India makes arrest in graft scandal

New Delhi - Indian police have made the first arrest of a company executive in a multi-billion dollar telecoms corruption scandal that has rocked the Congress party-led government and undermined Prime Minister Manmohan Singh.

The scandal, one of several during the Congress party's second term, has not yet threatened the survival of the coalition because it holds enough seats in parliament, and Singh is still seen as one of the few politicians skilled enough to hold the government together.

But it has already led to the arrest of the former telecoms minister and the opposition, led by the Hindu nationalist Bharatiya Janata Party, is going after the prime minister, accusing him of allowing graft to go unchallenged.

With the government and Singh on the back foot, the risk is that the scandal could hurt the coalition in state elections this year and prompt the government to shift to more populist measures, putting economic reforms in jeopardy such as allowing foreign investment in multi-brand retail and financial sectors.

Ultimately, it could weaken the unity of the coalition ahead of the 2014 general election.

"It is inevitable that as these scandals continue to arise, the spotless kurta of the clean man will begin to look dappled," said M.J. Akbar, editor of news magazine India Today, referring to the prime minister's traditional white tunic.

Authorities arrested Shahid Balwa, vice chairman of a joint venture with Abu Dhabi's Etisalat , overnight on allegations two Indian telecoms firms got favourable treatment when licences were awarded in 2007-2008 in the world's fastest growing mobile market.

One of those companies was Swan Telecom, which has since been renamed Etisalat DB and is about 45% owned by Etisalat.

Police suspect government officials colluded with the private sector in selling them lucrative 2G mobile licences below market value and are now probing whether anyone received kickbacks.

The case is India's biggest graft scandal since 1989, when the Congress party lost a general election due to the Bofors scandal over gun contracts involving close associates of then Prime Minister Rajiv Gandhi, who were accused of taking bribes.

The stakes in the telecoms scandal, which may have cost the country up to $39bn in lost revenue, are higher. Since Bofors, India has grown into a global power and a key destination for global investors in emerging markets.

"The same story of Rajiv Gandhi's election loss after Bofors is in danger of being repeated," said Paranjoy Guha Thakurta, a political analyst in New Delhi.

India's mobile market is huge with around 730 million subscribers, roughly equivalent to Europe's population. The number of subscribers is growing at some 17-18 million a month.

In another controversy this week, federal auditors are probing the allocation of satellite communication bandwidth to a firm by the space agency, a portfolio overseen by the prime minister. The government has moved to cancel what it says was a flawed 2005 contract that undervalued the spectrum.

Opposition claims that potential income of $44.1bn could have been lost may fail to gather momentum due to the case's complexity and the fact the satellites have not even been launched. But once again, Singh has been accused by the opposition of negligence.

The government has denied the opposition's claims.

"These decisions have been taken by technocrats, possibly without commercial savvy," said Mahesh Uppal, director of telecoms consulting firm Com First. "The government may have erred in its process."

Scandal after scandal

Parliament's last session was halted by opposition protests demanding a probe into the 2G scandal.

The government has refused a parliamentary investigation, but there have been recent signs it may cave in, worried more chaos could make the passage of the key February 28 budget difficult.

The executive arrested in Mumbai was managing director of DB Realty and vice chairman of Etisalat DB, an Indian telecoms joint venture with DB Group, which controls DB Realty.

A police lawyer earlier this month also named property firm Unitech , whose Unitech Wireless joint venture is majority held by Norway's Telenor , as a company that received unfair advantages in the license allocations.

Shares in DB Realty dropped about 20% in early trade after reports of the arrest before reducing losses to stand down close to 6%.

Shares in Unitech, India's second-largest listed realty company, fell more than 8% in early trade on Wednesday before paring losses.

Etisalat, whose shares were steady in Abu Dhabi trading, said on Wednesday it had no involvement in any corruption. DB Realty said the executive was "wrongly implicated" and that no one in the firm had done anything illegal.

Unitech last week denied it had received any favours and said it had complied with rules.