NEW DELHI, July 22 (Reuters) - A judicial report has indicted top ministers with illegal mining in a key state ruled by India's main opposition, an explosive charge that will hurt the party's anti-graft campaign against Prime Minister Manmohan Singh and his government.
Karnataka, the country's second largest iron ore producing state, has long struggled with illegal mining and become a showcase of a failure by institutions to crack down on graft and where politics and business are closely intertwined.
Justice Santosh Hegde, an independent ombudsman tasked with investigating charges of corruption in the southern state run by the Bharatiya Janata Party (BJP), confirmed on national television the contents of the report leaked to local media.
The report is an embarrassment for the BJP, which has aggressively taken on the Congress party-led federal coalition government over a series of scandals.
The BJP may be forced to sack the top officials implicated in the report to avoid a collapse of the state government.
Three ministers in Karnataka are accused of charging miners up to 45 percent of their produce before allowing it to be transported to ports, costing the state coffers more than 18 billion rupees ($400 million) in lost revenue, Hegde said.
The state's Chief Minister B.S. Yediyurappa was also named in the report but the specific allegations against him were not revealed.
"It's a huge racket. As a matter of fact, the CM (chief minister) is responsible for what's happening," Hegde was quoted by the Times of India and Indian Express newspapers as saying.
Yediyurappa is on holiday abroad and his spokesman, K.P. Jagadish, declined to comment on the report saying it had not been presented to the state government yet.
The chief minister has in the past denied any wrongdoing.
"Let the report come out. We will take adequate and appropriate action once we have studied the report," BJP spokeswoman Nirmala Sitharaman said.
The ongoing tussle in Karnataka resulted in the banning of iron ore exports from the state for a period. The state accounts for about a quarter of the country's iron ore exports.
Yediyurappa is one of the few leaders in the party with a mass following.
"With the monsoon session of parliament days away, the BJP can hardly expect to put the UPA on the mat on the issues of corruption and governance unless it cleans house in Karnataka," said a Times of India editorial on Friday.
Corruption and red-tape have long hindered India, Asia's third-largest economy, from maximising its growth potential.
India is ranked 87th in Transparency International's 2010 corruption perception index, behind China, Brazil and Greece, a situation consultancy firm KPMG says could hurt economic growth.
Public anger has risen sharply, with people blaming politicians of all hues for maintaining a situation where bribes have to be paid for everything from a school admission to getting a death-certificate.
Topping the scandals is a charge a telecoms minister rigged the 2007/08 issuance of lucrative telecoms licences, causing a loss of $39 billion to the state coffers. The minister, since fired, is in prison along with several executives pending trial.
Perceptions of government inaction have built up massive support for the anti-graft campaign of veteran social activist Anna Hazare, who went on a hunger strike in April to demand the creation of an independent ombudsman to investigate charges of corruption against senior officials, including the prime minister.
Editing by Paul de Bendern and Sugita Katyal