I've personally hired a number of people in my Delhi office from the local IIT, and these are a few things I've noticed amongst new grads: parrot fashion learning is rife across the board. Despite being smart, they often struggle to think on their feet. It's as if they want a fully defined a problem domain, AND want to solve problems only within that defined domain, much like an exam! Anything outside of their comfort zone is met with a rather damp response equating to "we haven't covered that in class yet". In business (and even development), that attitude is not a good one to have.
What's funny, however, is that if you walk past an Indian shanty town, you will find examples of (often illegal) innovation at every corner, from stolen electricty to rigged water meters etc - usually concocted by people with little education. The innovative mindset exists in the heart of Indian society, but the education system somehow seems to restrict it by making people believe that the path to success is narrow and the same for everyone. Hence the competition.
I feel the education system needs to encourage free thinking more than rote learning. I believe it would allow students to enjoy their subjects, rather than just looking at them as a stepping stone to success. Perhaps if students approached their studies with a sense of wonder and excitement, rather than competetive aggression, their mental state would be significantly better during their years of education.