for two years while the real-life trial played out (he learned his lesson and changed all the names in Gangs). Still, Black Friday earned him a cult following and a reputation on the festival circuit. Danny Boyle cited its chase scene through the slums as one of his inspirations for Slumdog Millionaire.

Kashyap is no longer an outsider but he doesn't fit into either commercial Bollywood or India's distinguished arthouse tradition either. He's more of a Tarantino, or even a Danny Boyle – an independent with control over his output. Gangs Of Wasseypur was financed by the industry, though the budget was surprisingly small: just over $3m (£1.98m). Kashyap cut costs by filming in places he knew from his childhood, including his former family home. "Mainstream Bollywood does not treat me as an insider," he says, "but there's a really good indie scene in India coming up in the last three years. For them I am an insider who supports them." He's not seeking "crossover appeal", which could be precisely why he's achieving it. "When I first started making films, Bollywood thought I was too European, and when I went to festivals, the first reviews I got were: 'This is too Bollywood.' And I had a real identity crisis each time. But after a while I stopped caring – as long as I'm given the money to make the films I want, and people are watching them."