Because the government doesn't want to be seen as xenophobic. One of the major talking points of the prime minister and his government is "diversity is our strength". They also may want (depending on the department) to be seen as distancing themselves from expenses, not necessarily engaging in cost savings per se, but in cost-saving-style behaviour.
> Even if its cheaper keeping the money in country seems better than sending it to India.
Having worked with IBM-sourced contractors working in the U.S. and Canada, I can say that at least the ones I worked with were pretty useless regardless of where they come from.
The problem is that the government is bidding by familiarity rather than competence, and isn't willing to hire anyone competent enough to build a genuine team. When they tried their Shared Services Canada thing, it was a disaster.
The problem with government in Canada is apathy. Nobody, and I mean nobody, cares at all about Canada as an ideal or concept; nobody really cares all that much about their fellow Canadians.