Yesterday's newspapers carried stories about a political party in Bombay rioting and burning vehicles; the papers of the week before carried stories of another political party's leaders physically attacking a female author. Everyday there are stories of these kind of serious criminal offenses with no action taken against them.
On the civil side its even worse. Every business knows that it is impossible to enforce contracts in India as it just takes too long (15 - 20 years). And every Indian knows to never ever take on any government official or body through the legal system because they will do all kinds of nasty things to you using the government machinery (tax raids, police lockup, etc).
In short the legal system is broken.
While there exist strong laws both on the civil and criminal side, the implementation is non existent. This is chiefly due to three reasons:
1. India has only 13 judges per million people, whereas the US has 150 per million. This results in millions of cases backlog at any given time. The average time it takes to settle non criminal cases is 20 years.
2. The judicial infrastructure is extremely weak. Many judges are not well trained and many are not provided with support infrastructure like typists, fans, desks, etc. Goto any court in India other than the High & Supreme court and you will find crowded claustrophobic rooms, where the poor litigants and even sorrier judges have to operate.
3. Judges are very poorly paid, thus keeping the better talent away. Did you know that the monthly cheque of a High Court judge is $600? I bet you can't even believe this. Do you expect the best and the brightest to apply? Or anyone to apply?
How will there be economic progress in India beyond a basic limit? There is only so much economic progress that can be achieved without a decent legal system. I think we are about to hit our economic growth plateau very soon, maybe 10 years at the most. After that growth may slow or there may even be negative growth.
The way out: private legal system. There is a great opportunity and need for a private legal system. Parliament has passed the Arbitration Act and this opens the way for a private disputes resolution mechanism. If private dispute resolution happens (and there is no reason why it should not happen) we will see massive continued growth of the economy.