I am India, so thought I would add my bit to this.
Apparently, the blogger ran a community in Orkut against an organisation called the Shiv Sena. They are a political party, and in some ways regionalistic. Generally they are not considered mainstream, and their son-of-the-soil ideology is considered parochial by pretty much all of India.
It is standard practice in India to say that these guys, by focusing on the benefit of a single state, are an evil / damaging the country / divisive. Such opinions are expressed in newspapers and TV all the time about the particular political party.
In this case, what has happened is that someone representing the party has decided to go after the blogger to the exclusion of everyone else who has insulted them in much worse ways. Obviously because it is easier. Ajith created a community where everyone expressed something that is being expressed publicly all the time, but he is now in big trouble.
The real threat is not jail. Once he goes to court and has to defend himself, he would likely get out. The courts are more or less reasonable. In this case, the Supreme Court has not said that he is guilty or not guilty, but that he has to defend himself.
The strategy really is to scare the crap out of you. Having a case filed against you means spending money. It means dealing with cops who do not understand any of this, and may choose to keep you in a police lockup for a day because they could not find a judge (standard excuse). It means sending a message out to the rest of the bloggers who think they can speak out online that no, we will come after you.
The court has, by declaring that he would have to deal with in court and fight a case, inadvertantly helped the cause of many who would like to see online free speech end.
Courts are not generally political in India, and the same Supreme Court judge would likely say there is no merit in the libel case. But it is scary enough for a lot of us who have to be very careful while making any political commentary at all. Big media can talk freely, politicians can call each others murderers and corrupted, but the battle is against the blogger.