Engaging India is an online column analysing the issues, trends and forces behind the business and politics shaping India and its impact on the world. Engaging India appears on Thursday mornings exclusively on FT.com India, a dedicated online section on India, and is written by Jo Johnson, the Financial Times' South Asia bureau chief; Amy Yee, New Delhi correspondent; and Joe Leahy, Mumbai correspondent.

In Mumbai, it is that time of the year again. India's information technology services industry, one of the main pillars of the country's economy, is holding its annual global outsourcing conference.

The showcase event has already kicked off with the usual surge of optimism. This time the industry is predicting 50 per cent growth in India's IT services exports by 2010.

But the more perceptive delegates among the visiting phalanxes of international consultants and chief executives may have noticed that all is not well in Mumbai. Beneath the glamour of the city - home to most of India's billionaires, bankers and movie stars - a groundswell of violent regionalist politics is rearing its ugly head.

On Tuesday night, at the five-star Taj Lands End hotel in the city's north where many delegates are staying, usually cooperative taxi drivers refused to use their meters and instead were demanding exorbitant sums for a journey.

They cited a "taxi problem" - a euphemism for a taxi shortage. The shortage stemmed from the fact that most of Mumbai's fleet of 1960s-era, black-and-yellow Fiat taxis are driven by migrants from the poor northern states of Bihar and Uttar Pradesh.

These migrants, who come to Mumbai in search of better-paying jobs, in recent weeks have become the target of violence from supporters of a regionalist politician, Raj Thackeray, who leads the Maharashtra Navnirman Sena party.

The party has accused the migrants of taking jobs from Maharashtrians, the local people in the state of Maharashtra, of which Mumbai is the capital.

The dispute has erupted into violence on several occasions, with the taxi drivers bearing the brunt of it. TV footage showed party workers jumping on taxis and the taxi union last week called a strike after people it accused of being supporters of the MNS smashed its offices. The MNS denied involvement.

There were even reports of violence against Amitabh Bachchan, one of Bollywood's most revered stars and a native of Uttar Pradesh. The Times of India reported that a bottle was thrown at his Mumbai house by unidentified youths. This followed a verbal attack by Mr Thackeray on the star, who he accused of not doing enough for Mumbai.

The issue has religious undertones too. Many northern migrants also happen to be Muslims while Mr Thackeray's party, and another party led by his even more powerful uncle, Bal Thackeray, are predominantly Hindu.

Mr Thackeray's recent remarks have attracted a fierce response from Muslim politician Abu Asim Azmi, a local leader of the Samajwadi party, a powerful political group whose base is mostly in the north.

The police have threatened to arrest both for promoting communal disharmony and threatening the integration of the state.

But this week, these threats degenerated into political farce. The government ordered the police to fence off the streets around the two politicians' homes but did not appear game to take them in.

All sorts of excuses were proffered - including that Mr Azmi should first be allowed to finish with his daughter's wedding celebrations in a few days time - but most believed the police were afraid that arresting the pair would spark civil unrest.

In a taste of what could happen, rumours on Tuesday that Mr Thackeray had been arrested sparked violence against northerners in Mumbai and the surrounding state with people stoning buses and driving migrants from the provincial city of Nashik.

The upsurge in crude sectarian politics is horrifying the elite of Mumbai, probably India's most cosmopolitan city.

Many of the country's biggest movie stars, most of whom have made their homes in Mumbai, hail from the north. The city's billionaire industrialists, IT tycoons and finance industry professionals come from all over the country and its top bankers include many non-resident Indians who have returned from comfortable jobs in the west to take part in India's economic resurgence.

"Everybody has the right to be anywhere in India … I'm now jittery to admit I'm from Delhi," said megastar Shah Rukh Khan, the "King of Bollywood".

Analysts say the root of the conflict is simple: votes. Politicians such as Raj Thackeray are afraid the influx of migrants will erode their influence by diluting the proportion of native Maharashtrians in Mumbai.

It is no idle fear. Several prominent northern politicians have visited Mumbai recently to build support among the city's growing migrant population.

No matter what the causes of the dispute, however, no one is in any doubt of the potential outcome if this brand of politicking is left unchecked.

Shiv Sena, the political organisation controlled by the elder Mr Thackeray, came to prominence on an anti-Muslim agenda and was later accused of fomenting anti-Muslim riots in Mumbai in 1992-1993. Those left 900 dead, shut the city down for days and are still considered a blight on Mumbai's history.

The city eventually recovered. But that was during the India of the pre-globalisation era, when the economy was still largely shuttered and few outsiders were watching.

Today, such an event would be a disaster for Mumbai, which is attracting a flood of domestic and foreign investment and hosting glamorous conferences, such as this week's summit for the global IT outsourcing industry.