* Scandal may distract from
* Opposition has threatened to stall parliament (Adds publication of telecoms audit report paragraph 7)
By Alistair Scrutton
NEW DELHI, Nov 16 (Reuters) - One of India's biggest corruption scandals in the Congress-led government's six years in power has damaged the ruling party's image, strained ties with a crucial coalition ally and disrupted the passing of reform bills.
While the scandal over the granting of 2G licenses that prompted the telecoms minister's sacking is unlikely to threaten the government's survival, it underscored the fragility of a fickle coalition despite its overwhelming re-election in 2009.
At stake is not only the image of Congress, a party that in 1989 lost a general election partly due to a scandal over gun contracts involving close associates of then Prime Minister Rajiv Gandhi who were accused of taking bribes.
The scandal also threatens to drag Prime Minister Manmohan Singh's second term into further policy limbo.
The main opposition party, which has repeatedly blocked progress in parliamentary sessions over the last year, said on Monday it would carry on blocking reform bills [ID:nSGE6AE0XR].
"It tainted the entire government," The Indian Express said of the scandal in an editorial on Tuesday.
"This is a crucial time ... and we cannot afford to have enormously important matters of governance held up because the ruling coalition's energies are focused on dousing the fires of impropriety and scandal."
The opposition demanded a parliamentary probe after Telecoms Minister Andimuthu Raja resigned on Sunday, after a report from the government auditor said the state may have lost up to ${esc.dollar}31 billion in revenue in the granting of telecoms licenses in 2007-2008.
Earlier media reports had suggested the figure may be as high as ${esc.dollar}39 billion.
Raja is accused of selling the licenses at deliberately low prices to companies, something he denies. The amount lost to the treasury would be roughly equivalent to India's defence budget.
Opposition parties have been calling for his resignation since 2007 but analysts say the crucial support his party gave to the coalition government prevented Singh from sacking him.
The Raja case has followed other graft cases in the last month that saw two senior Congress party officials resign -- Suresh Kalmadi, chief organiser of the Delhi Commonwealth Games, and Ashok Chavan, chief minister of Maharashtra state.
CORRUPTION
Even by the standards of India, where corruption is pervasive, from bribes for traffic violations to million-dollar payments to get business contracts, the 2G scandal numbers have shocked India and galvanised the Hindu-nationalist-led opposition.
India was ranked 87th in Transparency International's 2010 ranking of nations based on the level of corruption. India lies behind rival China, which is in 78th place.
The Hindu-nationalist Bharatiya Janata Party has threatened to block reform bills unless the government orders a parliamentary inquiry.
The government planned to push its reform agenda through the current session of parliament, including a bill to ease land acquisition for industry and mines. [ID:nSGE6A805B]
Perhaps mindful of 1989, Congress sacked Raja despite opposition from his regional DMK party of Tamil Nadu state.
"It may be good for the nation but it's not good for the coalition," said Amitabh Mattoo, a professor at Jawaharlal Nehru University in New Delhi. "It has weakened the trust element in the coalition. It is a signal to other coalition parties that Congress will not stand by you."
With no major parties capable of winning a majority on their own in parliament, Indian governments effectively come down to coalition juggling. The DMK, with 18 seats, is the second biggest ally of Congress in government.
But the DMK has become weaker in recent years, relying on support of other parties including Congress to hold power in Tamil Nadu. So it is unlikely the DMK would pull out of the coalition as it needs Congress as much as Congress needs it.
Prime Minister Singh may have acted quickly enough to stop more political rot. Most scandals in India soon move to the background in a country where voters assume politicians are corrupt. Almost no politicians go to jail in India.
"I do not think this will have a big impact on Congress nationally," said Amulya Ganguli, political commentator. "The DMK is on a weak wicket in Tamil Nadu, and in sacking Raja now the Congress has taken advantage of this weakness." (Additional reporting by Henry Foy; Editing by C.J. Kuncheria and Daniel Magnowski)
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