You bring up good points. Focusing on Vatican City is a funny example to pick and doesn't work well when we look at the facts.
So let's instead look at populations of each country and distribute caps that way. This seems reasonable and democratic, though different from the current system.
In 2017 there were 179,049 new H1B visas issued to persons of all nations globally. There were also 136,393 H4 H1B spousal visas issued.
Of this number, 129,097 new H1B visas were granted to Indian nationals and 117,522 spousal visas (which allow the right to work) were granted to spouses of Indian nationals.
Indian nationals received that year 129097/179049 = 72.1% of all new H1B visas. Indian spouses received that year received 117522/129097 = 91.0% of all H4 spousal visas.
I agree with you that these numbers are vastly disproportionate to population. You are right. These numbers are incredibly unfair to people of most nations, all but one in fact. Can you state what you have learned here which nations are receiving unfair treatment and which one single nation is receiving vast privilege and preference completely out of proportion with their population, based on documented verifiable facts? Please state what you have learned now that you know the actual facts regarding distributions of H1B and H4 visas population as they pertain to national origin. Thank you!
There is certainly reform needed in how, to whom and with which companies H1B visas are granted. However, let's put that aside as a separate issue and assume for now that H1B visas are granted in a fair, non-discriminatory fashion.
How does it make sense to limit the total green cards for any country to 7% of the total, regardless of that country's desire to immigrate to the US or even that country's overall population? What legitimate, non-discriminatory reason is there to cap green cards this way? (Vatican city is brought up because has the same cap on green cards that India has, despite much lower population and non-existent demand.)
The cynical view here (and one I suspect is at least partially correct) is that the relative inability of Indian workers to get green cards makes Indian H1B workers more cost effective and valuable to the companies that bring them to the US to work precisely because they are easier to exploit.
A truly fair system would impose identical caps on both H1B visas and green cards. (Ideally, this cap would scale somewhat with the overall population of that country.)
As it is, we have system seemingly designed to provide companies with low cost workers who are more easily exploited. This is bad not only for Indian workers, but for those worker's American peers and labor force competitors.
What we should have is a system designed to bring high quality, diverse workers with needed skills into our country and provide all those workers with a fair and realistic path to citizenship.