Hyderabad sinks

From Riding the Elephant blog

India’s southern city of Hyderabad is becoming one of India’s most potent symbols of the greed and corruption that link politicians and businessmen. For the third time in a year, the state has been rocked by a crisis that exposes those linkages – this time over whether Andhra Pradesh should be split in two with the creation of a new state of Telangana based around Hyderabad.

This is a far cry from the glory and international fame of the past 15 or so years when this prosperous capital of the state of Andhra Pradesh became an international symbol of India’s dramatic growth in software, second only to Bangalore as a thriving location for information technology investment. Companies located there include Google and Microsoft, and Bill Clinton visited as US president.

The first of the state’s crises came a year ago with the collapse of Satyam, a leading Hyderabad-based software company that was owned by the family of its then chairman, Ramalinga Raju. The Rajus were closely linked with various politicians, including the state’s Congress chief minister, Y S Rajasekhar Reddy (YSR), who died in a helicopter crash in September, as well as his predecessor, Chandrababu Naidu.

Politicians are widely believed to have invested their black money in both Satyam and in Maytas Infrastructure, an associated company that received favours on contracts from the state government and drained funds out of Satyam. Both companies (Satyam has now been sold) are now being investigated for massive fraud, and Raju has been detained in jail since January.

Next came YSR’s sudden death and an immediate attempt by his politically inexperienced 37-year old son, Y.S.Jaganmohan Reddy, to become the chief minister. Jaganmohan, who had built a substantial business empire since his father came to power in 2004, was frenetically backed in a campaign by local businessmen who wanted to protect deals they had struck with his father and to be able to replicate them in the future.

As Bharat Bhushan, editor of India’s Mail Today, put it in an article (“Money backs ‘Son-rise’ in Andhra” – October 3, 2009) that listed many company names, YSR secured the loyalty of his supporters not by giving them lucrative government jobs, which is common practice across the country, but by facilitating opportunities for developing new businesses, especially in booming Hyderabad.

“YSR converted his key supporters into businessmen, industrialists, contractors and realtors,” wrote Bhushan. “Their loyalty to the party, or the leader, was based on pure economic interest. YSR rewarded them with contracts in state sponsored irrigation projects …highway projects, real estate activities, development of Special Economic Zones, land grants and housing schemes in urban as well as rural areas …

“It has taken decades for Indian entrepreneurs like the Tatas, Birlas, Ambanis and Bajajs to convert family businesses into billion dollar corporations. The Congress Party under YSR in Andhra showed us that this could be done in barely five years.”

These are the businessmen who are now resisting the demands for a Telangana state. Coming from Andhra’s coastal regions, they mostly belong to the Reddy and Kamma upper castes that must now be ranked along with India’s more famous business castes and communities such as the Marwaris of the north and the Chettiars of the south.

They fear that the dispute will lead to a crash in Hyderabad real estate values and a cutback on infrastructure projects – and that they might be driven out of the capital by the new Telangana rulers.

Among the most powerful anti-Telangana politicians is Lagadapati Rajagopal, founder-chairman of the rapidly growing Lanco infrastructure, power and construction group and a Congress MP, whose development plans in and around Hyderabad would be hit hard if the state split. Another MP with powerful Delhi connections is T.Subbarami Reddy, whose Gayatri group has many infrastructure projects. Another businessman who would lose from a split is Andhra-born G.M.Rao, founder-chairman of the Bangalore-based GMR group that built Hyderabad airport and controversially has 5,000 of acres around the site waiting for development, as well as many other projects. National and local politicians are widely believed to have invested in such companies.

The Telangana claim

The Telangana people’s wish for some sort of constitutional identity has been around for over 50 years, and has been fudged and rebuffed by successive Indian governments. But last week (December 9) the central government gave way and agreed to create Telangana in order to end a fast by a local politician and activist, Chandrashekhar Rao, leader of Telangana Rashtriya Samiti, who was risking his life to revive his crumbling political image.

That humane but politically clumsy decision led to violent demonstrations in Hyderabad, plus resignation threats by about half the members of the legislative assembly. This paralysed the state government and sparked follow-on bifurcation claims from other states all over India.

But observers of India’s frequently muddled and confusing political scene need not fear any imminent Balkanisation of India’s 28 states. Having prevented the death of the fasting politician, the government is back to fudge, and hopes to stall the Telangana claims indefinitely, maybe even until the state’s next assembly elections in 2014. Meanwhile, other states’ claims to be split will be examined, and some may push ahead a little – but there is no crisis, despite blanket and over-excited media coverage.

Unlike most other bifurcation claims, the battle over Telangana is about wealth, not language or ethnic divisions, nor dramatic differences in geography. It would also the first time that the capital of a state has gone with the new entity – normally the breakaway has to start afresh.

The people of coastal Andhra have benefited economically since the days of British rule when there was extensive investment in irrigation, but the Telangana region lagged behind under the thumb of the Nizam of Hyderabad. When Hyderabad began to flourish in the 1990s as an IT centre, wealthy landowners from the coastal region flocked to the city to develop real estate and infrastructure projects, lining up with local politicians such as YSR and his cronies to secure contracts and licences. This is the wealth that they fear the creation of Telangana would put at risk.

The reputation of Hyderabad and Andhra has been severely damaged by this series of crises. It is causing concern among both Indian and international investors who had not known – or had ignored – the political-business linkages and scams.

The state now has an uncertain political future. The death of YSR has removed an able political leader who, despite his business links and cronyism, was an effective chief minister. Now the Congress Party is split over who his successor should be as, well as over the Telangana issue. And, of course, politicians’ fixing of contracts and projects for the benefit of their cronies is visible for all to see.

John Elliott was the FT’s first South Asia Correspondent (1983-88) and now writes from India