India's vital services sector, which contributes 60 % to the economy, shrank for the first time in nearly two years in July, figures Monday showed, fuelling pessimism about an early recovery.
The figures suggest "a near-term recovery in growth is not in the cards as confidence remains subdued and global headwinds persist", said HSBC chief Asian economist Leif Eskesen.
The HSBC Services Purchasing Managers' Index (PMI) contracted for the first time in 20 months to 47.9 points in July from 51.7 points in the previous month. Fifty is the mark that divides expansion from contraction.
The reading was also the lowest since April 2009, adding to deepening worries about Asia's third largest economy.
"Reducing macroeconomic risks and stepping up implementation rather than just announcements of structural reforms is what is needed to get the wheels turning again," Eskesen urged the government.
But investors fear that the embattled Congress-led coalition government will be unable to take bold action because of political gridlock before general elections due in the first half of 2014.
The numbers were a disappointment for finance minister P Chidambaram, who said just last week he expected the services sector to perform as strongly as , if not better than, last year.
Authorities hoped a services sector pickup would help drive a recovery in the economy which grew by five % last year -- the lowest pace in a decade.
Economists have cut their growth forecasts to around the same level as last year from earlier projections of six % and above. Nervous foreign investors pulled $10.5 billion from the Indian equities and debt market in June and July.
The rupee has been setting record lows against the dollar and the central bank has been forced to keep interest rates high to stem its fall.
Days earlier, HSBC's manufacturing growth index showed India's factory output slowdown deepened in July, with order books contracting by the most in more than four years.
The HSBC Indian Manufacturing Purchasing Managers' Index fell in July for a third straight month to 50.1 from 50.3 in June, clinging on to expansion territory.