The government was forced on Thursday to scrap a contract approved by the Prime Minister's office to lease valuable satellite spectrum in another blow to his credibility, stung by a series of corruption scandals.
The about-face followed a probe into how the state-run Indian Space Research Organisation (ISRO) granted a small firm, Devas Multimedia, a contract to obtain airwaves through two state satellites in 2005 without a proper bidding process.
Failure to seek the highest bid for access to the spectrum, which can be used for wireless broadband and other data services, may have cost the state billions of dollars in lost revenue, according to reports, which have said the lease was worth about USD 220 million.
The opposition has complained that the chaotic and unprofessional way the government issued licences in the world's fastest growing mobile phone market, with more than 750 million users, gave a worrying signal to investors.
The announcement came a day after embattled Prime Minister Manmohan Singh hosted a rare televised media roundtable to fend off accusations he was running a lame duck government mired in corruption scandals.
The new telecoms minister, meanwhile, has pledged to change the way India issues telecoms licences and will also go after wrongdoers, suggesting the turmoil surrounding corporate and political India may not end anytime soon.
"We have gone to the root of the matter," said Veerappa Moily, the federal law minister, adding the contract between the government and Devas "shall be annulled forthwith."
Allegations the government may have lost up to USD 39 billion in revenue after companies were awarded separate mobile licences and radio spectrum in 2007-2008 at rock-bottom prices in return for kickbacks have caused months of parliamentary paralysis, rocked the ruling coalition and rattled India's markets.
Singh's former telecoms minister is under arrest as a consequence, as is a senior executive of Etisalat DB, whose company won one of the licences. The federal Central Bureau of Investigation (CBI) is investigating whether anyone received kickbacks in the flawed contract process.
Billionaire quizzed by police
The probe into telecoms licencing reached the highest levels of corporate India on Wednesday when billionare Anil Ambani, one of India's richest men and chairman of No. 2 mobile firm Reliance Communications, was questioned by federal police.
Anil Ambani was ranked by Forbes last year as the world's 36th richest man, although the value of his listed assets has tumbled, with Reliance Comm and Reliance Infrastructure the two worst performing stocks over the past year on the main Sensex index.
JPMorgan on Wednesday slashed its target price on Reliance Comm by 49% to Rs 82, citing lower estimates for wireless and broadband segments and issues related to spectrum regulations.
Reliance Comm shares rose 0.25% on Thursday, while Reliance Infrastructure ended up 1.6% in a market that was 1.13% higher.
That Singh was forced to deny talk of resignation on Wednesday underscored both the gravity of the scandals and how Singh's decision-making has been paralysed in his second term despite being re-elected in 2009 with an increased majority.
The latest scandal is set to pour more oil to the flames.
Another telecoms scandal
The Devas satellite reversal is troubling for Singh because his office was responsible. In the 2G mobile scandal, the licences were granted by his telecoms minister.
Deutsche Telekom is an investor in privately-held Devas.
The ISRO leased transponders on two of its satellites to Devas Multimedia, grantind it access to S-band telecom spectrum, worth potentially billions of dollars to communication providers.
While not currently in extensive use, S-band spectrum is likely to become increasingly valuable in India's rapidly-growing mobile phone market, with its ability to provide wireless broadband and other mobile data services.
Singh, who oversees India's space ministry, denied in early February that any revenue had been lost.
Parliament deadlock?
The last parliamentary session was halted by opposition protests demanding a probe into the telecoms scam, effectively stopping any reform bills such as one to make land acquisition easier for both industry and farmers.
Singh's government now appears close to agreeing to a broad, cross-party investigation into the 2G mobile scandal, paving the way for parliament to resume as normal for a February 21 budget session, and Singh said he would press ahead with some reforms.
The Congress party-led government is not at risk of collapsing due to support it has from coalition allies.
Foreign investors have pulled hundreds of millions of dollars from the Indian stock market since the start of the year, while foreign direct investment (FDI) has fallen for three consecutive years, from 2.9% of GDP in 2008/09 to around 1.8% of GDP in 2010/11.
Some of this is connected with the global economic slowdown, but regulatory uncertainty is also a factor.
The next general election is still three years away and Singh has opportunities to regain the initiative, whether through spending on social welfare programmes or doing better than expected in state elections.
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