Well, It is hard to get into the schools that I mentioned, but not impossible (Yours truly is case in point - not from NIT either, from univ of Bombay). Many of my friends have got into big schools (not counting USC, because as you said, masters is a money making business for them).
Anyway, I met a guy who did MS from IISc and was hired for google research, but not in India, but US. The India center doesnt do core research, is what he told me. I understand it is similar in M$. In any case, what research does M$ do... they just copy Apple for most part.
IITians have reduced going to the US, yes. Because many of them went to the US for the $$. Many of them now do MBA in IIM to do that. Their brand equity makes them demi-gods in India, so it is to their advantage to be here, versus the US, where people know about them, but not elevated to the status of MIT or harvard. Only those really interested in research (PhD) or core engineering come to the US.
So, no... There's no real research happening in India. Only implementation/development. Intel does some of its research in Haifa, Israel but otherwise a lot of their research is in the US. Similar situation for IBM (Hardware and software, not sure of services), AMD, etc. There's a lot of hype but little substance in what comes out of these labs. Google was complaining not too long ago that it was having a hard time recruiting people in India for their standard programming positions due to a lack of talent.
