The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, fell to 50.7 in December from 51.3 in the previous month.
The index, which gauges business activity in Indian factories but not its utilities, spent three months below the 50 mark that separates growth from contraction before rising above it in November.
"Manufacturing activity decelerated slightly in December as a slowdown in domestic order flows led to slower factory output growth," said Leif Eskesen, a chief economist at HSBC.
"Today's numbers show that growth remains moderate and struggles to take off due to lingering structural constraints."
While overseas orders came in at a faster pace last month, domestic demand took a hit from the struggling economy.
A sub-index measuring overall new orders fell to 51.3, from 51.9 in November. That prompted firms to decrease the pace of output growth last month.
A long struggle to contain inflation with high interest rates, government policy paralysis and fragile global demand have put India in a rut of slowing growth.
The latest PMI showed inflationary pressures, which started to ease in November after a pick up in the previous few months, remained steady.
Raghuram Rajan, the central bank governor, has made fighting inflation a priority after his appointment in September and has raised the repo rate twice since to bring it to 7.75 percent.
However, despite an uptick in inflation in November, the Reserve Bank of India refrained from raising the key repo rate at its review last month, though it said it would remain vigilant on prices.
"Inflation pressures remain firm and are proving sticky. (The) RBI may yet again have to flex its muscles and tighten monetary policy to bring down the elevated level of inflation," Eskesen said.
India's Manufacturing PMI decelerates slightly in December: HSBC
(PTI) India's manufacturing sector decelerated marginally in December as a slowdown in domestic order flows led to slower output growth, an HSBC survey said today.
The HSBC India Manufacturing Purchasing Managers' Index (PMI) - a measure of factory production - dropped slightly from 51.3 in November to 50.7 in December.
Despite a slight deceleration, the manufacturing sector activity expanded for the second consecutive month. A PMI reading of above 50 differentiates growth from contraction.
"Today's numbers show that growth remains moderate and struggles to take off due to lingering structural constraints," HSBC Chief Economist for India and ASEAN Leif Eskesen said.
The Indian manufacturing sector ended 2013 on an encouraging footing. Operating conditions improved for the second successive month in December, as both output and new orders increased, HSBC said.
Consequently, firms raised their workforce numbers further in December, the survey noted.
New orders placed at Indian manufacturers rose in December, albeit marginally. The higher levels of new work was largely driven by improved domestic and overseas demand.
A sector-wise analysis shows that the overall expansion in production volumes was largely centred on the consumer goods sub-sector. Moreover, export order growth was registered for the third consecutive month.
On price rise, the survey said that the overall rate of inflation remained "robust". The increase was largely on the back of higher prices paid for raw materials such as metals, chemicals and textiles. Output prices rose for the seventh month in a row.
"Even so, inflation pressures remain firm and are proving sticky. RBI may yet again have to flex its muscles and tighten monetary policy to bring down the elevated level of inflation," Eskesen said.
As per official data, while retail inflation soared to a nine-month high of 11.24 per cent in November, the index based on wholesale prices zoomed to a 14-month high of 7.52 per cent last month.
Analysts are of the opinion that inflation has peaked and will ease in December as food prices cool on better supplies with winter crops coming in.
In the mid-quarter review of monetary policy on Dec 18, the Reserve Bank left key policy rates unchanged but said it will hike interest rates if inflation does not subside in line with the expected declining trend.