Andhra Pradesh police recovered Rs 32 lakh in cash and arrested two persons, including a Telugu Desam Party leader, after a brief encounter with Maoists in Bhadrachalam forest area in Khammam district on Saturday.

However, the Maoists managed to escape from the scene.

According to Khammam District Superintendent of Police Rajeev Kumar Meena, a special police party, which was tailing contractors close to the Maoists for the past two days, arrested two contractors -- Shaikh Abdul Rasool, Telugu Desam Party former district vice president, and Vastavai Sridhar Varma at Lachagudem, a forest village in Dummugudem Mandal, just 2 km from Chhattisgarh border, while they were returning after handing over cash to Maoists at a hide-out.

The SP said that the duo had contacts with Maoist leaders and collected the money on their directions.

They came to Lachagudem to hand over a suitcase containing cash amounting to Rs 31.97 lakh. A little before the arrests of the duo and seizure of cash, the police party came across a group of 20 Maoists holding camp in the forest.

Even as an exchange of fire ensued, the Maoists, including district committee secretary Naveen, Khammam-Warangal area committee secretary Rambabu and Manuguru area committee leader Sudhakar Sabari, fled from the encounter spot.

Rasool had taken up construction of a culvert on a rivulet in Lachagudem area while Sridhar Varma had taken the contract for a Rs 5 crore lift irrigation scheme at T Kothagudem village on Godavari river.

Both confessed to have collected the money from other contractors on the directives of the Communist Party of India-Maoist leadership.

The TDP leader has a chequered past. He is a close associate of former Roads and Buildings Minister Tummala Nageswara Rao and has worked in various capacities in the party organisation.  For sometime, he was on the hit-list of the Maoists. Recently, he secured a contract and developed contracts with the Maoists.

The police booked cases under Sections 147 (unlawful assembly), 148 (armed with deadly weapons), 307 read with 149 (attempt to murder with common intention) of the Indian Penal Code, Section 25 (1) (A) (illegal possession of firearms) of the Arms Act and Section 8 of AP Public Security Act against the two contractors. The arrested contractors were produced in the court and remanded to judicial custody.

Three others -- Lachagudem gram sarpanch (village headman) Sondi Arjun and villagers Seelam Chalapathi and Penuballi Srinu -- were picked up by the police for questioning.