Bad business: how Maoists are hurting the economy

New Delhi: The growing Maoist insurgency in India over large swathes of the mineral-rich countryside could soon hurt some industrial investment plans just as the country suffers an economic slowdown.

The government banned the Communist Party of India (Maoist) on Monday, bracketing it with Islamist militant groups, but experts said the ban would have little impact in the battle against the rebels.

On the ground, police fight Maoist insurgents with outdated weapons and are often outnumbered by rebels, who are skilled in jungle warfare and are armed with rocket launchers, automatic rifles and explosives.

Last week, hundreds of Maoists declared the town of Lalgarh about 170 km from Kolkata as a "liberated zone", sparking unease among investors.

While the economic impact may be small compared with India's trillion dollar economy, the insurgency and the sense that it is worsening signals that India does not fully control its own territory and adds to risks for companies mulling investments.

The Lalgarh incident worried the country's third-largest steel producer, JSW Steel, which is setting up a $7-billion, 10-million tonne steel plant near Lalgarh.

"We are waiting and watching, so are the others," Biswadip Gupta, chief executive officer of the company's West Bengal operations, told Reuters on Tuesday.

"On top of the economic woes, you have the problem of Maoists now. It is very jittery," Gupta said by telephone from Kolkata.

Prime Minister Manmohan Singh has described Maoists as the biggest internal security threat since independence, and this year more than 300 people, mostly police, have been killed.

The Maoists started their armed struggle in West Bengal's Naxalbari town in the late 1967, and have expanded their support among villagers by tapping into resentment at the government's recent pro-industry push.

The rebels, estimated to have 22,000 fighters, operate in large parts of the eastern, central and southern countryside, and officials say they are now spreading to cities and bigger towns.

The Maoists, who are fighting for the rights of poor farmers and the disenfranchised, regularly attack railway lines and factories, aiming to cripple economic activity.

"It is still a law and order problem, but it has not been taken seriously and can have serious consequences if not dealt with properly," said Anjan Roy, analyst at the Federation of Indian Chambers of Commerce and Industry, referring to growth of industry.

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The effect of the Maoist insurgency has already taken its toll on business.

In mineral-rich Orissa state, bauxite production at state-run National Aluminium Co Ltd (NALCO) has fallen by 20 percent since an April attack by Maoists in one of their mines.

The company has now reduced the storage of explosives at its mines, fearing attacks from the rebels.

"We are more vulnerable and we have to remain alert," said P.K. Mahapatra, the alumina company's executive director of mines and refinery.

A strike by Maoists in east and central India, against police action in Lalgarh, has hit supplies of iron ore and coal, a senior railway official said.

"Exports have also been hit and if supplies get cut off in this manner, at least three steel plants in the region will be greatly affected soon," Soumitra Majumdar, spokesman for the South Eastern Railways, said from Kolkata.

Rebels sided with farmers during violent protests by farmers, which forced the scrapping of a Tata Motors' Nano car plant and a $3 billion chemicals hub complex in West Bengal.

"Existing industry may survive, but new money will not come in very easily and investors will be very scared unless the state does something quickly to control the Maoists," said Ajai Sahni of the Institute of Conflict Management, a New Delhi-based think-tank.