Now it is possible that there is a bit of a chicken and egg problem here. But, imho, it is not enough to state baldly that there is significant entrepreneurial and IT activity happening here. IT as in "outsourcing" or "India Development Centres" sure. But the level of talent or software startups available is nowhere near what Silicon Valley offers. The few startups I have seen here in Bangalore are all a bit flaky. Examples :- Guruji.com claims to do "India Specific Search" better than Google. Their search engine is terrible . Minglebox attempts to create an Orkut clone (there was a scandal recently about some incestous connections between the VC and a founder of the company and suspicions about the objectivity of the deal and so on).
The only half decent software startup I know in India is Zoho and it remains to be seen if they can avoid being crushed by the Google Office juggernaut.
Now as to talent. Name 10 Indians who have significantly contributed to Open Source software and are based in India. Any significant languages, frameworks etc that came out of India?
I am not saying there aren't extremely bright people or developers in India . Given the size of the population it is impossible not to have bright people . But there does seem to be a distinct lack of entrepreneurial ability and the people who do seem to be very good developers don't want to take the risks of running their own company. Which is what Google Sacca was talking about. The people who do want to run their own companies are not correlated with high levels of programming skill, who prefer to emigrate to the USA.
Having worked 10 years in Bangalore, I assert that YC will find hypothetical Indian operations massively unsuccessful. This may change in the future. But for now, YC should focus on the US.
And before anyone accuses me of "racism "or something , I am Indian. I just try not to be blinkered.