The problem with India is that the market has been saturated. All the really good Indian engineers have migrated to Silicon Valley, and the rest of the good ones have been snapped up by the likes of Microsoft India and Google India.
As many companies who have tried to outsource in the last few years and have been burned in the process have learned, the engineers they've been getting have a poor grasp of computer science and an even poorer grasp of English. Until the public school system is fixed so that the Indian masses can get a good education, the situation isn't going to rectify itself very quickly.
India produces more engineers as more leave. There are decent number of good engineers. You have to understand that output of engineers have increased 10 times in the last 10 years and thus you may find quality deficit in some; but in general the number of good indian engineers have gone up roughly 10 times as well. By the way, Indian outsourcing industry is alive and kicking well - it is a $120B industry now and still growing at 15% per annum - not bad for such a large industry at all.
There are certainly a large number of engineers being produced - that doesn't mean they're employable. When you have training companies saying that "75 percent of engineering graduates are not employable,"[0] you know you have a serious problem.
And of course the outsourcing industry is doing well - you have plenty of American companies eager to outsource back-office programming in order to make their next quarterly earnings report look more impressive. This is just one symptom of the MBAification of American businesses, something that cannot continue unabated if long-term success is a goal.
One company you won't hear about much when it comes to outsourcing is Apple. They have an office in Bangalore, but they don't have the sort of branches that Microsoft or Google do. Why? Because they care about quality, even if that means paying their engineers more. If they hire Indian engineers, they'd rather that they come and work in Cupertino, rather than trying to cut costs by leaving them in India. And look where it's gotten them - more than $100 billion sitting in the bank and some of the most popular and profitable consumer electronics out there.
Yes the 75% figure may be right and that is a problem. But when you are producing 4million engineers a year, that still leaves 1m good ones. That is the sheer number. The mass effect. Apple is an outlier - so is Steve Jobs.
As many companies who have tried to outsource in the last few years and have been burned in the process have learned, the engineers they've been getting have a poor grasp of computer science and an even poorer grasp of English. Until the public school system is fixed so that the Indian masses can get a good education, the situation isn't going to rectify itself very quickly.