Steve Hamm's (The author of Bangalore Tiger) Blog has a very important and relevant post to the IT Services industry in India. In this post Steve highlights the issues faced by the CEO of "StreamServe" with a offshore development center they has in Mumbhai, India.

Excerpt from the post:
Some of the problems we encountered:
- Communication. You will never hear about problems until it is too late. It's a cultural thing. They loose face if they let someone know they don't know what they are doing or that the result is below par. The problem is that there is no way you can manage this and you cannot take actions. You end up with either a dropped project or a bad product. You need to have someone you trust on the ground. -Infrastructure. Our team was in Mumbai. Many in high tech use Bangalore. The Internet and phone connections were awful and dropped four to five times a day.
- Loyalty. We noticed a dramatic change in resources constantly moving. People were always leaving for another 20% salary increase. It's all about cash and who will give you more.
- Micro Management. If you are to avoid some impact on lack of information sharing about any problem you must micro manage the project. Preferably, you need someone there full time, which we couldn't.
- Cost. Well, it looks cheaper on the surface but caveot emptor. In the end, this cost us more and we were throwing money away. Furthermore, t is not that cheap any longer. WE moved our entire offshore model to Ukraine and are extremely pleased.
- Quality. In short, we discovered that the code developed in India was either poor or eventually thrown away. Not very well invested time and money.
It's probably better to use India for QA work rather than Development. Maybe we acquired/hired the wrong resources, or we didn't explain the product well enough, or we weren't as prepared for off shore business as we are today, but after moving the resources to Ukraine, I would not try India again.

Fact: These are positively issues that the Indian IT Industry is faced with.

75 per cent of India's 400K -plus engineers are unemployable. - NarayanMoorthy, below is an interesting chart from Forrester:
I found this another post at Life Beyond Code, A very interesting view of the kind of work that is done.

First, while the IT boom has helped a small percentage of people directly and a larger percentage of people indirectly, it has created a bunch of problems for all the people. Let me just focus on the dilemma for the software industry here, in this short note.

1. Small and mid-size companies typically are having a hard time attracting top talent to their companies. How can a small company match all the perks and resort-style living offered by big companies anyway?
2. The big companies are able to attract top talent. However, they are focused on getting bigger projects. Majority of bigger projects are focused on commodity work.
3. The big companies are not interested in working with smaller clients as the deal sizes are small. These smaller projects may be "really cool" but it may not make business sense for larger companies to chase them. Margins may just not justify the effort.
4. Smaller companies won't get projects from bigger clients (size does matter) so they get the cool projects for small and mid-size clients. Unfortunately, since they can't get top talent to work on these cool projects, they have to work "extra hard" to satisfy the clients.
5. The big companies are thriving on big commodity projects staffed by top talent. I think top talent who are working on commodity projects are held as prisoners as obviously they are being "overpaid for commodity work" but they can't exit as they have to make a "big sacrifice" to make the switch.

If you look at these two posts together, you realize that a large amount of the workforce is doing really low end work which doesn't require too much skill, most people/resources are just doing support and maintenance tasks and by extension the skills of these resources are also limited. That Of course doesn't mean there aren't quality developers around.

Source: 1, 2

Prashanth Rai