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India Stocks Sink on Telecommunications Scandal by Heather Timmons

A widening corruption scandal that has touched India’s prime minister sent the country’s stock markets down sharply on Friday and threatened to tarnish the country’s image as a rising economic power.

Setting off the turmoil was a report from the country’s auditor earlier this week that about $40 billion in wireless spectrum license fees had been squandered by the government’s telecommunications and information technology minister.

On Thursday, India’s Supreme Court criticized Prime Minister Manmohan Singh for failing to respond for more than a year to a request to investigate allegations that the licenses had been sold at well below market rates to politically connected companies.

While Mr. Singh was in no way implicated in the scandal, it was a rare rebuke of the mild-mannered economist, known as the father of India’s economic liberalization.

The Sensex, the benchmark of the Bombay Stock Exchange, fell more than 2 percent on Friday, before closing 1.7 percent lower. The National Stock Exchange’s Nifty index dropped as much as 2.5 percent and closed down 1.8 percent.

Shares of Reliance Communications, a phone company implicated in the scandal, whose chairman is the billionaire businessman Anil D. Ambani, dropped 3.8 percent.

Reliance Communications said in a statement that it had “always been in full compliance with all applicable laws, rules and regulations.”

The telecommunications minister, A. Raja, stepped down Sunday just ahead of the release of the auditor’s report. Mr. Raja, who has said he has done nothing wrong, was the third high-ranking Indian politician to step down this month amid allegations of corruption.

The string of departures seems to have prompted soul-searching at the highest levels of government.

“Our economy may be increasingly dynamic, but our moral universe seems to be shrinking,” Sonia Gandhi, the president of the Congress Party, said Friday at a conference in New Delhi, according to multiple news reports.

“Graft and greed are on the rise,” she said. “The principles on which independent India was founded, for which a generation of great leaders fought and sacrificed their all, are in danger of being negated.”

Ultimately, India’s ruling political alliance, headed by the Congress Party, could be weakened, and the country’s image as an attractive and open place to invest could be damaged, analysts say.

“This is a very serious crisis of credibility” for the Indian government, said Mahesh Rangarajan, a political analyst and history professor at Delhi University. “When you are deregulating an economy, you can’t do away with regulation.”

The Indian economy is projected to grow 8.5 percent this year, and Western companies and governments are looking to the country to lift their own weak growth rates. Last week, President Obama visited India, along with an entourage of more than 200 American executives, in an effort to strengthen economic ties.

Telecommunications is often held up as the most successful example of the Indian government’s ability to free industry from the stifling effects of the so-called License Raj, the traditional practice of doling out permits to make goods or deliver services, often to well-connected families who paid bribes.

That practice nominally ended as the government yielded control over many industries to private companies, mostly in the early 1990s, and allowed market forces to dictate which companies survived and failed.

But the recent investigation found that India’s telecommunication minister, Mr. Raja, awarded licenses for new spectrum in a way that “lacked transparency and fairness,” according to the report, which also implied that Mr. Raja favored some companies.

On Thursday, in criticizing Mr. Singh’s handling of the scandal, the Supreme Court gave him until Saturday to respond in writing. A hearing on the matter is scheduled for Tuesday. The hearing promises to be complicated and threatens to pit several of the government’s political appointees against one another.

On Friday, the Ministry of Law said that the attorney general would represent Mr. Singh in the Supreme Court case, while the country’s solicitor general would represent the Department of Telecommunications. An additional solicitor general will represent the Central Bureau of Investigation, the agency responsible for monitoring internal corruption.

With nearly 700 million customers, India’s booming mobile phone market is the world’s largest after China, and it has attracted foreign investment from individuals and companies in Europe, America and the Middle East.

The country’s telecommunications regulator said Thursday that 69 of the 130 telecommunications licenses issued since 2006 should be revoked. Kapil Sibal, who is serving as temporary minister of telecommunications, said Friday that he would not do anything that would disrupt service to customers but implied that some operators might need to pay more to keep their licenses.

Mr. Raja is a leading lower-caste politician in a major southern Indian political party that is a key ally of the Congress Party and provides a crucial 18 seats to the coalition government.

Tax evasion, crime and corruption have cost India $462 billion since 1948, according to a report released this week by Global Financial Integrity, an anticorruption group in Washington. Faster growth after the opening up of the economy has led to even more illicit money flowing out of the country, the report said.

Within India, many hope the recent tide of investigations and political departures is a sign that corruption’s long grip on the country is lessening, not increasing.

“If you want to damn India you say ‘They are full of corruption,’ but you have to see there is also a live democracy at work that is as free as the United States,” said N. Vittal, a retired Central Vigilance Commissioner, another anticorruption agency.

“We are witnessing a type of catharsis,” Mr. Vittal said, and “out of this something good may come.”

Lydia Polgreen contributed reporting.