NEW DELHI (Reuters) - Prime Minister Manmohan Singh faces more political headaches after the Supreme Court pressed for deeper probes into a multi-billion dollar corruption case and a ruling coalition ally was implicated in the scandal.
Allegations the government may have lost up to $39 billion in revenues after firms were awarded telecoms deals at rock-bottom prices in return for kickbacks have rocked the ruling coalition and compounded the fragility of India's fragile investment climate.
The Supreme Court, increasingly assertive under its new chief justice, told the federal police agency to go after more company executives and politicians and set up a special court to investigate India's biggest graft case in decades.
One Indian company executive, a former telecoms minister and two other aides have been arrested in the scandal.
"They are part of a wider conspiracy," a Supreme Court bench was quoted on Friday by local media as saying.
"We have a large number of people who think themselves to be above the law. You must catch all of them. Merely because a person is in the Forbes list of millionaires and billionaires does not matter. Remember there is no parallel to this case."
The Supreme Court, along with an aggressive media buoyed by widespread voter anger at the scams, has kept investigations alive, halting any government attempts to stonewall probes and underlining a shift in power politics as India modernises.
A federal police lawyer told a court on Thursday that in one instance companies linked to the scam had paid $47 million to a TV channel run by the regional DMK party, which helps the ruling coalition maintain its slim majority in parliament in Delhi.
The latest revelations will further tarnish the image of Singh and his coalition. While the government will likely survive, the scandal has paralysed Singh's government, with the last parliamentary session closed due to opposition protests.
Asia's third largest economy may be booming, but there may be signs of cracks in its high growth model as years of complacency over reforms to open up the heavily-regulated financial sector, industry and invest in creaky infrastructure takes its toll.
Foreign direct investment has fallen for three consecutive years, from 2.9 percent of GDP in 2008/09 to around 1.8 percent of GDP in 2010/11. Some of this has to do with the global economic slowdown, but investor scepticism is also a factor.
One factor may be the 78-year-old prime minister. His decision-making appears to have been paralysed in his second term despite winning re-election with an increased majority.
The main opposition Bharatiya Janata Party has said Singh's reliance on the DMK prevented him from probing the telecoms case.
The government appeared close to agreeing to a broad, cross-party investigation in the scandal, paving the way for parliament to resume as normal for a Feb. 28 budget session.
But there were few signs the parliamentary session would lead to more reform bills.
Editing by Paul de Bendern and Jonathan Thatcher