By Jonathan Stempel and Shyamantha Asokan
NEW YORK/NEW DELHI (Reuters) - An Indian diplomat charged in New York with visa fraud and making false statements about her domestic worker has won a dismissal of her federal indictment, in a move that could help smooth over a dispute that has frayed U.S.-India ties.
Devyani Khobragade, who was India's deputy consul-general in New York, had diplomatic immunity when she sought on January 9 to dismiss the indictment, and thus could not be prosecuted, U.S. District Judge Shira Scheindlin in Manhattan ruled on Wednesday.
New Delhi gave a cautious welcome to the news but it was far from clear if the matter had been fully resolved. U.S. prosecutors could still seek a fresh indictment, while in India reports emerged that Khobragade's two children held both U.S. and Indian passports, in apparent violation of Indian rules.
India is due to kick off a general election on April 7 and its major political parties have vied to outdo each other in condemning the U.S. over the Khobragade case, as they seek to match public anger over the row.
Narendra Modi, the prime ministerial candidate of the opposition Bharatiya Janata Party (BJP), brought up the diplomat's "ill-treatment" in a meeting with U.S. ambassador to India Nancy Powell last month. Modi has topped several recent opinion polls as the most popular choice for prime minister.
U.S. prosecutors have accused Khobragade of making Sangeeta Richard, her housekeeper and nanny, work 100-hour weeks at a salary of just over $1 an hour, far below the legal minimum U.S. wage of $7.25 an hour.
They argued that the indictment should stand because Khobragade did not have diplomatic immunity either when she was arrested, or now that she has left the country. They can seek a fresh indictment but it is not yet clear if they will do so.
"As the court indicated in its decision, and as Devyani Khobragade has conceded, there is currently no bar to a new indictment against her for her alleged criminal conduct, and we intend to proceed accordingly," said James Margolin, a spokesman for U.S. Attorney Preet Bharara in Manhattan.
Scheindlin said Khobragade had immunity on January 9 when the indictment was issued, having the day before been named a counselor to India's mission to the United Nations. She also lifted Khobragade's bail and said open arrest warrants based on the indictment must be thrown out.
India's Foreign Ministry welcomed the dismissal but would wait for its lawyers to go through the court order before giving a detailed reaction, a ministry spokesman said.
A U.S. State Department official said "we were surprised by the dismissal of the indictment" and referred further questions on Khobragade to the Justice Department.
Khobragade, 39 at the time of her arrest on December 12, is now working for the Foreign Ministry in Delhi, having left the United States in January, said her U.S. lawyer, Daniel Arshack.
BACK ON TRACK?
Khobragade's arrest and subsequent strip-search provoked an outcry in India, setting off reprisals against U.S. diplomats and the removal of some security barriers near the U.S. embassy in New Delhi. Many Indians thought the case reflected U.S. arrogance towards their country.
The dispute led to the postponement of trips by U.S. officials and business executives to India, although this month moves have been made to get relations between the world's two largest democracies back on track.
Assistant Secretary of State Nisha Biswal, Washington's point person for South Asia, visited India last week after a two-month delay. U.S. Energy Secretary Ernest Moniz also came to India this week on a postponed trip.
The attempts to strengthen ties, however, are blighted by trade rows between the two countries over issues including drug patents and solar panels.
Meanwhile, the citizenship of Khobragade's children is causing a stir in India, with fresh local media reports on Thursday that her two daughters have both U.S. and Indian passports. India offers certain kinds of lifelong visas for people of Indian origin but does not allow dual citizenship.
Khobragade's father, Uttam, told Reuters the children are U.S. citizens who have only been issued Indian passports to allow them to travel with their mother. They do not have dual citizenship and their Indian passports are kept at the Indian embassy in New York, he said.
"What is the great deal with that?" he said. "This is just to facilitate their travel."
The Foreign Ministry declined immediate comment on whether this broke any rules.
(Reporting by Jonathan Stempel in New York and Shyamantha Asokan in New Delhi; Editing by Douglas Busvine and Sophie Hares)