IITs have been increasing seats at a rate that is often unsustainable. During my stay at IITB from 2007-2012, I saw the number of undergraduate freshmen increase from about 500 to about 900. I think the largest issue has been scaling infrastructure and faculty.
And no, IITs don't have any nobel laureate to boast about, largely because of the lack of core sciences and graduate/post-graduate programs when compared to MIT/Stanford etc.
Its just a numbers game, the universities are not even smart enough to increase seats in a country of 1.2 billion.