Many people have highlighted the stifling regulations in India. Jayant Bhandari points out that inefficient and arbitrary enforcement of regulations really makes it terrible:
Economists would argue that government rules and minimum wage laws are the biggest cause of unemployment and poverty; and that government control takes away the individual initiative to enter into voluntary contracts, restricting the growth of a sophisticated and efficient web of contacts that provides sustainable growth, and stability.
But such a lack of economic efficiency would result in places where the laws were effectively enforced. In India, as in a lot of developing countries, this has a marginal importance: in real practice there are no minimum salaries and no control by the government on the working conditions as my acquaintance now experiences.
In such an environment the distortions take place in a different way, and are much worse. What rules the roost is corruption and bureaucracy. It drives the decent and conscientious to the fringes of economic activity (and the best leave the country). For those who go into business, it becomes the biggest cost of operation, and a huge drag on growth. People get a corrupt mindset, and those who do not want to participate in corrupt behavior get sidelined economically.
I think many regulations in India and elsewhere are designed for corruption. The rules are designed so that they are almost impossible to follow. For bureaucrats and the "law" enforcement authorities it a license to steal. There is not even a pretense of morality in those rules and therefore people and officers do not even think twice before offering and demanding bribes.
But what really surprises and confuses me is that ordinary people grumble about having to pay the bribe but do not want to do anything to remove the unjust rules and regulations. There is an amazing lack of debate about these rules. When people do debate, they point out without a hint of irony that if police and other officers were not so corrupt then the rules would have worked. It is as if the God should have manufactured police and other officers using some special anti-corruption material. Why don't we realize that Govt. servants (or masters) come from the same pool as rest of us? How can they be more honest (statistically speaking) than the general public?
In fact, with so much noise about India being the world's largest democracy, not even in one election, national or local, were the rules an issue! It is absolutely stunning that people bring corruption, misery and poverty onto themselves for 50 years and still not realize the reasons for their lot!