In India, Death to Global Business

How a violent—and spreading—Maoist insurgency threatens the country's runaway growth

Raising arms: A Naxalite exercise in the central state of Chhattisgarh Namas Bhojani

by Manjeet Kripalani

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Carrying the body of a paramilitary killed by Naxalites Mustafa Quraishi/AP Photo

Prime Minister Singh: It's crucial to eliminate the Naxal "virus" Rajesh Nirgude/AP Photo

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On the night of Apr. 24, a group of 300 men and women, armed with bows and arrows and sickles and led by gun-wielding commanders, emerged swiftly and silently from the dense forest in India's Chhattisgarh state. The guerrillas descended on an iron ore processing plant owned by Essar Steel, one of India's biggest companies. There the attackers torched the heavy machinery on the site, plus 53 buses and trucks. Press reports say they also left a note: Stop shipping local resources out of the state—or else.

The assault on the Essar facility was the work of Naxalites—Maoist insurgents who seek the violent overthrow of the state and who despise India's landowning and business classes. The Naxalites have been slowly but steadily spreading through the countryside for decades. Few outside India have heard of these rebels, named after the Bengal village of Naxalbari, where their movement started in 1967. Not many Indians have thought much about the Naxalites, either. The Naxalites mostly operate in the remote forests of eastern and central India, still a comfortable remove from the bustle of Mumbai and the thriving outsourcing centers of Gurgaon, New Delhi, and Bangalore.

Yet the Naxalites may be the sleeper threat to India's economic power, potentially more damaging to Indian companies, foreign investors, and the state than pollution, crumbling infrastructure, or political gridlock. Just when India needs to ramp up its industrial machine to lock in growth—and just when foreign companies are joining the party—the Naxalites are clashing with the mining and steel companies essential to India's long-term success. The threat doesn't stop there. The Naxalites may move next on India's cities, where outsourcing, finance, and retailing are thriving. Insurgents who embed themselves in the slums of Mumbai don't have to overrun a call center to cast a pall over the India story. "People in the cities think India is strong and Naxalism will fizzle out," says Bibhu Routray, the top Naxal expert at New Delhi's Institute for Conflict Management. "Yet considering what has happened in Nepal"—where Maoists have just taken over the government—"it could happen here as well. States, capitals, districts could all be taken over."

Officials at the highest levels of government are starting to acknowledge the scale of the Naxal problem. In May a special report from the Planning Commission, a government think tank, detailed the extent of the danger and the "collective failure" in social and economic policy that caused it. The report comes five months after Prime Minister Manmohan Singh shocked the country with a candid admission: "The Naxal groups…are targeting all aspects of economic activity…[including] vital infrastructure so as to cripple transport and logistical capabilities and slow down any development. [We] cannot rest in peace until we have eliminated this virus."

Why such rhetoric now about a movement that has coexisted with the rest of India for more than 40 years? One reason is the widening reach of the Naxalites. Today they operate in 30% of India, up from 9% in 2002. Almost 1,400 Indians were killed in Naxal violence in 2007, according to the Asian Center for Human Rights.

Collision Course

The other reason for sounding the alarm stems from the increasingly close proximity between the corporate world and the forest domain of the Naxalites. India's emergence as a hot growth market depended at first on the tech outsourcing boom in Bangalore and elsewhere. Now the world is discovering the skill and productivity of India's manufacturers as well. Meanwhile India's affluent urban consumers have started buying autos, appliances, and homes, and they're demanding improvements in the country's roads, bridges, and railroads. To stoke Indian manufacturing and satisfy consumers, the country needs cement, steel, and electric power in record amounts. In steel alone, India almost has to double capacity from 60 million tons a year now to 110 million tons. "We need a suitable social and economic environment to meet this national challenge," says Essar Steel chief Jatinder Mehra.

Instead there's a collision with the Naxalites. India has lots of unmined iron ore and coal—the essential ingredients of steel and electric power. Anxious to revive their moribund economies, the poor but resource-rich states of eastern India have given mining and land rights to Indian and multinational companies. Yet these deposits lie mostly in territory where the Naxals operate. Chhattisgarh, a state in eastern India across from Mumbai and a hotbed of Naxalite activity, has 23% of India's iron ore deposits and abundant coal. It has signed memoranda of understanding and other agreements worth billions with Tata Steel and ArcelorMittal (MT), De Beers Consolidated Mines, BHP Billiton (BHP), and Rio Tinto (RTP). Other states have cut similar deals. And U.S. companies like Caterpillar (CAT) want to sell equipment to the mining companies now digging in eastern India.

The appearance of mining crews, construction workers, and truckers in the forest has seriously alarmed the tribals who have lived in these regions from time immemorial. The tribals are a minority—about 85 million strong—who descend from India's original inhabitants and are largely nature worshippers. They are desperately poor, but unlike the poverty of the urban masses in Mumbai or Kolkata, their suffering has remained largely hidden to outsiders and most Indians, caught up as they are in the country's incredible growth. The Naxalites, however, know the tribals well and have recruited from their ranks for decades.