Creation of Telangana state sparks unrest in India, investors likely to face greater problems

India's ruling Congress party on 30 July accepted the recommendations of its working committee to carve the new state of Telangana out of Andhra Pradesh (AP), a southern province that was hitherto the country's fifth-most populated. The decision to divide the state has ignited deep political divisions and raised fear of violence. There have been violent protests across the residual Andhra regions, especially in Rayalaseema and coastal Andhra, causing disruption in major cities.

Since the announcement, Andhra state has witnessed a marked rise in protests, road blocks, sit-ins, and other forms of civil unrest from students, lawmakers and political parties opposed to the separation (see India: 30 July 2013: Indian government ruling on Telangana issue could increase likelihood of civil unrest). Some of the protests are against the actual split itself while a large part of the protests is a consequence of the multiple uncertainties that have sprung up in people's lives in the residual AP state after the announcement of the bifurcation.

Uncertainties and political turmoil are also expected to dampen the business economy in the state. India's Department of Industrial Promotion and Policy (DIPP) ranked AP second in terms of new industrial investments in the period from 2011 to date. There is a risk that the current political situation will have a negative impact on AP's attractiveness to investment. Ever since the decision last week and resulting political turmoil, many business representatives have expressed their apprehensions in the Indian media. Apart from investors remaining wary, those seeking opportunities in the state infrastructure such as hotels, transport, and ports are also less likely to be enthused about AP and the budding IT hub, Hyderabad.

Political Instability

In the near term, at least until the 2014 general election, many decisions are yet to be finalised about the formation of Telangana, and these can be expected to be followed by protests of varying intensities. DS Rawat, secretary general of the Associated Chambers of Commerce and Industry of India, expressed his concern in the media, saying: "Unfortunately, political events revolving around the demand for a separate state of Telangana have overwhelmed the political leadership. Besides, investors all over the world do not prefer a place which has rallies, bandhs [shut downs] and uncertainty of political structure." The ruling Congress party and the Telangana Rashtra Samithi (TSR) political party supported the decision to create Telangana in a bid to weaken the support base of the rival Yuvajana Sramika Rythu (YSR) Congress party in AP. Congress has seen a haemorrhaging of its support to the YSR over the past few years in Andhra, and so it sees an opportunity to undercut the YSR and to create a new political base through the formation of Telangana state. Despite the fact that the current AP government is a Congress-led coalition, and that several of its own party leaders have resigned over the decision to bifurcate AP, the Congress party believes that the creation of Telangana will secure Lok Sabha (central parliament) seats that it would have otherwise been in danger of losing in the 2014 general election.

Another major concern about the division is the perception that the newly formed Telangana state may face challenges of law and order such as the threat of communal violence and left-wing extremism. Furthermore, the home ministry warned last week that there may be a risk of increased attacks by left-wing Naxalite militants – who are active in several states in south and central India – owing to the potential weakness of the newly formed state's security infrastructure. The fact that Telangana districts have been notorious for Naxal activities does not bode well for the overall security and law enforcement picture for the new state.

Various demands from different sectors of society have cast doubts over the cohesiveness of the coastal Andhra districts, which will remain a part of Andhra Pradesh. Aside from protests against Telangana, another fallout is a growing demand for a greater Rayalaseema – one of the two regions that will comprise Andhra Pradesh after Telangana becomes a state. The idea is to create another state by adding two coastal districts of Nellore and Prakasham to Kurnool, Kadapa, Chittoor, and Anantapur of Rayalaseema, with Kurnool as its capital. Although this demand may not see fruition, it raises fears of added political problems within residual AP's districts.

Finally, another cause for disagreement among politicians would be how assets are divided between the new states. Telangana would take control of immovable assets such as state government property and buildings in Hyderabad, whereas moveable assets such as government funds, vehicles, etc can be transferred to residual AP. It is unlikely that AP would give up its premises without agreeing on compensation from the Telangana government. The same process was followed when the state of Bihar was split in 2000. However, Indian news reports note that distribution of assets dragged on for years in the case of newly-formed states of Jharkhand, Uttarakhand (formerly part of Uttar Pradesh), and Chhattisgarh (formerly part of Madhya Pradesh). In the case of Jharkhand, for instance, these disputes have still not been resolved 13 years after the creation of the state.

Future of Hyderabad

There remain several politically sensitive issues that threaten smooth functioning of the state government over the coming years. The decision will still require the passage of legislation from Delhi to be formalised. But the most important issues will pertain to the status of Hyderabad, the capital city of Andhra Pradesh and the nucleus of economic activity in the state. The Congress Working Committee last week proposed that Hyderabad will be the joint capital of Telangana and AP for a period of 10 years, after which it would formally be administered by Telangana. However, there is no consensus on this matter with both new states fighting for the city. Some leaders from the two regions have proposed making Hyderabad a union territory similar to Chandigarh or a permanent capital of the two states. Neither Telangana nor the rest of AP have any other city with the necessary infrastructure to attract the same kind of investment. The future of Hyderabad will be a major factor for foreign investment, especially keeping in mind the city's position as a global hub for the IT industry. Google, Facebook and Wipro, are among the scores of IT companies with bases in Hyderabad, and Microsoft has its largest non-US based campus located in the city.

As seen in previous cases where states are split, it is not uncommon for the new states to get a joint capital until administrative and governance issues are sorted. However, the proposed 10 years is rather a long waiting period for Hyderabad to remain as joint capital. The main reason for such a timeframe is the underlying concern that any immediate political change in Hyderabad may either result in a pull-out of companies or may halt inflow of new investment.

Outlook and implications

Officially, there is unlikely to be any change in the policy of welcoming foreign investment to Hyderabad, no matter which state the city will be allocated to. However, the new state of Telangana lacks the human and physical infrastructure to support Hyderabad's investment position. If Telangana is given Hyderabad then companies will suffer from the disadvantage of location as major ports and airports are all in the coastal Andhra territory. Hyderabad is surrounded by districts which until now have been economically backward, meaning that the skilled workforce may have to be sourced from the coastal Andhra states, to the extent that policies would allow this.

For example, Procter and Gamble announced, in July 2013, that it would set up a new manufacturing plant on the outskirts of Hyderabad. The plant under current plans will soon fall under Telangana and not the Andhra Pradesh administration, and it may face new regulatory hurdles as a result of the state's bifurcation.

There may not be an immediate pull-out of companies, but Hyderabad will have a difficult time attracting new investment in this situation of political instability. The political situation in Hyderabad is likely to remain precarious leading up to the 2014 election. Although the separation of the state has occurred, it is difficult to foresee an early solution to the capital issue.