1) Yes, most Indians who graduate from their colleges often are lacking quite horrifically in their knowledge as compared to a similar non-Indian counterpart, primarily because the culture within the educational system is largely based around acquiring short term knowledge and then never looking back.
While in the Canadian system, I found it quite pleasant that everything is gradually built from what you learn in your first year, the Indian system is modularized and disparate, with large parts of what they learn forgotten in their earlier undergraduate years.
2) There is a vast variation between the quality of universities in India, however even the IITs are definitely not the same thing anymore. My father who went to IIT gave me the impression that it was definitely a centre for higher learning, where the students actually seriously thought critically about what they were studying, whereas now (through the descriptions of most of my friends and colleagues), they have been reduced to places where one no longer has such a luxury, as their marks matter more than the actual knowledge they accumulate; this wouldn't be much of a problem if the courses actually aligned with real world problems, however the courses deal are largely tangential to real hard work that one might see in academia or industry.
3) In contrast to this, American (Or Canadian) universities offer a much more comprehensive education, and while definitely relying more on the initiative of the particular student, they generally encourage independent critical thinking, and don't place much emphasis on a number received from a three hour exam. This I think is the crucial difference between graduates of these universities and graduates from Indian universities, those who actually go on to do something important would have had a much harder time in an Indian university than a non-Indian one.
I should also probably state for completeness that I am not pursuing and Engineering degree, and I am a physics major, however I don't believe that makes much of what I have said irrelevant.