Just a year ago, I wrote a controversial column called "The Coming Death of Indian Outsourcing." In it, I pointed out that India was eroding its cost advantage with ballooning salaries and not paying attention to innovation.

Since then, however, the financial crisis has halted the pace of cost escalation. But a different devil has given India a whack on its face: Satyam's [Get Quote] scandalous implosion, which has smeared India Inc. All in all, India's outsourcing industry is facing tough times.

But what about Indian innovation? What about entrepreneurship?

These are two separate concerns, and we must acknowledge that the technology outsourcing industry, with its billionaires and mega brands, has successfully yanked India out of the "must work for the government" mentality. Centuries of colonization had bred a "servant" mentality; "business" was a dirty word, but "service" was prestigious. Middle-class Indian families preferred their kids to bag secure, well-paid jobs rather than take the risk of starting something of their own. Quite the opposite of Silicon Valley, where entrepreneurs are the coolest kids on the block.

But Narayan Murthy of Infosys [Get Quote] made the leap and became the poster child of the Indian information technology industry, spawning thousands of entrepreneurs who started similar outsourcing companies. Numerous small, mid-sized and large IT outsourcing companies dot the corporate landscape of India today.

In the process, however, millions of people found another option for secure servitude: working for those outsourcing firms, earning big salaries, doing mediocre work. This has had a remarkably damaging impact on several generations of Indian talent over the past 20 years.

After I wrote my infamous column, I received an invitation to write something for the students of Indian Institute of Technology (Kharagpur), with my thoughts on where the new generation ought to focus. In "An Open Letter To IIT Students," I urged India's best and brightest to look at innovation and entrepreneurship as their path forward

They invited me to deliver the opening speech at their entrepreneurship week last month during my India visit. As I stood on the stage of the packed Netaji auditorium, I told them I gave my first talk at IIT Kharagpur 13 years back. It was a recruitment talk for my small start-up, DAIS. I was not able to recruit a single student. During those days, IIT students either wanted to come to the U.S. or work for large companies with big brands, preferably multinational corporations. No one wanted to hear about entrepreneurship.

But 13 years later, I stood before a crowd of a thousand kids on a Friday evening, feeling exhilarated by their energy and enthusiasm. They all were interested in hearing me speak about entrepreneurship.

India is changing, I noted.

Pradeep Gupta, CEO of Cybermedia and president of TiE Delhi, concurs: "I have been talking on entrepreneurship at various colleges for the last two decades. I always ask a question: How many of you want to be entrepreneurs?" he says. "Earlier, maybe 5% [of] hands went up; today a quarter of the class raises their hands."

But is the entrepreneurship eco-system in India coming along? Is innovation becoming part of this fundamental shift, or are we still stuck in the outsourcing rut?

I asked the question on my blog recently after getting e-mails from several friends and colleagues in India expressing concern that it isn't. A storm of discussion kicked off.

One reader, Mav, started off by pointing out several negatives: "Lack of true seed capital. VCs in India are mostly inclined toward late-stage," Mav wrote. "Lack of mentors who could inspire--very few success stories. Very few good incubator programs. Lack of quality tech talent in India. Mediocrity is available in plenty." On and on, my readers went, listing the problems blocking innovation, blocking entrepreneurship--technology entrepreneurship in particular.

Gupta, however, disagrees. "There are at least 150 incubators in India, and about 40 of them are very good. These incubators don't just give the real estate but nurture the project toward success," Gupta offers. "All the IIT [campuses] have very good incubators. The track records of IIT Bombay and IIT Madras have been exceptional."

And what about mentorship? Gupta says the Indus Entrepreneurs (TiE), a global nonprofit organization, has about 1,000 charter members in India. "TiE has played a very important role in mentoring," he says. "There are extensive mentoring sessions done by all TiE chapters."

Gupta also notes that IIT held a major mentoring program in January 2008; about 1,000 entrepreneurs were mentored in 15 different cities by 225 IIT graduates.

So how do you reconcile the two points of views? Indeed, entrepreneurship in India is gaining momentum. But innovation still remains a big, gaping hole.

Ashish Gupta, a venture capitalist at Helion Ventures, went back to India after a successful track record in Silicon Valley as an entrepreneur. He understands the innovation process and acknowledges that the eco-system is stalling. "To build a product, you need to have either easy access to customers or many members in the team who all have deep shared knowledge of the customer pain," Ashish Gupta says. For now, neither is in place. In upcoming columns, I will explore why.

Meanwhile, Mother India is going through a prolonged labor, trying to give birth to a child called Innovation. We may need to give her a hand.

Sramana Mitra is a technology entrepreneur and strategy consultant in Silicon Valley. She has founded three companies and writes a business blog, Sramana Mitra on Strategy. She has a master's degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Her first book, Entrepreneur Journeys (Volume One), is available from Amazon.com.