Inducing a grammar directly from text is one of the oldest and most challenging tasks in Computational Linguistics. Significant progress has been made for inducing dependency grammars, however the models employed are overly simplistic, particularly in comparison to supervised parsing models. In this paper we present an approach to dependency grammar induction using tree substitution grammar which is capable of learning large dependency fragments and thereby better modelling the text. We define a hierarchical non-parametric Pitman-Yor Process prior which biases towards a small grammar with simple productions. This approach significantly improves the state-of-the-art, when measured by head attachment accuracy.