The HSBC India Composite Output Index, which maps both services and manufacturing output fell to 46.1 in September from from 47.6 in August, signalling a sharp deterioration in business activity across the country's private sector.
The HSBC India Composite Output Index has posted below the 50 mark, which marks contraction, for the third consecutive month.
Meanwhile, the services sector, which accounts for around 60 per cent of India's GDP, fell sharply from 47.6 in August to 44.6 in September.
According to HSBC, private sector output witnessed the third consecutive drop in new order levels amid weaker demand and a difficult economic climate.
"Service sector output contracted further in September, with the index dropping to its lowest reading in more than four years as tighter financial conditions and heightened macroeconomic uncertainty weighs on growth," HSBC Chief Economist for India and ASEAN Leif Eskesen said.
The findings of the HSBC survey comes at a time when India is battling slower growth rate, wider current account deficit and a devaluation of the rupee.
India's service sector PMI witnessed the sharpest contraction in new business since February 2009, driven by weaker order flows in renting and business activities, hotels and restaurants, and financial intermediation.
In response to lower volumes of incoming new work, private sector firms reduced their workforce numbers. Both manufacturers and service providers reporting job shedding for the first time in 19 months, it said.
Earlier this week the HSBC/Markit manufacturing PMI showed that India's manufacturing sector activity contracted for the second consecutive month in September as both output and new orders witnessed a decline.
According to Eskesen "despite the weak growth backdrop, inflation readings held broadly steady. This, in turn, supports RBI's stepped up efforts to better anchor inflation expectations."
The Reserve Bank of India, in its September 20 policy review, had unexpectedly raised the policy rate by 0.25 per cent as it kept its focus on controlling inflation.
Driven by costlier food items, wholesale price inflation rose to a six-month high of 6.1 per cent in August.