Kyanar: I've seen some really bright cookies in India (and 90% of the team I work with now are Indian and do an exceptional job) and I've seen some terrible ones (in my previous job, the Indian outsourcing provider screwed up so badly, they flew their developer to us in NZ to do the job properly!) so it's not necessarily even the outsourcing that's the problem, it's just the fact that... well, the people they chose to do the job didn't know what they were doing.
I've been working with IT outsourced to India for a number of years now, and work with outsourced Indian dev's almost daily. They are great devs, but man the communications are hard sometimes. Language and culture have to be factored it, and it often take 3 or 4 times more effort on our part to fully communicate what we need from them than it would have if they were in the same room.
Getting outsourcing of any kind up and running is hard slog to start with. It's only once it becomes mature that it starts to deliver value (IMHO).