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Not secondly, firstly.

I agree with jfb3, fom my experience...(and those that I know of who've outsourced projects to Indian firms), the only reason anyone has taken their development efforts off shore has been strictly price. I can name several companies that I've talk with that sent something offshore because the price was "right" and got back nothing usable and wound up having to throw everything out and start from scratch with local geeks. In my opinion, (and I really don't want to sound like an ass here, but I'm afraid there's now way around it)..all the good Indian developers have already left India and are working here in the US.
I have yet to meet someone who has chosen to offshore a project that has anything good to say about the experience or the quality of the code. Hell one company said that received a single jar file for a given application and the damn thing didn't even run...it actually contained non-compiling code.
Quality/talent is the LAST reason projects are sent to India.

I agree with jfb3 and lifewithryan, but to be fair, this is not inclusive to India. The last company I worked for still outsources to Vietnam. It has nothing to do with talent, and everything to do with saving a few dollars. No one likes working with them, their work is average at best, and the time difference and language barriers that need to be overcome are not worth the headache full-time employees must endure. Just so no one gets uptight about this, it is not a cultural shortcoming, but an economic reality. CEOs take one look at this and think, "I don't care if the quality of work sucks. They work cheap and they get it done when I want. Stop being so touchy about your code." Quite frankly, it could be a twelve year old in his basement in some slum in the U.S., and poor managers would still take the bait.

You're tellin' me, buddy! I'm up to my freakin' neck in AdventNet products right now and that makes me sad. The education systems in south Asian countries must be teaching Java about as much and about as effectively as they teach English--that is to say, gigantic shit-tons, and not really very well at all, respectively.

I just posted an article that argues that Indian outsourcing firms are so successful that they are not finding small outsourcing jobs attractive:

http://www.dzone.com/links/india_is_a_uniquely_difficult_environment_for_sta.html

BTW I am working in a Pakistan based software company that is marketing an enterprise application in US.
The venture is pretty successful as we have around 100 clients already using the product.
Interestingly a division of the company is also doing outsourcing work. Although managing these two teams having very different work flows is challenging but it gives the necessary depth to company's cash flows.

So I think the Indian companies should be looking towards software products as a diversification strategy.

Pretty old joke:
If builders built houses just as programmers write programs that the first woodpecker would destroy a civilization.

I worked with Indians. No way. The software development is not just a well paid wasting of time. One must completely understand that he could kill a lot of people because of the code he made. I understand that nobody's perfect but anyway...