I totally agree with your point. It is jus that algo and ds are the best way to judge the analytical skill of a person and his ability to think in the right direction.
Actually this is extremely common and infact, projects for undergraduates and post graduates are a thriving business in India. The colleges give a damn about this and they are seldom bothered. This kind of practice is extremely common in government aided universities in India.
But, I must also say that there are some universities where the students perform exceptionally.
The entire mathematics community eagerly awaits the announcement, at the opening of the ICM 2010, of the Fields Medals (started in 1936) and the Nevanlinna Prize (started in 1982). At the 2006 Congress another award, the Gauss Prize, was added. A new award, the Chern Prize, will be given for the first time in Hyderabad. The IMU has been awarding the Fields Medals- generally considered the “Nobel Prize for mathematics” – since 1936, the Nevanlinna Prize in the field of theoretical computer science since 1982, and the Gauss Prize for applied mathematical work since 2006. The Fields Medals and the Nevanlinna Prize are given to young researchers below 40 years of age, in recognition of specific path breaking results. The Gauss Prize recognizes mathematical results that have opened new areas of practical applications.