Govt decides to carve Telangana state out of Andhra Pradesh

Policemen detain a protester in Hyderabad December 9, 2009. The government will carve a new state called Telangana out of Andhra Pradesh.

HYDERABAD (Reuters) - The government will carve a new state called Telangana out of Andhra Pradesh, home to several major international companies, a move that could fuel social unrest and separatist demands in other states.

The government's decision came after more than a week of violent protests shut down business in Hyderabad, home to firms like Microsoft, Google and Mahindra Satyam.

No decision has yet been made on whether Hyderabad, one of the faces of economic success, will stay in Andhra Pradesh or move to the new state.

"The process of forming the state of Telangana will be initiated," Home Minister Palaniappan Chidambaram told reporters, without giving further details.

Congress leaders say the government wanted to respect the sentiments of the people of Telangana who have been demanding statehood for a long time.

The creation of another state not only raises concerns it may push movements in other states to use violent protests to press their demands but also worries about whether Hyderabad will be locked in a power-struggle, affecting the growing IT sector.

"The creation of Telangana will act as a spur for Vidarbha, Kamtapur, Gorkhaland, possibly for agitations in certain regions of north India," political analyst Mahesh Rangarajan said, referring to areas in the states of Maharashtra and West Bengal.

"It is very, very significant. It has got the potential of changing the way the map of India runs inside," said Rangarajan.

Though the Congress party returned to power with a strong mandate in the May federal election, it has since grappled with issues such as rising food prices and labour unrest.

Last month, the government yielded to demands from tens of thousands of protesting sugar cane farmers who had brought parliamentary proceedings to a halt in the capital Delhi.

Hyderabad rivals Bangalore, India's Silicon Valley, and has a mix of software firms and shopping complexes along with ancient mosques and forts.

There are concerns that integrating Hyderabad into Telangana will choke off a major revenue stream to Andhra Pradesh, which had invested heavily in developing the city's infrastructure, including a world-class airport and flyovers.

"If it goes to Telangana, the investment will be a bit adversely affected. Telangana is a relatively underdeveloped state. The focus of the new government will be on ... how to improve the conditions of the poor," said D.H. Pai Panandikar, president of the RPG Foundation, a think-tank.

Jubilant supporters of a new state set off firecrackers and danced in Hyderabad when they heard news of the government decision.

One Congress lawmaker resigned in protest and dozens of ministers from the state resigned.

(Writing by Bappa Majumdar, Matthias Williams and Rina Chandran;

Editing by Paul de Bendern and Sugita Katyal)