The report on 'Human Rights Practices in India for 2016' also referred to restrictions on foreign funding of NGOs, including some whose views the government believed were not in the "national or public interest", female genital mutilation and dowry-related deaths as human rights problems in the country.
It mentioned about rejection of renewal of government permission to 25 NGOs to receive foreign funds, including senior lawyer Indira Jaisingh's 'Lawyers Collective' and US-based Compassion International's two primary partners, noting that several voluntary organisations said these actions threatened their ability to continue to operate in India.
The report termed the police case against Setalvad, her husband Javed Anand and others for allegedly misusing donors' fund as an instance of "governmental attitude regarding international and non-governmental investigation of alleged violations of human rights".
They were charged with embezzlement after donors claimed Setalvad, the founder of NGO Citizens for Justice and Peace, misused 1.5 million rupees (USD 22,500) collected for building a memorial to the victims of the Gulbarg Housing Society massacre during the 2002 Gujarat riots.
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In July 2015 the CBI launched a second probe against Setalvad and Anand over alleged misuse of grants from foreign donors.
The activists had alleged the authorities filed the case in retaliation for their work on behalf of the victims of the Gujarat riots, said the report.
The killing of eight suspected members of the outlawed Students Islamic Movement of India (SIMI) in a police encounter after they escaped from Bhopal central jail also found a mention in the report under a sub-section "arbitrary deprivation of life and other unlawful or politically motivated killings".
The report termed it as an example of "corruption and lack of transparency in government".
The CBI was investigating the death of 48 individuals allegedly linked to the scam over a span of five years. These included a journalist, who reported on the fraud, it said.
"A lack of accountability for misconduct at all levels of government persisted, contributing to widespread impunity.
"Investigations and prosecutions of individual cases took place, but lax enforcement, a shortage of trained police officers, and an overburdened and under resourced court system contributed to infrequent convictions," the report said.
Other human rights problems included disappearances, hazardous prison conditions, arbitrary arrest and detention, and lengthy pretrial detention, the executive summary of the report on Human Rights Practices in India alleged.
Court backlogs delayed or denied justice, including through lengthy pretrial detention and denial of due process.
"There were instances of infringement of privacy rights. The law in six states restricted religious conversion, and there were reports of arrests but no reports of convictions under those laws. Some limits on the freedom of movement continued," it said.
"Child abuse, female genital mutilation and cutting, and forced and early marriage were problems.
"Trafficking in persons, including widespread bonded and forced labour of children and adults, and sex trafficking of children and adults for prostitution, were serious problems," said the report, which has been shared with country's social activists and others for their feedback.
Bhopal-based activist Ajay Dubey, one of the whistle blowers in the Vyapam scam who has also been asked for his feedback, said India needs to strengthen its anti-corruption laws besides making provisions to provide protection to those exposing corruption and human-rights violation.