The southern state of Andhra Pradesh, of which Hyderabad is the capital, has been rocked for weeks by violent demonstrations for and against the division of the state into two entities.
The national government first backed the idea under pressure from a hunger strike, then appeared to backpedal, and since then almost daily disruptions by protestors have dented the city's image as a fertile ground for business.
Chief Minister K. Rosaiah told reporters last week that firms, including metals group Bharat Forge and French automaker PSA Peugeot Citroen, had relocated projects or deferred planned investment on account of the turmoil.
“The image of Hyderabad as an investment destination and a hub of information technology, pharmaceuticals and other industries has taken a beating because of the unrest,” said Rosaiah.
Hyderabad's star rose during the 1990s and last decade as India established itself as a global IT hub, offering low-cost services to multinational companies for a fraction of the cost in their domestic markets.
A proposed new state called Telangana would be carved out of Andhra Pradesh's poor tribal belt, a drought-prone region which supporters say has been neglected by the state government for too long.
Hyderabad is located in what would become Telangana, but neither Telangana supporters nor those in the rump of Andhra Pradesh are willing to give up the capital and its spoils.
The 400-year-old city boasts a mix of tall glass buildings amid its many minarets and historic temples, a sign of the software boom which began when US software giants Oracle and Microsoft first planted themselves on Indian soil.
Hyderabad has since attracted several Fortune 500 and Indian companies, including the disgraced outsourcing giant Satyam, once the city's pride.
In 2009, Satyam was discovered to be the source of India's biggest corporate fraud, worth more than three billion dollars.
Now, frequent strikes and road and rail blockades have caused widespread disruption to the operation of several firms, including software and pharmaceutical companies.
Analysts say the political turmoil has created a sense of uncertainty among investors, many of whom might look to the rival, larger Indian IT hub of Bangalore.
“Foreign investors are following the 'wait and watch' strategy before making any financial commitment in the region,” said Deepak Kher, an IT analyst working in Hyderabad.
The state government has created a task force to protect the city's business interests after industry representatives and corporate executives conveyed their concerns to the state government.
Chief minister Rosaiah appealed to protestors “not to subject industries to hardship as the latter are no way concerned with their demands”.
He said Hyderabad's pharmaceutical industry had suffered a loss of five billion rupees in the past one month, and that hotels had registered a 40-per cent drop in reservations.
He also said the world's largest steel maker, Arcelor Mittal, and Japanese pharmaceutical company Eisai have put proposed investments on hold.
Hyderabad accounts for software exports of 7.55 billion dollars and pharma and bulk drugs exports of 3.23 billion dollars annually, according to local and national government estimates.
J.A. Chowdary, former president of the Hyderabad Software Exporters Association, said companies were being disrupted by the strikes and street protests, though losses could not be quantified yet.
“All IT exports and businesses are definitely taking a beating due to the agitation,” he told AFP.
The Telangana Rashtra Samithi party, which is spearheading calls for the new state, accused the state government of using fear to discredit the movement.
“Several industries did not come to Hyderabad because of the faulty policies of the government. Why blame the Telangana movement?” party member T. Harish Rao said.
Communication experts say the image of Hyderabad as the modern face of India — cosmopolitan, fast-paced and professional — was under threat.
“Both sides are fighting to get Hyderabad but they are failing to realise that this political mess will dampen Hyderabad's image all over the globe,” said Madhukar Sabnavis, an executive with advertising firm Ogilvy and Mather.
