The HSBC India Composite Output Index, which maps both services and manufacturing, declined from 50.3 in February to 48.9 in March, as manufacturing production growth eased and service sector activity fell at faster rate during the month.
Meanwhile, the HSBC services business activity index fell from 48.8 in February to 47.5 in March, remaining below the 50 level mark for the ninth successive month.
A PMI reading above 50 indicates growth while a lower reading means contraction.
The contraction in the services sector activity was largely on the back of softer domestic demand. New business received by Indian services companies decreased for the ninth month running in March.
According to the HSBC survey, the weaker client demand, that led to the latest drop in new work intakes, can be partly linked to the forthcoming elections.
"Following some stabilisation in recent months, service sector activity weakened again in March led by softer domestic demand," HSBC Chief Economist for India & ASEAN, Leif Eskesen said.
However, Indian service providers were optimistic that activity would rise over the next 12 months as growth of new business, supported by improved economic conditions and new marketing initiatives, is expected to drive the expansion.
On price rise, the report said inflationary pressures in the Indian private sector softened during March, with both input costs and output prices rising at weaker rates.
Looking ahead, growth is expected to remain subdued in coming months, but pick up gradually during the second half of 2014, Eskesen said adding "this, however, assumes that the election outcome provides the elected government with a workable mandate".
India's economic growth slowed to 4.5 per cent in 2012-13 due to the global slowdown and domestic factors such as high interest rates.
The growth rate during April-September of 2013-14 slipped to 4.6 per cent from 5.3 per cent in the same period in the previous financial year.