India's top business groups have warned of an "atmosphere of fear" enveloping corporate circles and bureaucrats that could hurt economic recovery after police accused a leading industrialist of corruption.

The Central Bureau of Investigation (CBI) earlier in the week filed a case accusing Kumar Mangalam Birla, chairman of conglomerate Aditya Birla Group and one of India's most respected business names, of conspiring to obtain a coal block for a cut-rate price eight years ago.

"Reputations of institutions and individuals take years to build," Kris Gopalakrishnan, president of the Confederation of Indian Industry, said.

"Extreme caution needs to be exercised before any action is taken which jeopardises reputations," he said late Friday, adding, "creation of an atmosphere of fear is not desirable."

The case against Birla, viewed in the corporate world as a by-the-rules player, sent shock waves through the business community.

"Such developments dent the national psyche and dampen investor confidence," said Gopalakrishnan.

The corporate alarm comes as the economy has slumped, growing by 4.4 percent in the last quarter -- half the nearly double-digit rates seen in the last decade.

Birla, 46, joins a string of senior business figures and civil servants being probed over various graft scandals that have rocked the Congress-led government and forced several ministers' exits.

The billionaire was accused of conspiracy along with the former coal secretary, P.C. Parakh, over a scandal in which the national auditor accused the government of underpricing coalfields and giving away billions of dollars in windfall gains to firms. Both men have denied any wrongdoing.

The series of scandals have cast a shadow over the government's re-election hopes in polls due by May.

The president of the Federation of Indian Chambers of Commerce and Industry Naina Lal Kidwai called the accusations against "industry icons" and bureaucrats "unfortunate".

"Capable and highly regarded officers and business leaders cannot be made scapegoats of mere suspicion and misconstrued actions," she said.

Civil servants in the vast Indian bureaucracy, a legacy of British colonial rule commonly mocked for its red tape, have spoken about paralysis in ministries.

Officials have said they are worried about taking decisions for fear of facing accusations of wrongdoing later.

"We're in a very, very uncomfortable situation as a nation" with industrialists and senior bureaucrats under investigation, D.K. Mittal, a former top finance ministry official, told a financial portal.

If business and government cannot "work for the nation, how can we grow?" he asked.

Senior civil servants met Friday to discuss ways they can be "protected for bona fide decisions" taken in the "line of duty", local media reported.

Business people have said they are hesitant to bid for contracts in case the transaction is questioned later and they face legal action.

"We need to bring back a regime of courageous decision-making," said Kidwai, adding that decisions involving no personal gain "are critical for growth".

Oil Minister M. Veerappa Moily also expressed his unease.

"India cannot become just like Russia where investors are not prepared to go and billionaires are put behind the bars," he told reporters.