No room (for foreigners), part 2

I've been having trouble in north India, in two towns the now familiar 'no room' problem in budget hotels. In these areas budget lodges are prevented from accepting foreigners, it has something to do with the local police and a particular 'form C' required to register their arrival. Foreigners entering is pretty obvious, it's not like any secret deals are possible. In practice this raises the cost for a room from about Rs300 to Rs800-1000. For a while I'd been upset by the illogicality of this, how does this help tourists (both cities have dedicated and very helpful tourist assistance persons at train and bus stations). But then it struck me, there are also foreign business travelers and PIOs to consider. Forcing a higher rate on these groups who have to visit a particular city can increase the income for the area. This is the link, the places where I have encountered the higher fees (Baroda, Lucknow, Chandigarh) are not on the typical tourist trail, or have other traits which make them unsuitable for budget travelers.
For places which do target foreigners, there isn't a clear advantage for forcing minimum rates on hotel rooms. There are two reasons, differentiation, and duration of stay. The first, differentiation, is that the facilities offered by each hotel vary, and in many tourist towns where rooms vary from Rs200 - Rs5000 per night certain tourists still opt for more expensive accommodation. These may offer pools, gyms, cleanliness, hot water, service and so on. In short the lack of a minimum rate does not necessarily drive down rates. This isn't entirely true, the price conscious (and desire not to be cheated) nature of most western tourists causes a large number of hotels to cluster within the lower end of the range.
The other factor is duration, Indian tourists and higher paying Western tourists may be on shorter stays than backpackers and travelers. It is fairly typical that in attractive spots, Indian tourists visit for the weekend whereas a western tourist may stay for at least a week. This leads to the almost amusing situation where western tourists are offered rates around Rs300 which for the same room an Indian pays Rs800-Rs1000. In the end the lodge owner makes roughly the same profit per week. There is also the effect, backpackers only visit or stay for this period because it is cheap.
Trying to explain this in a non tourist spot is very difficult. Indians who can afford to take a holiday are the richer middle class, and consequently pay more. (Price is also a symbol of status, it separates you from the those in different income brackets, and accommodation is chosen for this reason). The preconceived view amongst slightly backward Indians is that everyone from a Western country is rich, shouldn't these people have lots of money. Trying to explain that you want to pay 10% of what Indian tourists pay (I heard one tout call it the 'white rate'... a reversal) isn't easy. Western travelers do come from a different income bracket, and now there is a likelihood that the Indian middle class are wealthier than the young people on their limited savings, or their parents wallet.
Ultimately, returning to the issue of effective minimum rates, I have no problem with cities, states and nations which act in their own best interest, providing it is not to the direct detriment of a particular group. I do have real problems with incompetence and inefficiency, that is bad decisions. If it is in the best interest for these cities to squeeze money out of foreigners on business, so be it.